NEW ISSUE RATINGS

BOOK-ENTRY-ONLY Standard & Poor’s: “A+ (Stable)”

Moody’s: “A2”

See “CONCLUDING INFORMATION - Ratings on the Certificates” herein).

In the opinion of Rutan &Tucker, LLP, Costa Mesa, California, Special Counsel, subject, however, to certain qualifications described in this Official Statement, under present law, interest with respect to the Certificates is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations; however, receipt or accrual of such interest in respect of a Certificate owned by a corporation may affect the computation of its alternative minimum taxable income. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Tax Code will be computed. In addition, in the opinion of Special Counsel, interest with respect to the Certificates is exempt from personal income taxation imposed by the State of California. See “LEGAL MATTERS - Tax Matters” herein.

SANTA CRUZ COUNTY STATE OF CALIFORNIA

$6,285,000 2014 REFUNDING CERTIFICATES OF PARTICIPATION Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to Be Made by the COUNTY OF SANTA CRUZ, CALIFORNIA as Rental for Certain Property Pursuant to a Sub-Sublease Agreement with the SANTA CRUZ COUNTY PUBLIC FINANCING AUTHORITY

Dated: Date of Delivery Due: August 1, as Shown on the Inside Front Cover.

The cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. See “RISK FACTORS” herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Certificates.

The County of Santa Cruz (the “County”) 2014 Refunding Certificates of Participation (the “Certificates”) are being executed and delivered to (i) refinance certain obligations of the County, (ii) fund a reserve fund for the Certificates and (iii) pay the costs incurred in connection with the execution and delivery of the Certificates. The Certificates evidence direct, undivided fractional interests in supplemental lease payments (“Lease Payments”) to be made by the County to the Santa Cruz County Public Financing Authority (the “Authority”) as rental for certain real property and the improvements thereon (referred to herein as the “Leased Property”) consisting of the County’s Water Street and Blaine Street detention facilities pursuant to a Sub-Sublease Agreement, dated May 1, 2005 as previously amended and supplemented, including as amended and supplemented by a Third Supplement to Sub-Sublease dated as of March 1, 2014, each by and between the County and the Authority (as amended and supplemented, the “Lease Agreement”), as described herein. See “THE LEASED PROPERTY” herein. The County is required under the Lease Agreement to make Lease Payments in each fiscal year in consideration of the use and possession of the Leased Property from any source of available funds, including certain funds held under a trust agreement, as described herein, and insurance or condemnation awards, in an amount sufficient to pay the annual principal and interest due with respect to the Certificates, subject to abatement, as described herein. See “SOURCES OF PAYMENT FOR THE CERTIFICATES” and “RISK FACTORS” herein.

Interest represented by the Certificates is payable on August 1, 2014, and semiannually thereafter on February 1 and August 1 of each year until maturity or earlier prepayment. See “THE CERTIFICATES - General Provisions” and “THE CERTIFICATES - Prepayment” herein.

THE CERTIFICATES DO NOT CONSTITUTE AN OBLIGATION OF THE AUTHORITY OR THE COUNTY FOR WHICH THE AUTHORITY OR THE COUNTY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE AUTHORITY OR THE COUNTY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE COUNTY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT DOES NOT CONSTITUTE AN OBLIGATION OF THE COUNTY FOR WHICH THE COUNTY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE COUNTY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE COUNTY TO MAKE LEASE PAYMENTS CONSTITUTES AN INDEBTEDNESS OF THE AUTHORITY, THE COUNTY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. THE AUTHORITY HAS NO TAXING POWER.

The Certificates are offered, when, as and if executed and delivered, subject to the approval as to their legality by Rutan & Tucker, LLP, Costa Mesa, California, Special Counsel. Certain legal matters will be passed on for the County by the County Counsel, and by Fulbright & Jaworski LLP, a member of Norton Rose Fulbright, Los Angeles, California, as Disclosure Counsel and for the Underwriter by its counsel, Nossaman LLP, Irvine, California. It is anticipated that the Certificates, in book-entry form, will be available for delivery on or about April 10, 2014 through the facilities of The Depository Trust Company (see “APPENDIX E - DTC AND THE BOOK-ENTRY-ONLY SYSTEM” herein).

The date of the Official Statement is March 20, 2014.

Stifel

$6,285,000 2014 CERTIFICATES OF PARTICIPATION

Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to Be Made by the COUNTY OF SANTA CRUZ, CALIFORNIA as Rental for Certain Property Pursuant to a

Sub-Sublease Agreement with the SANTA CRUZ COUNTY PUBLIC FINANCING AUTHORITY

MATURITY SCHEDULE

(Base CUSIP®† 801820)

Maturity Date Principal Interest Reoffering

August 1 Amount Rate Yield CUSIP®†

2014 $280,000 3.00% 0.50% JH5

2015 250,000 3.00 0.60 JJ1

2016 255,000 4.00 0.86 JK8

2017 265,000 4.00 1.14 JL6

2018 275,000 4.00 1.48 JM4

2019 290,000 4.00 1.90 JN2

2020 300,000 4.00 2.40 JP7

2021 310,000 5.00 2.85 JQ5

2022 330,000 5.00 3.18 JR3

2023 345,000 5.00 3.40 JS1

2024 360,000 5.00 3.61 JT9

2025 380,000 5.00 3.83* JU6

2026 400,000 4.00 4.03 JV4

2027 415,000 4.00 4.12 JW2

2028 430,000 4.00 4.17 JX0

2029 450,000 4.00 4.28 JY8

2030 465,000 4.125 4.37 JZ5

2031 485,000 4.25 4.46 KA8

* Priced to the first optional call date of August 1, 2024.

† Copyright 2014, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services Bureau, operated by Standard & Poor’s. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. CUSIP numbers have been assigned by an independent company not affiliated with the County and are included solely for the convenience of the holders of the Certificates. None of the Authority, the County, the Financial Advisor or the Underwriter takes any responsibility for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Certificates or as included herein. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Certificates as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Certificates.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

Use of Official Statement. This Official Statement is submitted in connection with the offer and sale of the Certificates referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Certificates.

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the Authority or the County, any press release and any oral statement made with the approval of an authorized officer of the County or any other entity described or referenced herein, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material.

Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the Authority or the County to give any information or to make any representations in connection with the offer or sale of the Certificates other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the Authority, the County, the Financial Advisor or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Certificates by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

Involvement of Underwriter. The Underwriter has submitted the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

Information Subject to Change. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority or the County or any other entity described or referenced herein since the date hereof. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions.

Stabilization of Prices. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the Certificates at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Certificates to certain dealers and others at yields or prices lower than the public offering yields or prices set forth on the inside front cover page hereof and said public offering prices may be changed from time to time by the Underwriter.

COUNTY OF SANTA CRUZ, CALIFORNIA

COUNTY GOVERNING BOARD

John Leopold, Supervisor, 1st District Zach Friend, Supervisor, 2nd District

Neal Coonerty, Supervisor, 3rd District Greg Caput, Supervisor, 4th District

Bruce McPherson, Supervisor, 5th District ______________________________________________

COUNTY STAFF

Susan A. Mauriello, County Administrative Officer Carol D. Kelly, Assistant County Administrative Officer

Mary Jo Walker, Auditor-Controller Fred Keeley, Treasurer-Tax Collector

Dana McRae, County Counsel ______________________________________________

PROFESSIONAL SERVICES

Special Counsel Rutan & Tucker, LLP

Costa Mesa, California

Disclosure Counsel Fulbright & Jaworski LLP, a member of Norton Rose Fulbright

Los Angeles, California

Financial Advisor Harrell & Company Advisors, LLC

Orange, California

Trustee and Escrow Bank The Bank of New York Mellon Trust Company, N.A.

Los Angeles, California

TABLE OF CONTENTS

INTRODUCTION ........................................................... 1 The County ..................................................................... 1 Security and Sources of Repayment ............................... 1 Tax Exemption ............................................................... 3 Professional Services ...................................................... 3 Offering of the Certificates ............................................. 4 Information Concerning this Official Statement ............ 4

THE CERTIFICATES .................................................... 5 General Provisions ......................................................... 5 Prepayment ..................................................................... 6 Scheduled 2014 Lease Payments.................................... 7 Scheduled Lease Payments ............................................ 8

THE FINANCING PLAN............................................... 9 Estimated Sources and Uses of Funds ............................ 9

THE LEASED PROPERTY ......................................... 10 Description of the Leased Property .............................. 10 Additional Obligations Payable from Lease Payments 10

SOURCES OF PAYMENT FOR THE CERTIFICATES ........................................................ 11 General ......................................................................... 11 Lease Payments; Abatement ......................................... 11 Reserve Fund ................................................................ 12 Insurance Relating to the Leased Property ................... 12 Reentering and Reletting .............................................. 13 Encumbrances; Substitution of Property ...................... 13

THE AUTHORITY ....................................................... 14

SANTA CRUZ COUNTY ............................................. 14 General Information ..................................................... 14 Government Organization ............................................ 14 Governmental Services ................................................ 15 Community Information ............................................... 16 Transportation .............................................................. 17 Population .................................................................... 17 Per Capita Personal Income ......................................... 19 Employment and Industry ............................................ 20 Commercial Activity .................................................... 23 Building Activity .......................................................... 25

FINANCIAL INFORMATION .................................... 26 Economic Conditions and Outlook .............................. 26 Budgetary Process and Administration......................... 27 Budget Policy ............................................................... 27 Fund Balance Policy..................................................... 27 General Fund Revenues and Expenditures ................... 28 Ad Valorem Property Taxes .......................................... 31 The Teeter Plan ............................................................. 31 Taxable Property and Assessed Valuation .................... 32 State Legislative Shifts of Property Tax Allocation ...... 35 Other Local Taxes ........................................................ 36

State and Federal Funds ............................................... 37 Other Revenue Sources ................................................ 37 Short-Term Tax Exempt Obligations ........................... 38 Long-Term Tax Exempt Obligations ........................... 38 Retirement Programs ................................................... 40 Deferred Compensation Plan ....................................... 46 Other Post Employment Benefits ................................. 46 Employee Relations and Collective Bargaining ........... 48 Self-Insurance Program ............................................... 48 County Treasurer’s Investment Pool ............................ 50 Financial Statements .................................................... 50

RISK FACTORS ........................................................... 56 The Lease Payments .................................................... 56 Limited Recourse on Default; No Acceleration ........... 57 State Budget ................................................................. 58 Enforcement of Remedies ............................................ 59 Bankruptcy of the County ............................................ 60 Constitutional Limitation on Taxes and Expenditures . 61 Early Prepayment Risk ................................................ 65 Loss of Tax Exemption ................................................ 65 IRS Audit of Tax-Exempt Bond Issues ........................ 65 Seismic Considerations ................................................ 66 Other Natural Hazards ................................................. 66 Secondary Market Risk ................................................ 67

LEGAL MATTERS ...................................................... 68 Enforceability of Remedies ......................................... 68 Approval of Legal Proceedings ................................... 68 Tax Matters .................................................................. 68 Absence of Litigation .................................................. 70

CONCLUDING INFORMATION .............................. 71 Ratings on the Certificates ........................................... 71 Underwriting ................................................................ 71 The Financial Advisor .................................................. 71 Verifications of Mathematical Computations ............... 71 Continuing Disclosure ................................................. 72 Additional Information ................................................ 72 References ................................................................... 72 Execution ..................................................................... 72

APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

APPENDIX B - COUNTY AUDITED FINANCIAL STATEMENTS

APPENDIX C - FORM OF CONTINUING DISCLOSURE CERTIFICATE

APPENDIX D - FORM OF SPECIAL COUNSEL OPINION

APPENDIX E - DTC AND THE BOOK-ENTRY-ONLY SYSTEM

[THIS PAGE INTENTIONALLY LEFT BLANK]

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OFFICIAL STATEMENT $6,285,000

2014 REFUNDING CERTIFICATES OF PARTICIPATION Evidencing Direct, Undivided Fractional Interests of the Owners

Thereof in Lease Payments to Be Made by the COUNTY OF SANTA CRUZ, CALIFORNIA as Rental for Certain Property Pursuant to a

Sub-Sublease Agreement with the SANTA CRUZ COUNTY PUBLIC FINANCING AUTHORITY

This Official Statement which includes the cover page and appendices (the “Official Statement”), is provided to furnish certain information concerning the sale, execution and delivery of 2014 Refunding Certificates of Participation (the “Certificates”), in the aggregate principal amount of $6,285,000, representing the direct, undivided fractional interests of owners thereof in Lease Payments (defined below) to be made by the County of Santa Cruz, California (the “County”), as rental for certain property pursuant to a Sub-Sublease Agreement as more fully described herein (the “Lease Agreement”) with the Santa Cruz County Public Financing Authority (the “Authority”).

INTRODUCTION This Introduction contains only a brief description of this issue and does not purport to be complete. The Introduction is subject in all respects to more complete information in the entire Official Statement and the offering of the Certificates to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision (see “RISK FACTORS” herein).

The County

The County of Santa Cruz was incorporated in 1850. It has a general law form of government. It is located on the coast of California, between the San Francisco Bay area and the Monterey Bay Peninsula, 74 miles south of San Francisco (see “SANTA CRUZ COUNTY” herein).

Security and Sources of Repayment

In 2001, the Authority issued $11,900,000 Lease Revenue Bonds, 2001 Series B (the “2001 Bonds”) for the purpose of acquiring and constructing various facilities throughout the County. In connection with the issuance of the 2001 Bonds, the County leased certain detention facilities and related land (the “Leased Property”) as described more fully herein, to the Authority under a Site Lease dated as of July 15, 1995 as amended by an Amendment No. 1 to Site Lease dated as of October 1, 2001 (the “2001 Site Lease”), and the Authority concurrently leased the Leased Property back to the County under a Lease Agreement dated as of July 15, 1995 (the “1995 Lease”) as amended by an Amendment No. 1 to Lease Agreement dated as of October 1, 2001 (the “2001 Lease”).

In 2005, the County executed and delivered its 2005 Refunding Certificates of Participation (the “2005 Certificates”) for the purpose of refinancing obligations of the County with respect to the 1995 Lease. In order to provide funds for such purposes, the County subleased the Leased Property to the Authority under a Sublease Agreement dated as of May 1, 2005 (the “Sublease”) under which the Authority agreed to pay the County an up-front sublease payment which was sufficient to provide for such refinancing. In turn, the Authority sub-subleased the Leased Property back to the County under a Sub-Sublease Agreement dated as of May 1, 2005 (the “2005 Lease Agreement”). Under the 2005 Lease Agreement, the County is obligated

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to pay certain lease payments (the “2005 Lease Payments”) which are sufficient to provide for payment of principal and interest represented by the 2005 Certificates when due.

In 2006, the County executed and delivered its 2006 Certificates of Participation (the “2006 Certificates”) to finance additional public improvements. In order to provide funds for such purposes, the County supplemented the 2005 Lease Agreement pursuant to a First Supplement to Sub-Sublease dated as of August 1, 2006 (the “2006 Supplement”). Under the 2006 Supplement, the County agreed to pay supplemental lease payments (the “2006 Lease Payments”) which are equal to the principal and interest represented by the 2006 Certificates.

In 2008, the County executed and delivered its 2008 Certificates of Participation (the “2008 Certificates”) to finance additional public improvements. In order to provide funds for such purposes, the County supplemented the 2005 Sub-Sublease Agreement pursuant to a Second Supplement to Sub-Sublease dated as of June 1, 2008 (the “2008 Supplement”). Under the 2008 Supplement, the County agreed to pay supplemental lease payments (the “2008 Lease Payments”) which are equal to the principal and interest represented by the 2008 Certificates.

The purpose of the Certificates is to provide funds which will refinance the 2001 Lease and 2001 Bonds. In order to provide funds for such purposes, the County will supplement the 2005 Lease Agreement pursuant to a Third Supplement to Sub-Sublease dated as of March 1, 2014 (the “Lease Supplement”). Under the Lease Supplement, the Authority agrees to deposit funds which are sufficient to refinance the 2001 Lease, in consideration of which the County agrees to pay supplemental lease payments (the “2014 Lease Payments”) which are equal to the principal and interest represented by the Certificates. The proceeds from the sale of the Certificates will also be used fund a reserve fund for the Certificates and to pay the costs of issuance of the Certificates (see “THE FINANCING PLAN” herein). The Lease Supplement also provides for substitution of a portion of the Leased Property (see “THE LEASED PROPERTY” herein.

Collectively, the 2005 Lease Payments, the 2006 Lease Payments, the 2008 Lease Payments and the 2014 Lease Payment are referred to herein as the “Lease Payments.”

The Certificates are being executed and delivered pursuant to a Trust Agreement dated as of March 1, 2014 (the “Trust Agreement”), by and among the County, the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). For a summary of the Trust Agreement, see “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - TRUST AGREEMENT” herein. Certain capitalized terms used in this Official Statement and not otherwise defined have the meanings given them in “APPENDIX A.”

The Lease Payments are payable by the County from any source of legally available funds of the County, including certain funds held under the Trust Agreement and investment earnings thereon, and the net proceeds of insurance or condemnation awards (see “SOURCES OF PAYMENT FOR THE CERTIFICATES,” “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - LEASE AGREEMENT,” and “FINANCIAL INFORMATION” herein).

In general, the County is required under the 2005 Lease Agreement, as supplemented by the 2006 Supplement, the 2008 Supplement and the Lease Supplement (as so supplemented, the “Lease Agreement”) to pay to the Trustee specified amounts for use and possession of the Leased Property which amounts are calculated to be sufficient in both time and amount to pay, when due, the principal and interest payable with respect to the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates. The County is also required to pay any taxes and assessments levied on the Leased Property and all costs of maintenance and repair of the Leased Property. The County has covenanted in the Lease Agreement to take such actions as may be necessary to include all Lease Payments in its annual budgets and to make the necessary annual appropriations for all such Lease Payments subject to complete or partial abatement of such Lease Payments resulting from a taking of the Leased Property (either in whole or in part) under the powers of eminent domain or resulting from damage or loss of all or any portion of the Leased Property. Except for the Authority’s right, title and interest in and to the Lease Agreement which have been assigned

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to the Trustee, pursuant to an Assignment Agreement dated as of March 1, 2004 between the Authority and the Trustee (the “Assignment Agreement”) no funds or properties of the Authority or the County are pledged to or otherwise liable for the obligations of the Authority (see “RISK FACTORS” herein).

The Lease Agreement is, in the opinion of Special Counsel, a valid and binding obligation of the County enforceable against the County in accordance with its terms, except to the extent enforceability thereof may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights heretofore or hereinafter enacted and may be subject to the exercise of judicial discretion in accordance with general principles of equity or otherwise in appropriate cases (see “RISK FACTORS - The Lease Payments - Limited Recourse on Default” herein). The form of Special Counsel’s opinion is attached hereto as “APPENDIX D.”

The obligation of the County to pay Lease Payments does not constitute an obligation for which the County is obligated to levy or pledge any form of taxation or for which the County has pledged any form of taxation. The obligation of the County to pay Lease Payments does not constitute a debt or liability of the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction.

Tax Exemption

In the opinion of Rutan &Tucker, LLP, Costa Mesa, California, (“Special Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, the portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, receipt or accrual of such interest in respect of a Certificate owned by a corporation may affect the computation of its alternative minimum taxable income. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Tax Code will be computed. In the further opinion of Special Counsel, the portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is exempt from personal income taxation imposed by the State of California. See “LEGAL MATTERS - Tax Matters” herein.

Professional Services

The legal proceedings relating to the execution and delivery of the Certificates are subject to the approving opinion of Rutan & Tucker, LLP, Costa Mesa, California, Special Counsel. Certain legal matters will be passed on for the County by Dana McRae, County Counsel and by Fulbright & Jaworski LLP, a member of Norton Rose Fulbright, Los Angeles, California, as Disclosure Counsel and for the Underwriter by its counsel, Nossaman LLP, Irvine, California.

The Bank of New York Mellon Trust Company, N.A., serves as Trustee under the Trust Agreement. The Trustee will act on behalf of the Certificate Owners for the purpose of receiving all moneys required to be paid to the Trustee, to allocate, use and apply the same, to hold, receive and disburse the Lease Payments and other funds held under the Trust Agreement, and otherwise to hold all the offices and perform all the functions and duties provided in the Trust Agreement to be held and performed by the Trustee.

Harrell & Company Advisors, LLC (the “Financial Advisor”) advised the County as to the financial structure and certain other financial matters relating to the Certificates.

The County’s audited general purpose financial statements for the fiscal year ended June 30, 2013, attached hereto as “APPENDIX B” have been audited by Marcum LLP, Irvine, California (the “Auditor”). As stated in their report appearing in Appendix B, the Auditor were not requested to consent to the inclusion of their report in Appendix B, nor have they undertaken to update their report or to take any action intended or

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likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by the Auditor with respect to any event subsequent to the date of their report.

Offering of the Certificates

Authority for Execution and Delivery. The Certificates are to be executed and delivered pursuant to the Trust Agreement, and have been authorized by a resolution adopted by the Board of Supervisors of the County on March 11, 2014. The Lease Agreement is entered into in accordance with the laws of the State of California (the “State”), and particularly Section 37350 of the Government Code of the State.

Offering and Delivery of the Certificates. The Certificates were sold to Stifel, Nicolaus & Company, Incorporated. The Certificates are offered, when, as and if executed and delivered, subject to the approval as to their legality by Rutan & Tucker, LLP, Costa Mesa, California, Special Counsel. It is anticipated that the Certificates, in book-entry form, will be available for delivery on April 10, 2014 through the facilities of The Depository Trust Company (“DTC”). See “APPENDIX E - DTC AND THE BOOK-ENTRY-ONLY SYSTEM.”

Information Concerning this Official Statement

This Official Statement speaks only as of its date. The information set forth herein has been obtained by the County with the assistance of the Financial Advisor, from sources which are believed to be reliable and such information is believed to be accurate and complete, but such information is not guaranteed as to accuracy or completeness, nor has it been independently verified and is not to be construed as a representation by the Financial Advisor or the Disclosure Counsel. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended as such and are not to be construed as representations of fact. The information and expressions of opinion herein are subject to change without notice and the delivery of this Official Statement shall not, under any circumstances, create any implication that there has been no change in the information or opinions set forth herein or in the affairs of the County since the date hereof.

Availability of Legal Documents. The summaries and references contained herein with respect to the Trust Agreement, the Lease Agreement, the Assignment Agreement, the Certificates and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Certificates are qualified in their entirety by reference to the form thereof included in the Trust Agreement. Copies of the documents described herein are available for inspection during the period of initial offering of the Certificates at the offices of the Financial Advisor. Copies of these documents may be obtained after delivery of the Certificates at the trust office of the Trustee, The Bank of New York Mellon Trust Company, N.A., Los Angeles, California or from the County at Government Center, 701 Ocean Street, Santa Cruz, California 95060, telephone (831) 454-2100.

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THE CERTIFICATES

General Provisions

Payment of the Certificates. Interest represented by the Certificates is payable at the rates per annum set forth on the inside front cover page hereof. Said interest will represent the portion of Lease Payments designated as interest and coming due on each Interest Payment Date. The share of the portion of Lease Payments designated as interest with respect to any Certificate will be computed by multiplying the portion of Lease Payments designated as principal with respect to such Certificates by the rate of interest represented by such Certificates. Interest represented by the Certificates and the Lease Payments will be computed on the basis of a year consisting of 360 days and twelve 30-day months. Principal with respect to the Certificates is payable from the principal component of Lease Payments allocable to the Certificates on August 1 in each of the years and in the amounts set forth on the inside front cover page hereof.

Each Certificate will be dated as of the date of original delivery of the Certificates (the “Date of Delivery”), and interest with respect to the Certificates will be payable from the Interest Payment Date next preceding the date of execution thereof, unless (a) it is executed following the 15th day of the month preceding an Interest Payment Date (a “Record Date”) and on or before such Interest Payment Date, in which event interest with respect thereto will be payable from such Interest Payment Date; or (b) it is executed on or before the first Record Date, in which event interest represented thereby will be payable from the Date of Delivery. Notwithstanding the foregoing, if, as of the date of any Certificate, interest represented by such Certificate is in default, interest represented by such Certificate will be payable from the Interest Payment Date to which interest has previously been paid or made available for payment with respect to such Certificate.

Book-Entry-Only System. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. Interest with respect to and principal of the Certificates will be payable when due by wire of the Trustee to DTC which will in turn remit such interest and principal to DTC Participants (as defined herein), which will in turn remit such interest and principal to Beneficial Owners (as defined herein) of the Certificates (see “APPENDIX E - DTC AND THE BOOK-ENTRY-ONLY SYSTEM” herein). As long as DTC is the registered owner of the Certificates and DTC’s book-entry method is used for the Certificates, the Trustee will send any notices to certificate owners only to DTC.

Discontinuance of Book-Entry System. DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to the County or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Certificates are required to be printed and delivered as described in the Trust Agreement. The County may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the Certificates will be printed and delivered as described in the Trust Agreement. In addition, the following provisions shall apply: interest represented by each Certificate will be paid on each Interest Payment Date by check of the Trustee mailed on such Interest Payment Date by first class mail, to the person appearing on the registration books of the Trustee as the Owner thereof as of the close of business on the preceding Record Date, at such Owner’s address as it appears on the registration books of the Trustee; provided however, that at the written request of the Owner of Certificates in an aggregate principal amount of at least $1,000,000, which request is on file with the Trustee as of any Record Date, interest with respect to such Certificates shall be paid on each succeeding Interest Payment Date by wire transfer in immediately available funds to such account within the United States of America as shall be specified in such request. The principal and prepayment price represented by any Certificate at maturity or upon prepayment will be payable upon presentation and surrender of such Certificate at the Office of the Trustee in Los Angeles, California, or at such place as may be designated by the Trustee.

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Prepayment

Optional Prepayment. The Certificates maturing on or before August 1, 2024 are not subject to prepayment prior to maturity. The Certificates maturing on or after August 1, 2025 are subject to prepayment prior to maturity at the option of the County, on any date on or after August 1, 2024, as a whole or in part among maturities designated by the County and by lot within a maturity, from any source of available funds at a prepayment price equal to 100% of the principal amount thereof to be prepaid, without a premium, together with accrued interest thereon to the date fixed for prepayment.

Prepayment From Net Proceeds of Insurance or Condemnation. The Certificates are subject to mandatory prepayment as a whole, on any date, or in part on any Interest Payment Date, from net hazard or title insurance proceeds not used to repair or replace any portion of the Leased Property damaged or destroyed, or from condemnation proceeds received with respect to any portion of the Leased Property and elected by the County to be used for such purpose, pro-rata among maturities, at a prepayment price equal to the principal amount of the Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment, without premium. Because the 2005 Certificates, the 2006 Certificates, the 2008 Certificates and the Certificates are secured by lease payments payable under the Lease Agreement, any net proceeds will be applied on a pro-rata basis to prepay the 2005 Lease Payments, the 2006 Lease Payments, the 2008 Lease Payments and the Lease Payments and, therefore, the 2005 Certificates, the 2006 Certificates, the 2008 Certificates and the Certificates. There can be no assurance that such proceeds will be adequate to prepay all of the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates (see “SOURCES OF PAYMENT FOR THE CERTIFICATES - Insurance Relating to the Leased Property” and “RISK FACTORS - The Lease Payments - Insurance” herein).

Notice of Prepayment. When prepayment is authorized or required, the Trustee is required to give written notice to the respective Certificate Owners of any Certificates designated for prepayment at their addresses appearing on the Certificate registration books, to the Securities Depositories and to one or more of the Information Services, all as provided in the Trust Agreement, by first class mail, postage prepaid, no less than 20, nor more than 60, days prior to the date fixed for prepayment. Neither failure to receive such notice nor any defect in the notice so mailed will affect the validity of the proceedings for prepayment of such Certificates or the cessation of accrual of interest from and after the prepayment date.

Rescission of Notice. The County has the right to rescind any notice of the optional prepayment of Certificates by written notice to the Trustee on or prior to the dated fixed for prepayment. Any notice of optional prepayment will be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for prepayment for the payment in full of the Certificates then called for prepayment, and such cancellation will not constitute an Event of Default. The County and the Trustee have no liability to the Owners or any other party related to or arising from such rescission of prepayment. The Trustee shall mail notice of such rescission of prepayment in the same manner as the original notice of prepayment was sent.

Effect of Prepayment. Interest represented by the Certificates (or portions thereof) called for prepayment will cease to accrue on the date fixed for prepayment and such Certificates (or portions thereof) will cease to be entitled to any benefit or security under the Trust Agreement and the Owners of such Certificates will have no rights in respect thereof except to receive payment of the prepayment price thereof. The Trust Agreement contains no provisions requiring any publication of notice of prepayment, and Certificate Owners must maintain a current address on file with the Trustee to receive any notices of prepayment.

Partial Prepayment. In the event only a portion of any Certificate is called for prepayment, then upon surrender of such Certificate the Trustee will execute and deliver to the Certificate Owner thereof, at the expense of the County, a new Certificate or Certificates of authorized denominations equal in aggregate principal amount equal to the unprepaid portion of the Certificate surrendered and of the same interest rate and the same maturity.

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Scheduled 2014 Lease Payments

The following is a schedule of 2014 Lease Payments, and therefore the scheduled payments of principal and interest represented by the Certificates.

Period

Ending* Principal Interest Semi-Annual Total Annual Total

August 1, 2014 $ 280,000.00 $ 81,752.66 $ 361,752.66 $ 361,752.66

February 1, 2015 128,371.88 128,371.88

August 1, 2015 250,000.00 128,371.88 378,371.88 506,743.76

February 1, 2016 124,621.88 124,621.88

August 1, 2016 255,000.00 124,621.88 379,621.88 504,243.76

February 1, 2017 119,521.88 119,521.88

August 1, 2017 265,000.00 119,521.88 384,521.88 504,043.76

February 1, 2018 114,221.88 114,221.88

August 1, 2018 275,000.00 114,221.88 389,221.88 503,443.76

February 1, 2019 108,721.88 108,721.88

August 1, 2019 290,000.00 108,721.88 398,721.88 507,443.76

February 1, 2020 102,921.88 102,921.88

August 1, 2020 300,000.00 102,921.88 402,921.88 505,843.76

February 1, 2021 96,921.88 96,921.88

August 1, 2021 310,000.00 96,921.88 406,921.88 503,843.76

February 1, 2022 89,171.88 89,171.88

August 1, 2022 330,000.00 89,171.88 419,171.88 508,343.76

February 1, 2023 80,921.88 80,921.88

August 1, 2023 345,000.00 80,921.88 425,921.88 506,843.76

February 1, 2024 72,296.88 72,296.88

August 1, 2024 360,000.00 72,296.88 432,296.88 504,593.76

February 1, 2025 63,296.88 63,296.88

August 1, 2025 380,000.00 63,296.88 443,296.88 506,593.76

February 1, 2026 53,796.88 53,796.88

August 1, 2026 400,000.00 53,796.88 453,796.88 507,593.76

February 1, 2027 45,796.88 45,796.88

August 1, 2027 415,000.00 45,796.88 460,796.88 506,593.76

February 1, 2028 37,496.88 37,496.88

August 1, 2028 430,000.00 37,496.88 467,496.88 504,993.76

February 1, 2029 28,896.88 28,896.88

August 1, 2029 450,000.00 28,896.88 478,896.88 507,793.76

February 1, 2030 19,896.88 19,896.88

August 1, 2030 465,000.00 19,896.88 484,896.88 504,793.76

February 1, 2031 10,306.25 10,306.25

August 1, 2031 485,000.00 10,306.25 495,306.25 505,612.50

Total $6,285,000.00 $2,676,115.32 $8,961,115.32 $8,961,115.32 __________________ * 2014 Lease Payments are made on the 15th calendar day of the month immediately preceding each Interest Payment

Date.

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Scheduled Lease Payments

The following is a schedule of total annual Lease Payments with respect to the Leased Property, on a fiscal year basis.

Year Ending 2005 Lease 2006 Lease 2008 Lease 2014 Lease Total Lease

June 30 Payments Payments Payments Payments Payments

2015 $ 865,848.76 $ 667,957.50 $ 465,075.00 $ 490,124.54 $ 2,489,005.80 2016 880,586.26 667,892.50 461,750.00 502,993.76 2,513,222.52 2017 888,045.63 662,147.50 462,050.00 499,143.76 2,511,386.89 2018 903,205.00 420,552.50 461,750.00 498,743.76 2,284,251.26 2019 906,305.00 418,252.50 460,850.00 497,943.76 2,283,351.26 2020 921,840.00 420,530.63 258,450.00 501,643.76 2,102,464.39 2021 929,337.50 422,152.51 259,650.00 499,843.76 2,110,983.77 2022 - 418,281.26 255,550.00 496,093.76 1,169,925.02 2023 - 418,953.76 255,850.00 500,093.76 1,174,897.52 2024 - 414,219.38 255,375.00 498,218.76 1,167,813.14 2025 - 414,127.50 - 495,593.76 909,721.26 2026 - 413,567.50 - 497,093.76 910,661.26 2027 - 417,457.50 - 499,593.76 917,051.26 2028 - 415,662.50 - 498,293.76 913,956.26 2029 - 418,175.00 - 496,393.76 914,568.76 2030 - 415,125.00 - 498,793.76 913,918.76 2031 - 416,512.50 - 495,203.13 911,715.63 2032 - 412,337.50 - 495,306.25 907,643.75 2033 - 417,487.50 - - 417,487.50 2034 - 416,628.13 - - 416,628.13 2035 - 409,978.13 - - 409,978.13 2036 - 412,634.38 - - 412,634.38 2037 - 414,365.63 - - 414,365.63 Total $6,295,168.15 $10,324,998.81 $3,596,350.00 $8,961,115.32 $29,177,632.28

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THE FINANCING PLAN The Authority issued the 2001 Bonds in the principal amount of $11,900,000, of which $6,220,000 currently remains outstanding. On the Delivery Date, the County will irrevocably deposit a portion of the proceeds from the Certificates with the Trustee as escrow bank (the “Escrow Bank”), pursuant to an Escrow Agreement, dated as of March 1, 2014 (the “Escrow Agreement”), by and between the County, the Authority and the Escrow Bank. The deposit will be in an amount sufficient, together with interest thereon, to pay interest and principal with respect to the 2001 Bonds due on August 1, 2014, and to pay the prepayment price with respect to the 2001 Bonds pursuant to an optional prepayment thereof on August 1, 2014.

Special Counsel will deliver an opinion at closing to the effect that, assuming the sufficiency of the amounts deposited under the Escrow Agreement, the 2001 Bonds will be discharged and no longer be Outstanding and will not be secured by the 2001 Lease or the lease payments due thereunder (see “CONCLUDING INFORMATION - Verifications of Mathematical Computations.”) Amounts on deposit with the Escrow Bank are not available to pay debt service with respect to the Certificates.

Estimated Sources and Uses of Funds

Under the provisions of the Trust Agreement, the Trustee will receive the proceeds from the sale of the Certificates and will apply them as follows:

Sources of Funds Par Amount of Certificates $6,285,000.00 Net Original Issue Premium 297,706.65 Funds Held Under the 2001 Indenture 527,938.56 Available Funds $7,110,645.21 Uses of Funds Escrow Fund $6,362,140.81 Reserve Fund (1) 508,343.76 Underwriter’s Discount 29,104.49 Costs of Issuance Fund (2) 211,056.15 Total Uses $7,110,645.21

__________________ (1) An amount equal to the Reserve Requirement (see “SOURCES OF PAYMENT FOR THE CERTIFICATES - Reserve

Fund”).

(2) Expenses include fees and expenses of Special Counsel, the Financial Advisor, Disclosure Counsel and Trustee, rating fees, costs of printing the Official Statement, and other costs of delivery of the Certificates.

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THE LEASED PROPERTY

Description of the Leased Property

The Leased Property consists of the land and improvements which constitute the Water Street Men’s Detention Facility and the Blaine Street Women’s Detention Facility of the County. The Blaine Street Women’s Detention Facility is being included in the Leased Property in substitution for the County’s men’s medium security detention facility originally leased under the Lease Agreement.

The appraised value of the Leased Property is at least equal to $23,350,000, which is in excess of the combined principal amount of the outstanding 2005 Certificates, the 2006 Certificates, the 2008 Certificates and the Certificates ($22,015,000). The following is a brief description of these facilities.

Water Street Detention Facility

The Water Street Detention Facility serves as the County’s primary adult men’s detention facility. Phases I and II of this facility were designed and constructed to operate as a single maximum security facility. The first phase was completed in 1982 and the second phase was completed in 1986. The two phases together total 71,000 square feet, located on approximately 5.65 acres of land fronting on Water Street in the City of Santa Cruz (the “Site”). In calendar year 2013, this facility had an average daily population of 369 individuals and various law enforcement agencies in the County brought 9,791 individuals to this facility for booking. The facility is located in a flood zone designation AE subject to inundation by 100-year shallow flooding.

Blaine Street Detention Facility

The Blaine Street Women’s Detention Facility is also located on the Site. This women’s minimum/medium jail facility is 8,166 square feet and was also built in 1986. The facility has a rated inmate capacity of 32 inmates and an average daily population in 2013 of 16 individuals.

Additional Obligations Payable from Lease Payments

The County may amend and supplement the Lease Agreement for the purpose of providing additional lease payment obligations of the County thereunder which secure additional bonds, certificates of participation or other debt instruments. Such provision is currently being utilized by the County in connection with the Certificates, through the execution and delivery of the Lease Supplement which provides for supplemental lease payments under the Lease Agreement, constituting the Lease Payments which are evidenced by the Certificates. The County covenants in the Lease Agreement not to incur any such additional lease obligations under the Lease Agreement unless the Leased Property has a value at least equal to the principal amount of the outstanding obligations which are secured by such lease payments, including the 2005 Certificates, the 2006 Certificates, the 2008 Certificates, the Certificates and the additional bonds, certificates or other debt instruments.

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SOURCES OF PAYMENT FOR THE CERTIFICATES

General

Each Certificate represents a direct, undivided fractional interest in the Lease Payments to be made by the County (except certain right to indemnification) to the Authority under the Lease Agreement, consisting of the supplemental lease payments which the County is obligated to pay under the Lease Supplement. Under the Assignment Agreement, the Authority has assigned all of its rights under the Lease Agreement, including its rights to receive 2014 Lease Payments from the County and its remedies under the Lease Agreement to the Trustee for the benefit of the Owners of the Certificates. The 2014 Lease Payments are calculated to be sufficient to pay, when due, the annual principal of and interest due with respect to the Certificates.

Principal and interest with respect to the Certificates will be paid from the 2014 Lease Payments payable by the County for the use and possession of the Leased Property, insurance or condemnation Net Proceeds received in respect to the Leased Property to the extent that such Net Proceeds are not used for repair or replacement, interest or other income derived from the investment of the funds held by the Trustee under the Trust Agreement, or, in certain instances, from the Reserve Fund established by the Trust Agreement.

Lease Payments; Abatement

The County is required to pay to the Authority specified amounts for use of the Leased Property, which are equal to the principal of and interest due with respect to the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates. The Lease Payments payable under the Lease Agreement are in addition to the 2005 Lease Payments, the 2006 Lease Payments and the 2008 Lease Payments which the County has agreed to pay for the use and possession of the Leased Property under the 2005 Lease Agreement, 2006 Supplement and 2008 Supplement. The Lease Agreement requires the County to make Lease Payments to the Authority fifteen days preceding each Interest Payment Date. Under the Assignment Agreement, the Authority has assigned its rights to receive 2014 Lease Payments to the Trustee for the benefit of the Certificate Owners, as a result of which all 2014 Lease Payments will be made by the County directly to the Trustee. The Trust Agreement requires that the 2014 Lease Payments necessary to pay the principal and interest with respect to the Certificates then coming due and payable will be deposited in the Lease Payment Fund maintained by the Trustee under the Trust Agreement.

The County covenants in the Lease Agreement to take such action as may be necessary to include all Lease Payments in its annual budgets and to make annual appropriations for all such Lease Payments. The Lease Agreement provides that the several actions required by such covenants are deemed to be and shall be construed to be duties imposed by law and that it is the duty of each and every public official of the County to take such action and do such things as are required by law in the performance of the official duty of such official to enable the County to carry out and perform the covenants in the Lease Agreement agreed to be carried out and performed by the County.

The Lease Agreement provides that Lease Payments for any portion of the Leased Property will be abated during any period in which there is substantial interference with the County’s use of such portions of the Leased Property because of damage, destruction or condemnation of such portions. The amount of such abatement will be an amount such that the resulting Lease Payments represent fair consideration for the use and occupancy of the portions of the Leased Property not taken, damaged or destroyed. Such abatement will continue for the period commencing with such taking, damage or destruction and ending with the substantial completion of the work of replacement, repair or reconstruction. In the event of any such damage or destruction, the Lease Agreement will continue in full force and effect and the County waives any right to terminate the Lease Agreement by virtue of such damages, destruction and taking. Notwithstanding the foregoing, there shall be no abatement of Lease Payments under the Lease Agreement to the extent that the proceeds of rental interruption insurance or amounts in the Lease Payment Fund or the

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Reserve Fund are available to pay Lease Payments which would otherwise be abated under the Lease Agreement. Any such abatement will be allocated on a pro-rata basis between the 2005 Lease Payments, the 2006 Lease Payments, the 2008 Lease Payments and the 2014 Lease Payments.

During any period of abatement of 2014 Lease Payments, the Trustee may pay principal and interest with respect to the Certificates allocable to such portions of the Leased Property from moneys on deposit in the Reserve Fund, and, if available, a pro-rata share of proceeds of insurance or condemnation award. The County’s reduced rental payments will constitute the total Lease Payments. The reduced Lease Payments may not be sufficient to pay principal and interest with respect to the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates in the amounts and at the rates set forth therein. In the event and to the extent the Lease Payments are subject to abatement, there could be insufficient amounts to pay principal of and interest with respect to the 2005 Certificates, the 2006 Certificates, the 2008 Certificates and the Certificates in full, and such insufficiency would not constitute a default by the County under the Trust Agreement, the Lease Agreement or otherwise.

The obligation of the County to make Lease Payments does not constitute an indebtedness of the County for which the County is obligated to levy or pledge any form of taxation or for which the County has levied or pledged any form of taxation. Neither the Certificates nor the obligation of the County to make Lease Payments constitutes an indebtedness of the County, the State of California, or any of its political subdivisions within the meaning of any constitutional or statutory debt limitation or restriction.

Reserve Fund

A Reserve Fund has been established under the Trust Agreement to be held by the Trustee to further secure the timely payment of principal and interest represented by the Certificates. The reserve requirement is an amount equal to the lesser of (a) 10% of the initial offering price to the public of the Certificates as determined by the Internal Revenue Code, (b) maximum amount of 2014 Lease Payments coming due in the current or any future Certificate Year, or (c) 125% of average annual 2014 Lease Payments as of the date of issuance (the “Reserve Requirement”) and will initially be funded in the amount of $508,343.76 Amounts in the Reserve Fund are to be used only to make 2014 Lease Payments with respect to the Certificates to the extent the amounts in the Lease Payment Fund are insufficient for such purpose. All interest or income received on the investment of the Reserve Fund is required to be retained in the Reserve Fund in the event that amounts on deposit in the Reserve Fund is less than the Reserve Requirement. All interest or income received on the investment of the Reserve Fund will be transferred to the Lease Payment Fund to the extent the Reserve Requirement is satisfied. Amounts in the Reserve Fund are not pledged or available to make payments with respect to the 2005 Certificates, the 2006 Certificates or the 2008 Certificates.

Insurance Relating to the Leased Property

The Lease Agreement requires the County to maintain or cause to be maintained with respect to the Leased Property, comprehensive general public liability and property damage insurance and fire insurance with extended coverage. Such insurance must include earthquake coverage, but only if earthquake coverage is available at reasonable cost from reputable insurers in the reasonable opinion of the County and only with respect to structures. The County is also required to maintain rental interruption insurance covering loss of the use of any part of the Leased Property in an amount equal to the maximum aggregate amount of Lease Payments scheduled to be payable in any twenty-four month period (see “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - LEASE AGREEMENT - Insurance” and “RISK FACTORS - The Lease Payments - Insurance” herein). Although the County currently maintains earthquake insurance with respect to the Leased Property (see “THE LEASED PROPERTY”), damage from earthquakes may not be covered in future years.

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In the event the Leased Property is damaged or destroyed, the County may apply the net proceeds of any insurance award (except that included for the purposes of rental interruption) to replace, repair, restore, modify or improve (collectively, “repair”) the Leased Property, or if repairing the Leased Property is not economically feasible, or in the best interest of the County, to prepay the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates. In the event the Leased Property has been damaged or destroyed and the County directs the Trustee to apply insurance proceeds arising from such damage or destruction to the payment or prepayment of Lease Payments, then the Trustee shall apply such proceeds to the redemption of Certificates as described under the caption “THE CERTIFICATES - Prepayment - Prepayment From Net Proceeds of Insurance or Condemnation” herein. The amount of the Lease Payments will be adjusted or abated (but only after all available moneys have been depleted) during any period in which damage or destruction to the Leased Property or condemnation of the Leased Property substantially interferes with the County’s use and possession thereof.

If there are not sufficient insurance proceeds to complete repair of the Leased Property, the Lease Payment schedule will be proportionally reduced in accordance with the Lease Agreement. Such reduced Lease Payments may not be sufficient to pay principal and interest with respect to the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates. Such reduction would not constitute a default under either the Trust Agreement or the Lease Agreement.

Reentering and Reletting

If the County defaults in performance of its obligations under the Lease Agreement, the Trustee, as assignee of the Authority, may re-enter and relet the Leased Property and may enforce the Lease Agreement and hold the County liable for all Lease Payments on an annual basis while re-entering and reletting the Leased Property. Such re-entry and reletting shall not effect a surrender of the Lease Agreement. The County, in the event of default, waives all rights to any rentals received by the Trustee through reletting of the Leased Property. The County agrees to pay all costs, loss or damage howsoever occurring.

Due to the fact that the Leased Property serves essential governmental purposes and the specialized nature of the Leased Property, it is unlikely that the Trustee could readily re-lease it for rents which are sufficient to enable it to pay principal and interest represented by the Certificates, the 2005 Certificates and the 2006 Certificates in full when due, or that a court would permit such remedy to be exercised on a timely basis.

Encumbrances; Substitution of Property

The County and the Authority may not create any mortgage, pledge, lien, charge or encumbrance upon the Leased Property other than “Permitted Encumbrances.” The County has the right under the Lease Agreement, however, to delete or substitute for portions of the Leased Property an alternate Leased Property subject to the satisfaction of certain requirements. Such requirements for substitution of property under the Lease Agreement include the requirements that the County obtain an appraisal report prepared by an MAI appraiser demonstrating that the market value of the new property is not less than the principal amount of the Outstanding Certificates, 2005 Certificates, 2006 Certificates, 2008 Certificates, and Additional Debt, if any.

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THE AUTHORITY The Authority is a joint exercise of powers authority organized and existing under and by virtue of the Joint Powers Act. The County of Santa Cruz, pursuant to Resolution No. 152-90 adopted on March 6, 1990, and the Santa Cruz County Redevelopment Agency, pursuant to Resolution No. 153-90 adopted on March 6, 1990, formed the Authority by the execution of a Joint Exercise of Powers Agreement.

The Authority is governed by a five-member Board which consists of all members of the County Board of Supervisors. The Chair of the Board of Supervisors acts as the Chair of the Authority. The County Administrative Officer acts as the Executive Director, the Assistant County Administrative Officer acts as the Assistant Executive Director, the Clerk of the Board acts as the Secretary and the County Auditor-Controller acts as the Treasurer of the Authority.

SANTA CRUZ COUNTY

General Information

Santa Cruz County is situated at the northern tip of Monterey Bay, 65 miles south of San Francisco, 35 miles north of Monterey, and 35 miles south of the Silicon Valley. The County is the gateway to the Monterey Bay National Marine Sanctuary, has 29 miles of beaches and includes seven state parks and seven state beaches. It is the second smallest county in California in land area, containing a total of 440 square miles. Two-thirds of the County is considered to be forest land by the U.S. Department of Agriculture. There are four incorporated cities in the County of Santa Cruz: Capitola, Santa Cruz, Scotts Valley and Watsonville. The City of Santa Cruz was incorporated as a city in 1866. It is the county seat of the County and is the location of the Santa Cruz campus of the University of California. The City of Watsonville, established in 1868, lies 18 miles southeast of the City of Santa Cruz. It is the trading and shipping center for the Pajaro River Valley, a fertile agricultural region. The City of Watsonville is the center of the County’s agriculture region transporting fresh and processed farm crops to worldwide destinations. Watsonville’s economy has been diversifying with an influx of electronics, manufacturing, and service firms. The City of Capitola stretches along the coast east and south of the City of Santa Cruz. It was incorporated in 1949 and is a tourist destination. The City of Scotts Valley, incorporated in 1966, lies north of the City of Santa Cruz and includes community commercial areas serving local residents and a mix of industrial sites that have supported light manufacturing and research development firms predominantly in the electronics and technology industries.

Unincorporated communities in Santa Cruz County include: Live Oak, an urban coastal area, between the City of Santa Cruz and the City of Capitola; Soquel, which lies inland between Capitola and Santa Cruz; Aptos; south of Soquel, Felton; Ben Lomond and Boulder Creek, which are located in the San Lorenzo Valley between the City of Santa Cruz and Big Basin State Park; Davenport, which is located on the coast north of the City of Santa Cruz; Freedom, which is adjacent to and north of the City of Watsonville; and the Pajaro Valley, an agricultural area surrounding the City of Watsonville.

Government Organization

The County was incorporated in 1850 as one of the original 27 counties of the State with the City of Santa Cruz as the County seat. It has a general law form of government. A five-member Board of Supervisors elected to four-year terms serves as the legislative body. Also elected are the Auditor-Controller, District Attorney-Public Administrator, Sheriff-Coroner, County Clerk, Assessor-Recorder, and Treasurer-Tax Collector. The County Administrative Officer and County Counsel are appointed by the Board of Supervisors.

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The members of the Board of Supervisors, the expiration dates of their terms and key administrative personnel are set forth in the charts below.

BOARD OF SUPERVISORS

Board Member Term Expires John Leopold, Supervisor, 1st DistrictZach Friend, Supervisor, 2nd District Neal Coonerty, Supervisor, 3rd District Greg Caput, Supervisor, 4th District Bruce McPherson, Supervisor, 5th District

January 2017January 2017 January 2015 January 2015 January 2017

KEY ADMINISTRATIVE PERSONNEL

Susan A. Mauriello Mary Jo Walker Fred Keeley Dana McRae Carol D. Kelly

County Administrative OfficerAuditor-Controller Treasurer-Tax Collector County Counsel Assistant County Administrative Officer

The Board of Supervisors approved the consolidation of the Auditor-Controller and Treasurer-Tax Collector elected officer beginning January 5, 2015.

Governmental Services

Criminal Justice System

The County criminal justice system is supported primarily by local County revenues. In addition to the Sheriff, Adult and Juvenile Detention, the Probation Department, the District Attorney and the Public Defender, the County is responsible for the facilities of the State Courts. In addition to countywide law enforcement services, the Sheriff provides narcotics enforcement, investigation of arson, homicides, consumer fraud and crime scene investigation, and acts as coroner for the County and all incorporated cities. The Sheriff operates three jail facilities throughout the County.

General Government

The County is responsible for the administration of the property tax system, including property assessment, assessment appeals, collection of taxes and distribution of taxes to cities, former redevelopment agencies, special districts, local school districts and the County. A second major function is the County’s voter registration and election system.

Emergency Services

The County coordinates an entire emergency network to handle floods, fires, earthquakes and other major disasters. The Santa Cruz County Flood Control and Water Conservation District provides flood control and water conservation planning. Fire protection services in the County are provided by the cities of Santa Cruz and Watsonville, ten fire protection districts and the University of California, Santa Cruz. The Santa Cruz County Fire Department in cooperation with the California Department of Forestry and Fire Protection (CALFIRE) is responsible for fire protection and first responder emergency medical services, in all five unincorporated areas outside the boundaries of the fire protection districts. The County is a participant in a joint powers emergency communications agency which provides public safety dispatchers who coordinate multi-agency mutual aid response, as well as dispatch the Sheriff’s Department, ambulance/paramedic services and most fire protection agencies operating within the County.

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Health and Human Services

The County’s Health Services Agency was established to provide central administration for various health-related programs operated or sponsored by the County. These programs include mental health, public health, medical outpatient clinics, medical care for indigents and drug and alcohol treatment services. Most programs operated by the Health Services Agency are mandated by State law and are funded through State subsidies, grants and fees for services. State and federal laws also mandate that counties provide certain human services including Aid to Families with Dependent Children, CalFresh program, Adult Protective Services, public guardian, Child Protective Services, foster care and adoption services and job training. Implementation of the Patient Protection and Affordable Care Act (“Affordable Care Act”) will be provided by the County’s Human Services Department (social services) and by the Health Services Agency.

Culture and Recreation

The Parks, Open Space and Cultural Services Division of the Department of Public Works (“POSCS”) is responsible for maintenance of the County’s park system, and currently operates 59 separate park sites totaling 225 acres with 10 soccer fields, 10 baseball fields, and 4 public pools. POSCS offers a wide variety of recreational and cultural programs, events and services year-round.

Community Information

Public school education is available through 35 elementary schools, 21 secondary schools and 10 unified school districts as well as numerous charter and alternative education programs. The University of California (the “University”) established its Santa Cruz campus in 1965. The University is structured into ten independent undergraduate colleges and offers graduate study in 41 academic fields. Eight of the colleges are self-contained educational and residential communities. The Lick Observatory, a multi-campus research facility for astronomers, is headquartered at the University. University sponsored activities form an important part of the cultural life of Santa Cruz County. The 2,000-acre campus, set among redwood groves and meadows, lies on the northwest boundary of the City of Santa Cruz.

Cabrillo Community College (“Cabrillo”), a publicly supported institution, offers a broad curriculum which includes liberal arts, business, engineering, nursing and allied health technologies, and vocational education. Cabrillo is located in the community of Aptos.

Santa Cruz County also hosts the Seymour Marine Discovery Center, the Long Marine Laboratory, the National Marine Fisheries Service, the Oiled Wildlife Veterinary Care and Research Center, and the Monterey Bay National Marine Sanctuary Exploration Center.

There are two full service hospitals in the County. Santa Cruz Dominican Hospital is located in the Santa Cruz area and Watsonville Community Hospital is located in Watsonville. A maternity and outpatient surgery center, Sutter Hospital, is also located in the County.

Cultural amenities include Open Studios, the Tannery Arts Center, the Santa Cruz County Symphony, the Cabrillo Music Festival, Shakespeare Santa Cruz, the McPherson Museum of Art and History, the University of California Performing Arts Center, the Henry J. Mello Performing Arts Center and the Cabrillo College Visual & Performing Arts Complex.

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Transportation

Six major State highways connect Santa Cruz with adjacent counties. Highway 1 leads along the coast from San Francisco south to the City of Santa Cruz and on to Monterey. Highways 9 and 17 traverse the County from the City of Santa Cruz across the Santa Cruz Mountains into Santa Clara County. Watsonville is joined with Santa Clara County by Highway 152 and with San Benito County by Highway 129. Highways 17, 152 and 129 connect with U.S. 101, a major north-south route. Highway 236 provides access to Big Basin State Park.

Air cargo and passenger flight services are provided at the Norman Y. Mineta San José International Airport, 32 miles east; Monterey Peninsula Airport, 43 miles south; and San Francisco International Airport, 60 miles northeast. Watsonville Municipal Airport provides private and executive air transportation facilities and air cargo.

Bus transportation is provided through the Santa Cruz Metropolitan Transit District for inter-urban and local inter-community service. Greyhound Bus Lines provide service to other local areas and additional transcontinental service with connections to Amtrak.

Population

Approximately 50.9% of the County’s population lives in the County’s four incorporated cities: Capitola, Santa Cruz, Scotts Valley and Watsonville.

TABLE NO. 1 COUNTY OF SANTA CRUZ

POPULATION INCORPORATED CITIES AND UNINCORPORATED COMMUNITIES

2009 – 2013

Unincorporated

Incorporated Cities Communities Santa Cruz County

Percentage Percentage Percentage

Year Population Change Population Change Population Change

2009 131,638 129,254 260,892

2010 132,628 0.8% 129,924 0.5% 262,552 0.6%

2011 133,975 1.0% 129,979 0.0% 263,954 0.5%

2012 134,879 0.7% 130,471 0.4% 265,350 0.5%

2013 135,650 0.6% 131,012 0.4% 266,662 0.5%

% Increase Between

2009 - 2013 3.0% 1.4% 2.2%

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The population in the incorporated cities in Santa Cruz County is set forth in the following table:

Year Capitola Santa Cruz Scotts Valley Watsonville Total

2009 9,861 59,357 11,520 50,900 131,638

2010 9,924 59,871 11,587 51,246 132,628

2011 9,923 61,245 11,581 51,226 133,975

2012 9,957 61,825 11,613 51,484 134,879

2013 9,988 62,372 11,678 51,612 135,650

% Increase Between

2009 - 2013 1.3% 5.1% 1.4% 1.4% 3.0%

Source: State of California, Department of Finance, “E-4 Population Estimates for Cities, Counties and the State, 2001-2010, with 2000 & 2010 Census Counts” Sacramento, California, November 2012, and “E-4 Population Estimates for Cities, Counties, and the State, 2011-2013, with 2010 Census Benchmark” Sacramento, California, May 2013.

The County is adjacent to Santa Clara and Monterey counties. The following table sets forth the population for Santa Cruz County, Santa Clara County and Monterey County between 2009 and 2013.

TABLE NO. 2 POPULATION

COUNTIES OF SANTA CRUZ, SANTA CLARA AND MONTEREY 2009 – 2013

SANTA CRUZ COUNTY SANTA CLARA COUNTY MONTEREY COUNTY

Percentage Percentage Percentage

Year Population Change Population Change Population Change

2009 260,892 1,767,204 412,233

2010 262,552 0.6% 1,781,427 0.8% 415,108 0.7%

2011 263,954 0.5% 1,794,337 0.7% 416,968 0.4%

2012 265,350 0.5% 1,813,696 1.1% 419,586 0.6%

2013 266,662 0.5% 1,842,254 1.6% 421,494 0.5%

% Increase Between

2009 - 2013 2.2% 4.2% 2.2%

Source: State of California, Department of Finance, “E-4 Population Estimates for Cities, Counties and the State, 2001-2010, with 2000 & 2010 Census Counts” Sacramento, California, November 2012, and “E-4 Population Estimates for Cities, Counties, and the State, 2011-2013, with 2010 Census Benchmark” Sacramento, California, May 2013.

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Per Capita Personal Income

Per capita personal income information for the County, the State of California and the United States are summarized in the following table.

TABLE NO. 3 PER CAPITA PERSONAL INCOME

SANTA CRUZ COUNTY, CALIFORNIA AND UNITED STATES 2008 – 2012

Year Santa Cruz County (1) State of California (1) United States (1)

2008 $50,446 $43,609 $40,873

2009 46,584 41,569 39,357

2010 46,925 42,297 40,163

2011 50,138 44,666 42,298

2012 52,442 46,477 43,735

Source: U.S. Department of Commerce, Bureau of Economic Analysis. ____________________________________

(1) Per capita personal income was computed using Census Bureau midyear population estimates. Estimates for 2010-2012 reflect county population estimates available as of March 2013.

Note: All state and local area dollar estimates are in current dollars (not adjusted for inflation). Estimates for 2001 forward reflect the results of the comprehensive revision to the national income and product accounts (NIPAs) released in July 2013. This will create a temporary break in BEA’s time series for earlier years.

Last updated: November 21, 2013 - new estimates for 2012; revised estimates for 2001-2011.

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Employment and Industry

Services

Analysis prepared by the Santa Cruz County Workforce Investment Board identified five major economic clusters that contribute significantly to the regional economy: technology, tourism, lifestyle enterprises, agriculture, and environmental technology.

The services sector is the largest economic sector in the County, and includes a wide range of activity. Hotels, other lodging places, business and finance services, personal services, automotive repairs services, amusement and recreation, and health services are all part of this sector. The sector includes employers such as Plantronics, which develops computer software and business computer applications, and Bluetooth Mobile headsets, the Santa Cruz Beach Boardwalk (employing 1,600 in the high season) and Dominican Hospital (about 1,000 employees), as well as very small software development and business service firms employing 10 or fewer.

New information technologies and the County’s proximity to Silicon Valley are factors that contribute to growth in the areas of computer, networking services, and software development, and the County’s location on the Monterey Bay National Marine Sanctuary contributes to growth in marine sciences’ research and development.

Agriculture

Agriculture is one of the region’s largest industries. The gross value of crops has increased steadily in recent years, as some segments of the industry have adapted successfully to changing consumer tastes, adopted new technologies and taken advantage of growing overseas markets. The agriculture economy has become highly diversified, producing over 2,000 kinds of crops in Santa Cruz County. According to the County’s Agriculture Commissioner, the largest producers are strawberries, raspberries, cut flowers, nursery and landscape plants and vegetables.

Tourism

Santa Cruz County is an important vacation and recreation area. Miles of coastline and accessible beaches border the second largest Marine Sanctuary in the world, an amusement park and other attractions, acres of redwood forest land, multiple State Parks, U-pick farms, wineries, and the presence of a diverse music and art scene, all in close proximity to the Bay Area.

Commercial

In addition to traditional commercial and retail businesses, Santa Cruz County is home to many recreation and personal lifestyle businesses started by local entrepreneurs with nationally-recognized brands and products, including O’Neill Wetsuits, Santa Cruz Skateboards, Annieglass, Odwalla Juices, Driscoll Berries, Santa Cruz Guitars, Marmot Clothing and Equipment, and Santa Cruz Bicycles. The County also has a diverse and productive arts community anchored by the Tannery Arts Center in Santa Cruz, the Visual, Applied and Performing Arts Division at Cabrillo College, and the Digital Arts and New Media Program at the University of California, Santa Cruz.

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Santa Cruz County is located in the Santa Cruz-Watsonville Metropolitan Statistical Area (“MSA”). As of December 2013, seven major job categories constitute 87.5% of the work force. These are government (22.9%), service producing (16.4%), educational and health services (14.3%), leisure and hospitality (11.5%), professional and business services (10.2%), manufacturing (6.1%), and farm (6.1%). The December 2013 unemployment rate in the Santa Cruz-Watsonville MSA was 9.2% (not seasonally adjusted to account for agricultural employment). The State of California December 2013 unemployment rate (unadjusted) was 7.9%. The employment in the Santa Cruz-Watsonville MSA is presented in the following table.

TABLE NO. 4 SANTA CRUZ-WATSONVILLE MSA

WAGE AND SALARY WORKERS BY INDUSTRY (1) (in thousands)

Industry 2009 2010 2011 2012 2013

Government 20.3 21.0 18.9 22.1 22.4

Other Services 3.6 3.5 3.7 3.7 3.6

Leisure and Hospitality 10.2 10.0 10.3 11.5 11.2

Educational and Health Services 13.2 13.9 14.0 14.1 14.0

Professional and Business Services 9.1 9.3 9.3 10.0 10.0

Financial Activities 3.3 3.2 3.0 3.3 3.3

Information 1.0 0.9 0.9 0.8 0.8

Transportation, Warehousing and Utilities 1.4 1.5 1.3 1.5 1.5

Service Producing

Retail Trade 11.7 11.8 11.6 12.2 12.5

Wholesale Trade 3.5 3.5 3.4 3.5 3.5

Manufacturing

Nondurable Goods 2.5 2.9 2.5 2.6 2.8

Durable Goods 2.8 3.0 3.0 3.0 3.1

Goods Producing

Mining, Logging and Construction 2.9 2.8 2.9 3.1 3.1

Total Nonfarm 85.5 87.3 84.8 91.4 91.8

Farm 6.0 5.9 5.1 5.6 6.0

Total (all industries) 91.5 93.2 89.9 97.0 97.8

Source: State of California Employment Development Department, Labor Market Information Division, “Industry Employment & Labor Force - by month, March 2012 Benchmark.”

__________________________________________

(1) Annually, as of December.

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The principal employers operating within the County during the Fiscal Year ended June 30, 2013 are as follows:

TABLE NO. 5 COUNTY OF SANTA CRUZ PRINCIPAL EMPLOYERS

Number

Name of Company of Employees (1) Product/Service

University of California at Santa Cruz 1,000-4,999 Education

County of Santa Cruz 1,000-4,999 County Services

Pajaro Valley Unified School District 1,000-4,999 Education

Dominican Hospital 1,000-4,999 Hospital

Santa Cruz Beach Boardwalk 1,000-4,999 Amusement/Recreation

Cabrillo College 500-999 Education

City of Santa Cruz 500-999 City Services

Threshold Enterprises 500-999 Manufacturing

Watsonville Community Hospital 500-999 Hospital

West Marine 500-999 Retail

Plantronics 500-999 Telephone Apparatus Manufacturer

Santa Cruz City School District 500-999 Education

Source: County of Santa Cruz Comprehensive Annual Financial Report. __________________________________________

(1) Number of Employees reflects an average range based on California Employment Development Department data.

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Commercial Activity

The following table summarizes the volume of retail and food services sales and taxable transactions for the County for 2007 through 2011 (the most recent year for which full-year statistics are available). The County’s sales tax receipts increased by approximately 6.2% for Fiscal Year 2011/12 and by approximately 8.4% in 2012/13.

TABLE NO. 6 COUNTY OF SANTA CRUZ

TOTAL TAXABLE TRANSACTIONS (in $ thousands)

2007 - 2011

Retail and Retail and Total Taxable

Food Services Food Services Transactions Issued Sales

Year ($000’s) % Change Permits ($000’s) % Change Permits

2007 2,385,543 3,719 3,195,786 8,568

2008 2,211,878 (7.3%) 3,807 3,031,072 (5.2%) 8,614

2009 1,956,754 (11.5%) 5,557 2,638,469 (13.0%) 8,092

2010 2,079,236 6.3% 5,711 2,731,832 3.5% 8,222

2011 2,248,131 8.1% 5,823 2,893,395 5.9% 8,301

Source: California State Board of Equalization, “Taxable Sales in California.”

The following table sets forth taxable transactions in the County of Santa Cruz and surrounding counties for 2007 through 2011 (the most recent year for which full-year statistics are available).

TABLE NO. 7 TOTAL TAXABLE TRANSACTIONS

COUNTY OF SANTA CRUZ AND SURROUNDING COUNTIES (in $ thousands)

2007 - 2011

% Change from

County 2007 2008 2009 2010 2011 2007 - 2011

SANTA CRUZ $ 3,195,786 $ 3,031,072 $ 2,638,469 $ 2,731,832 $ 2,893,395 (9.5%)

San Mateo 13,326,306 13,137,913 11,327,022 11,966,338 13,020,643 (2.3%)

Santa Clara 33,663,448 32,274,306 27,427,709 30,523,322 33,431,217 (0.7%)

San Benito 550,032 504,523 422,942 449,872 486,490 (11.6%)

Monterey 5,680,652 5,399,594 4,705,845 4,955,562 5,312,732 (6.5%)

Source: California State Board of Equalization, “Taxable Sales in California.”

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Taxable transactions by type of business for the County are summarized below for 2007 through 2011 (the most recent year for which full-year statistics are available).

TABLE NO. 8 COUNTY OF SANTA CRUZ

TAXABLE TRANSACTIONS BY TYPE OF BUSINESS (in $ thousands)

2007 – 2011

2007 2008 2009 2010 2011

Retail and Food Services

Motor Vehicle and Parts Dealers $ 341,717 $ 248,129 $ 202,343 $ 217,152 $ 257,320

Furniture and Home Furnishings Stores 73,331 57,776 42,214 42,656 47,221

Electronics and Appliance Stores 43,465 46,476 60,553 63,183 66,499

Building Material, Garden Supplies 283,731 240,523 200,782 243,660 247,364

Food and Beverage Stores 236,194 225,836 210,528 215,102 226,249

Health and Personal Care Stores 83,576 85,288 91,471 89,147 96,753

Gasoline Stations 252,183 290,255 238,382 283,133 349,163

Clothing and Accessories Stores 115,004 120,243 128,188 133,381 139,153

Sporting Goods, Hobby, Books, Music 87,901 72,756 78,106 79,066 81,319

General Merchandise 305,958 273,635 232,232 235,293 238,918

Miscellaneous Store Retailers 223,765 207,397 127,037 126,282 128,820

Nonstore Retailers - - 13,172 13,818 14,918

Food Services and Drinking Places 338,718 343,564 331,746 337,363 354,433

Total Retail and Food Services 2,385,543 2,211,878 1,956,754 2,079,236 2,248,131

All Other Outlets 810,243 819,194 681,715 652,596 645,264

Total All Outlets $3,195,786 $3,031,072 $2,638,469 $2,731,832 $2,893,395

Source: California State Board of Equalization, “Taxable Sales in California.”

Note: In 2009, the classification of some categories were changed and are not directly comparable with prior years.

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Building Activity

The following table summarizes building activity valuations for the County for the five calendar years from 2008 through 2012.

TABLE NO. 9 COUNTY OF SANTA CRUZ

BUILDING ACTIVITY AND VALUATION (in $ thousands)

2008 – 2012

2008 2009 2010 2011 2012

Residential $100,176 $ 54,300 $ 61,446 $ 58,010 $ 68,932

Non-Residential 66,206 50,809 40,841 40,165 51,671

Total Valuation $166,382 $105,109 $102,287 $ 98,175 $120,603

No. of New Dwelling Units:

Single-Dwelling 194 107 92 79 80

Multi-Dwelling 63 2 23 111 173

Total New Units 257 109 115 190 253

Source: County of Santa Cruz Comprehensive Annual Financial Report.

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FINANCIAL INFORMATION

Economic Conditions and Outlook

The County, like many other municipal entities, was not immune to the effects of the most recent economic recession. Like many municipal entities throughout the nation, the County’s General Fund revenues were hampered as a result of declining assessed values and depressed consumer spending. The County’s Budget for Fiscal Year 2013/14 (“Budget”) continued to reflect the slow economic recovery.

A 3.1% decline in Fiscal Year 2009/10 assessed values marked the first decline in the County since it began tracking property tax growth in 1968. Assessed value declined further by 0.6%, 0.1% and 0.9% for Fiscal Years 2010/11, 2011/12 and 2012/13, respectively. Assessed values increased by 3.9% in Fiscal Year 2013/14, including allowed inflationary increases and the recapture of some of the market value reductions in real estate in prior years as discussed under the caption “Taxable Property and Assessed Valuation” below.

Sales tax receipts were also affected by the downturn, declining by 10% in both Fiscal Years 2008/09 and 2009/10. However, sales tax receipts increased by 9% in Fiscal Year 2010/11, 6% in Fiscal Year 2011/12 and 9% for Fiscal Year 2012/13. In addition, actual sales tax for Fiscal Year 2013/14 is expected to exceed amounts budgeted.

Tourism is important to the Santa Cruz County economy. After a brief period of weaker tourist spending, the County experienced a 12% increase in transient occupancy tax collections in Fiscal Year 2011/12 due to both increasing occupancy and institution of audit compliance procedures. In November 2012, voters approved a 1.5% increase to the transient occupancy tax rate which was expected, together with higher occupancy rates, to increase revenue by 14% in Fiscal Year 2013/14. Actual transient occupancy tax for Fiscal Year 2013/14 is expected to exceed amounts budgeted.

The County continues to employ strict cost control measures to reduce budget imbalances. With respect to staffing costs in prior years, employees were offered other available positions to the extent possible if positions eliminated were not vacant. In Fiscal Year 2012/13, County employees agreed to continue the furlough program, although at a level that was 2.3% lower than prior years. Furloughs ranged from 12 days (4.62%) to 13.5 days (5.2%) depending on the bargaining unit. The County’s agreement with its largest employee bargaining unit was negotiated in September 2013 for a 3-year term and includes a reduced furlough to 6.5 days (2.5%) for the first 12 months, and the elimination of the furlough in future years. For the Fiscal Year 2013/14 Budget, the County had assumed either a continuation of the existing furlough, or an equivalent dollar amount of concessions, which assumption was realized at the conclusion of negotiations with bargaining units to date.

One factor not in the control of the County, and not estimated at this time, are any impacts of potential further federal sequestration spending cuts which, with respect to the County, target discretionary programs such as substance abuse prevention and treatment block grants, HIV screening and Workforce Investment Act grants. The County has made and continues to make supplemental budget changes as details are available, and to reduce programs in line with any funding cuts.

Despite the difficult economic climate, the County was able to increase its committed, assigned and unassigned General Fund reserves during Fiscal Year 2010/11 from $30.4 million to $35.2 million and during Fiscal Year 2011/12 from $35.2 million to $38.4 million. Such reserves decreased during Fiscal Year 2012/13 to $37 million, but not as much as originally anticipated. See “Financial Statements - GASB Statement No. 54” below for a discussion of General Fund fund balance designations by category. The final Fiscal Year 2013/14 Budget projected General Fund reserves declining by $9.8 million to $28.3 million by the end of Fiscal Year 2013/14, a level consistent with the County’s fund balance policy of 7% of General Fund revenue. See “Fiscal Year 2013/14 Budget Assumptions” below.

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Budgetary Process and Administration

In accordance with the provisions of Chapter 1, Division 3, Title 3, of the Government Code of the State of California, the County prepares and adopts a budget for each fiscal year. Prior to June 30, the County Administrative Officer is required to submit to the Board of Supervisors (the “Board”) a proposed budget for the fiscal year commencing the following July 1. The budget includes proposed expenditures and the means of financing them. On or before August 20, public hearings are conducted to obtain public comments. On or before October 1, the budget is legally enacted by adoption of a resolution.

The Board approves all transfers of budgeted appropriation amounts between budget units within any fund or between expenditure objects.

Budgetary control is maintained at appropriation totals for salaries and employee benefits, services and supplies. All budgetary changes during the budget year require Board action. No increase in the aggregate appropriations can be made unless the County receives written certification of additional revenue from the sources of such revenue.

Budget Policy

The County has adopted Budget Principles. The Budget Principles contain principles designed to provide overall guidance in the preparation, adoption, implementation and evaluation of the annual budget. The major principles include:

encouraging public input,

balanced budgeting,

targeting the use of Fund Balance for one-time costs and cyclical rather than structural budgetary imbalances,

maintaining prudent reserves for cashflow, and for unforeseen or emergency events,

prioritizing funding decisions,

responding to changing conditions,

developing strategic approach to address unfunded liabilities,

maintaining a five-year Capital Improvement Program, and

seeking cost recovery.

Fund Balance Policy

The County believes that sound financial management principles require that sufficient funds be retained by the County to provide a stable financial base at all times. To retain this stable financial base, the County needs to maintain unrestricted fund balance sufficient to fund cash flows of the County and to provide financial reserves for unanticipated expenditures and/or revenue shortfalls of an emergency nature. Committed, assigned and unassigned fund balances (described below under “Financial Statements - GASB Statement No. 54”) are considered unrestricted.

The purpose of the County’s fund balance policy is to maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls or unpredicted one-time expenditures.

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The policy is designed to achieve and maintain committed and assigned fund balance categories of no less than 7% of the upcoming year’s estimated General Fund revenues.

General Fund Revenues and Expenditures

The revenues in the tables that follow are categorized as:

Taxes, detailed in Table No. 14 “Tax Revenues by Source,” which includes general property tax, property tax in-lieu of motor vehicle license fees, sales tax, property tax in-lieu of sales tax and transient occupancy taxes;

Licenses and Permits, which includes construction and grading permits, franchise fees (cable, utility, trash) and food vendor permits;

Fines and Forfeitures, which includes municipal and vehicle code violations and criminal fines;

Revenue from Use of Money, which includes interest income and rent and concessions;

Intergovernmental Revenue, detailed in Table No. 15 “State and Federal Funds” which includes Proposition 172 sales tax, and state and federal reimbursements for health and welfare services;

Charges for Services, comprised of outpatient clinic fees (42%), County overhead charges (4%), property tax administration fees (4%), consumer fraud penalties and other charges such as booking fees, court filing fees, fees for dispatch services and alarm response, recoding fees, plan checking, building inspection, park and recreation fees and other municipal services (50%); and

Miscellaneous Revenue.

The expenditures in Table No. 10 that follows are categorized by governmental function, such as public protection and public assistance. Each function generally includes salaries and benefits, services and supplies and other charges.

Salaries and benefits include direct personnel costs, pension and post-retirement benefits, health insurance costs and workers’ compensation and unemployment insurance costs.

Services and supplies include non-personnel operating costs and contract professional services, of which approximately 43.5% relates to the Health Services Agency operations and 13.6% relates to the Human Services department.

Other charges primarily consist of non-personnel related costs, of which approximately 34.9% is related to health services and 50.4% is associated with social services.

Operating transfers reflected in the financial statements consist primarily of debt service payments. However, as shown in Table No. 10, for budget purposes, the County includes inter-department cost allocations to the Health Services Agency in the “transfers out” line. These transfers are eliminated in preparing the audited financial statements, as are any related transfers in from the Health Service Agency.

Fiscal Year 2013/14 Budget Assumptions

The County’s proposed Budget for 2013/14 reflected the County’s assessment of the continuing impact of the slow economic recovery on revenues.

Some key assumptions incorporated into the 2013/14 Budget are as follows:

Property tax would increase 1.4% from 2012/13 estimated actual figures;

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Property tax In-Lieu of Vehicle License fees would increase 1.6% from 2012/13 estimated actual figures;

Sales tax would remain level with 2012/13 estimated actual sales tax.

Transient occupancy tax would increase 14% compared with 2012/13 estimated actual transient occupancy tax primarily due to a tax rate increase of 1.5% approved by voters. Estimated actual 2012/13 transient occupancy tax was expected to be relatively equal to transient occupancy tax received in 2011/12, after an increase of 12.2% from 2010/11.

Additional expenses relating to realignment of programs from the State level to the County level would be offset by revenue from the State.

The County would make further adjustments to its budget if required as a result of the adoption of the State’s final 2013/14 budget. See “RISK FACTORS - State Budget” herein.

The elimination of 8.75 vacant positions and 2.15 filled positions.

The addition of 55 positions required for the implementation of the Affordable Care Act (“ACA”), funded with federal and State ACA available funding.

Mid-year opening of the County’s Behavioral Health Center (“BHC”) facility, replacing acute psychiatric care services previously provided for by Dominican Hospital.

After budget hearings, the County made adjustments to the proposed budget revenues and expenditures. Revenues were increased by $6.4 million primarily for expected increases in reimbursable ACA expenditures on salaries, or for reimbursable costs for carryover items rebudgeted from Fiscal Year 2012/13. Expenditures were increased $11.1 million, of which $6.1 million were carryover obligations from Fiscal Year 2012/13 and $3.7 million were increased salary and benefits for additional ACA personnel. A reserve for contingencies of $1.27 million was also included. These increased costs were offset by a $2.5 million increase in related cost allocations. The 2013/14 Budget shown in Table No. 10 reflects these adjustments.

Mid-Year Update and Estimates for Fiscal Year 2014/15

As of the County’s mid-year review, the County’s tax revenues for Fiscal Year 2013/14 are expected to increase by $2.1 million over budgeted amounts, due to better than projected property tax, sales tax and transient occupancy tax receipts. An additional $1 million in budget savings are expected by year end due to cost savings and liquidation of prior year encumbrances no longer needed for current year appropriations.

Using the Fiscal Year 2013/14 Budget as the basis for Fiscal Year 2014/15 budgeting, the County expects that the $9.8 million deficit originally projected in the Fiscal Year 2013/14 Budget would be offset by a $1.7 million reduction in costs in Fiscal Year 2014/15 for the elimination of one-time expenditures included in the Fiscal Year 2013/14 Budget, together with a further $3.5 million in tax revenue growth over and above the growth projected in Fiscal Year 2013/14 based on the mid-year review (for a total increase in tax revenues of $5.6 million compared to the Fiscal Year 2013/14 Budget), a small increase in expenditures and the use of the anticipated $3.1 million in fund balance carryover from Fiscal Year 2013/14.

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TABLE NO. 10 COUNTY OF SANTA CRUZ

GENERAL FUND REVENUES AND EXPENDITURES

FY 2011/12 FY 2012/13 FY 2012/13 FY 2013/14

Actual Budget Actual Final Budget

Revenues

Taxes $ 88,406,635 $ 87,291,909 $ 88,390,337 $ 89,969,942

Licenses, Permits and Franchises 10,355,966 10,264,567 9,819,321 10,410,289

Fines and Forfeitures 4,660,530 4,565,517 4,418,159 5,483,063

Use of Money and Property 1,720,668 1,715,859 1,079,143 1,746,961

Intergovernment Revenues 198,723,877 206,092,439 208,953,957 207,890,368

Charges for Current Services 54,524,658 51,992,902 43,279,759 50,640,823

Other Revenues 2,058,972 4,049,294 3,554,348 3,251,942

Other Financing Sources 85,423 - 268,390 -

Transfers In (1) 2,569,154 29,736,614 2,073,089 26,987,150

Total Revenues 363,105,883 395,709,101 361,836,503 396,380,538

Expenditures

General Government 26,597,298 32,537,467 27,919,587 32,100,120

Public Protection 106,679,270 119,699,407 113,965,861 122,036,303

Public Ways and Facilities 190,609 222,411 219,847 217,364

Health and Sanitation 107,809,876 120,196,721 107,549,603 117,219,373

Public Assistance 98,996,195 105,289,933 101,042,337 110,836,591

Education 108,666 123,418 115,398 121,549

Recreation and Culture 5,800,735 5,906,733 5,663,542 6,162,351

Debt Service 364,502 247,502 182,978 229,809

Transfers Out (2) 13,619,810 22,137,770 6,777,255 16,028,664

Other Financing Uses 137,065 - - -

Appropriation for Contingency - 406,634 - 1,271,948

Total Expenditures 360,304,026 406,767,996 363,436,408 406,224,072

Net Change in Fund Balances 2,801,857 (11,058,895) (1,599,905) (9,843,534)

Beginning Fund Balance (3) 35,249,423 42,168,827 38,429,388 38,169,460

Change in Reserves 378,108 - 193,765 -

Ending Fund Balance (3) $ 38,429,388 $ 31,109,932 $ 37,023,248 $ 28,325,926 _________________________________________

(1) For budget purposes, the County budgets as “transfers in” revenues that the County receives for public health, mental health and social services that are required to be recorded first in a trust fund and transferred in or “realigned” for the intended General Fund purpose. These transfers are eliminated in preparing the audited financial statements.

(2) For budget purposes, the County budgets as “transfers out” the cost allocation which offsets the cost of services provided by various General Fund departments to other General Fund functions. These transfers are eliminated in preparing the audited financial statements. The primary transfers out shown in the audited financial statements are for the payment of debt service and in Fiscal Year 2011/12, a transfer of $7 million to the Capital Projects Fund relating to funding the BHC.

(3) Committed and Assigned Fund Balance only. See “Financial Statements - GASB Statement No. 54” below.

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Ad Valorem Property Taxes

Taxes are levied for each fiscal year on taxable real and personal property which is situated in the County as of the preceding January 1. For assessment and collection purposes, property is classified either as “secured” or “unsecured,” and is listed accordingly on separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containing State assessed property and real property having a tax lien which is sufficient, in the opinion of the assessor, to secure payment of the taxes. Other property is assessed on the “unsecured roll.”

Property taxes on the secured roll are due in two installments, on November 1 and February 1 of the fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment in addition to a $20 cost on the second installment. On July 1 of each fiscal year any property which is delinquent will become defaulted. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty of l½% per month to the time of redemption, together with any other charges permitted by law. If taxes are unpaid for a period of five years or more, the property is subject to sale by the County Tax Collector.

Property taxes on the unsecured roll become delinquent, if unpaid on August 31. A 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of l½% per month begins to accrue on November 1 of the fiscal year. The County has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Recorder’s Office, in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee.

The Teeter Plan

The County has adopted an alternate procedure authorized in Chapter 3, Part 8, Division 1 of the Revenue and Taxation Code of the State of California (comprising Sections 4701 through 4717, inclusive) commonly referred to as the “Teeter Plan,” for distribution of certain property tax levies on the secured roll.

Pursuant to the Teeter Plan, the County adopted Resolution 541-93 on October 5, 1993 adopting the Teeter Plan. Generally, the Teeter Plan provides for a tax distribution procedure by which secured roll taxes are distributed to taxing agencies within the County included in the Teeter Plan on the basis of the tax levy, rather than on the basis of actual tax collections. The County then receives all future delinquent tax payments, penalties and interest, and a complex tax redemption distribution system for all participating taxing agencies is avoided. All taxing agencies within the County are participating in the Teeter Plan. The County anticipates property taxes to be apportioned during each December, April and June, with the balance of the levy to be apportioned on or before June 30 each year. The overall historical and estimated delinquency rates in the County are as follows:

2007/08 5.15% 2008/09 5.61% 2009/10 5.29% 2010/11 3.98% 2011/12 3.90% 2012/13 3.64% 2013/14 3.50% (Estimate)

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These delinquency rates represent the current year delinquencies (see “TABLE NO. 12” below) together with past years’ delinquencies that continue to accrue interest until paid.

In addition, pursuant to the Teeter Plan, the County is required to establish a tax losses reserve fund to cover losses which may occur in the amount of tax liens as a result of special sales of tax-defaulted property (i.e., if the sale price of the property is less than the amount owed). The appropriate amount in the fund is determined by one of two methods: (1) an amount not less than 1% of the total amount of taxes and assessments levied on the secured roll for a particular year for entities participating in the Teeter Plan, or (2) an amount not less than 25% of the total delinquent secured taxes and assessments calculated as of the end of the fiscal year for entities participating in the Teeter Plan. The County’s tax losses reserve fund is fully funded in accordance with the County’s most current election (on October 29, 2013) to be governed by the second alternative at $4,389,583, as of June 30, 2013. Accordingly, any additional penalties and interest that otherwise would be credited to the tax losses reserve fund are available to be credited to the County’s General Fund.

Taxable Property and Assessed Valuation

Set forth in the tables below are assessed valuation for secured and unsecured property and tax levies and collections within the County. Article XIIIA of the California Constitution prescribes the method for determining the full cash value of real property and the maximum ad valorem tax on real property. The full cash value, once established, is subject to annual adjustment to reflect inflation at a rate not to exceed 2% or a reduction in the California Consumer Price Index. There may also be declines in valuations if the California Consumer Price Index is negative.

Proposition 8 provides for the assessment of real property at the lesser of its originally determined (base year) full cash value compounded annually by the inflation factor, or its full cash value as of the lien date, taking into account reductions in value due to damage, destruction, obsolescence or other factors causing a decline in market value. Reductions based on Proposition 8 do not establish new base year values, and the property may be reassessed as of the following lien date up to the lower of the then-current fair market value or the factored base year value. The County saw Proposition 8 reductions in property values between 2009 and 2013 as reflected in the assessed values shown below in Table No. 11. See “RISK FACTORS - Constitutional Limitation on Taxes and Expenditures - Article XIIIA” and “- Proposition 8 Adjustments” herein.

TABLE NO. 11 COUNTY OF SANTA CRUZ

GROSS ASSESSED VALUE OF ALL TAXABLE PROPERTY (INCORPORATED CITIES AND UNINCORPORATED COUNTY AREAS)

Fiscal Year Secured Unsecured Total Change

2008/09 $33,586,675,030 $861,576,055 $34,448,251,085

2009/10 32,531,716,741 865,264,771 33,396,981,512 (3.1%)

2010/11 32,390,764,838 801,371,482 33,192,136,320 (0.6%)

2011/12 32,332,270,918 767,714,452 33,099,985,370 (0.3%)

2012/13 32,033,769,082 767,064,323 32,800,833,405 (0.9%)

2013/14 33,301,783,628 764,939,349 34,066,722,978 3.9%

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Proposition 8 Adjustments. There are approximately 96,000 taxable secured parcels and 8,000 taxable unsecured parcels in the County. Under Proposition 8 (see “RISK FACTORS - Constitutional Limitation on Taxes and Appropriations - Proposition 8 Adjustments,”) the County Assessor reduced the 2009/10 assessed value of approximately 18,000 properties throughout the County from the maximum amount that could be assessed on such property under Proposition 13 (see “RISK FACTORS - Constitutional Limitation on Taxes and Appropriations - Article XIIIA”). The County Assessor also reduced assessed values of properties throughout the County from the maximum amount that could be assessed on such property under Proposition 13 as follows:

Fiscal Year No. of Parcels 2010/11 18,253

2011/12 21,000 (approximate)2012/13 26,271

2013/14 23,808

Largest Taxpayers. The largest taxpayers in the County for the 2012/13 Fiscal Year are shown below.

2012/13 % of Total

Assessed Assessed Valuation

Taxpayers Type of Business Valuation 2012/13

Pacific Gas & Electric Company Gas & Electric Utility $225,458,856 0.69%

Santa Cruz Seaside Company Amusement Park 67,868,390 0.21

Macerich Partnership L P Commercial Real Estate 61,199,999 0.19

Neven Development LLC Hospital 58,289,484 0.18

Pacific Bell Telephone Co. Telephone Utility 52,153,174 0.16

S C Beach Hotel Partners LLC Hotel 44,143,577 0.13

Cypress Point RE Investors LLC Real Estate 39,811,821 0.12

George Ow, Jr. et al Real Estate 37,515,680 0.11

Safeway Inc. Food Retailer 37,439,682 0.11

SC Shaffer Road Investors Real Estate 34,433,102 0.10

$658,313,765 2.00%

Source: County of Santa Cruz Comprehensive Annual Financial Report, Fiscal Year ended June 30, 2013.

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Tax Collections. Prior to Fiscal Years ending June 30, 2010, the County reported General Fund property tax levies and collections separately. Beginning with Fiscal Years ending June 30, 2010, the County reports tax collection data on a County-wide basis for secured taxes only as set forth in Table No. 12.

TABLE NO. 12 COUNTY OF SANTA CRUZ

SECURED TAX LEVIES AND COLLECTIONS (in $ thousands)

Fiscal Total Collections within the Fiscal Year of the Levy

Collections

Year Secured Tax in Total

Ended Levy for Percentage Subsequent Tax Percentage

June 30 Fiscal Year (1) Amount of Levy Years Collections of Levy

2009 $402,589 $387,153 96.2% $13,808 $400,961 99.6%

2010 395,628 383,707 97.0 10,095 393,802 99.5

2011 394,498 385,099 97.6 5,658 390,757 99.1

2012 395,546 388,135 98.1 4,190 392,325 99.2

2013 399,146 393,223 98.5 - 393,223 98.5

Source: County of Santa Cruz Comprehensive Annual Financial Report. __________________________________________

(1) Includes secured tax levy for the County, school districts, cities and special districts in the County under the supervision of independent governing boards.

Redevelopment Agencies. The California Redevelopment Law (Part 1 of Division 24 of the Health & Safety Code of the State) authorized the redevelopment agency of any city or county to receive an allocation of tax revenues resulting from increases in assessed values of properties within designated redevelopment project areas (the “incremental value”) occurring after the year the project area was formed. In effect, local taxing authorities, such as the County, realized tax revenues only on the assessed value of such property at the time the redevelopment project was created for the duration of such redevelopment project, except to the extent a redevelopment agency made payments by agreement or in some cases, pursuant to a statutory formula. There have been six redevelopment projects formed in the County (some of the 11 original redevelopment projects that had been formed have been merged). Table No. 13 sets forth total assessed valuations and redevelopment agency incremental values.

The State Legislature approved a bill, AB XI 26, during the 2011/12 State budget process. AB XI 26 eliminated redevelopment agencies State-wide. The California Redevelopment Association and the League of California Cities filed a petition with the California Supreme Court (the “Court”), requesting the Court to review the constitutionality of AB XI 26. On December 29, 2011, the Court issued its opinion and upheld AB XI 26. As a result of the decision, all California redevelopment agencies, including the County’s Redevelopment Agency and other redevelopment agencies formed by cities within the County, were dissolved as of February 1, 2012. Certain tax revenues allocable to the County’s former Redevelopment Agency will continue to be available to the County, as successor agency to the County’s Redevelopment Agency, to pay certain obligations of the former Redevelopment Agency, and some of those revenues may be redirected to other taxing agencies, such as the County, school districts, and cities. This is also true for the former redevelopment agencies formed by cities within the County. Any General Fund impact resulting from AB XI 26 (and subsequent Legislation AB 1484) were incorporated into the County’s budget beginning in 2012/13. As a result of redevelopment dissolution, the County has received approximately $1.2 million in one-time revenues and approximately $400,000 per year in additional property taxes.

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TABLE NO. 13 COUNTY OF SANTA CRUZ

TOTAL AND NET PROPERTY TAX VALUATIONS

Total Redevelopment/

Fiscal Assessed Successor Agency Net

Year Valuation Incremental Value Value

2008/09 $34,448,251,085 $4,541,432,808 $29,906,818,277

2009/10 33,396,981,512 4,121,255,800 29,275,725,712

2010/11 33,192,136,319 4,477,971,205 28,714,165,114

2011/12 33,099,985,370 4,501,523,187 28,598,462,183

2012/13 32,800,833,405 4,434,487,308 28,366,346,097

2013/14 34,066,722,978 4,589,607,105 29,477,115,873

Source: County of Santa Cruz Auditor-Controller.

State Legislative Shifts of Property Tax Allocation

Beginning in 1992/93, the State has required that local agencies including counties remit a portion of property taxes received to augment school funding. These funds are deposited in each county’s Education Revenue Augmentation Fund (“ERAF”). These property taxes are permanently excluded from the County’s property tax revenues.

On November 2, 2004, California voters approved Proposition 1A, which amended the State Constitution to significantly reduce the State’s authority over major local government revenue sources. Under Proposition 1A, the State may not (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-third approval of both houses of the State Legislature, or (iv) decrease Vehicle License Fees revenues without providing local governments with equal replacement funding. Beginning in Fiscal Year 2008/09, the State was permitted to shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including (a) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (b) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. The first shift occurred in 2008/09. 2012/13 was the first year that another shift was allowable, but the State has not implemented another borrowing yet.

In addition, certain other provisions in the State budget have resulted in a realignment of property tax revenues. See “RISK FACTORS - State Budget” herein and “Other Local Taxes - Sales and Use Taxes” and “Property Tax In Lieu of Motor Vehicle License Fee” below.

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Other Local Taxes

In addition to ad valorem taxes on real property, the County receives the following local taxes:

Transient Occupancy Taxes. The County levies a transient occupancy tax on hotel and motel bills. In November 2012, voters approved an increase in this tax rate from 9.5% to 11%.

Property Transfer Taxes. A documentary stamp tax is assessed for recordation of real property transfers.

Sales and Use Taxes. Sales tax is collected and distributed by the State Board of Equalization. Each local jurisdiction receives an amount equal to 1% of taxable sales within their jurisdiction.

On March 2, 2004, voters approved a bond initiative formally known as the “California Economic Recovery Act.” This act authorized the issuance of $15 billion in bonds to finance the 2002/03 and 2003/04 State budget deficits, which would be payable from a fund to be established by the redirection of tax revenues through the Triple Flip as described more fully below.

Under the “Triple Flip,” one-quarter of local governments’ 1% share of the sales tax imposed on taxable transactions within their jurisdiction will be redirected to the State. In an effort to eliminate the adverse impact of the sales tax revenue redirection on local government, the legislation provides for property taxes in the ERAF to be redirected to local government. Because the ERAF moneys were previously earmarked for schools, the legislation provides for schools to receive other state general fund revenues. It is expected that the swap of sales taxes for property taxes would terminate once the deficit financing bonds were repaid, which is currently expected by the State to occur in 2016/17 based on its estimated early repayment of the deficit financing bonds. The County treats the Triple Flip property tax revenue as sales tax in its financial statements.

Property Tax In-Lieu of Motor Vehicle License Fee. The payments of property tax in-lieu of Motor Vehicle license fees (“VLF”) are a State backfill from property tax revenues for a portion of the VLF fees collected statewide.

TABLE NO. 14 COUNTY OF SANTA CRUZ

TAX REVENUES BY SOURCE

Budgeted

2009/10 2010/11 2011/12 2012/13 2013/14

Transient Occupancy Tax $ 3,511,320 $ 4,101,086 $ 4,604,773 $ 4,515,035 $ 5,211,895

Property Transfer Tax 1,629,814 1,708,708 1,528,127 1,935,643 1,649,200

Other Taxes 74,197 72,392 72,433 72,030 72,318

Sales Tax 7,212,290 7,892,028 8,378,175 9,128,896 9,159,106

Property Tax In Lieu – VLF 24,524,086 24,374,489 24,306,240 24,087,484 24,476,534

Regular Property Taxes (1) 50,205,282 50,505,157 49,516,888 48,651,249 49,400,889

Total Tax Revenues $87,156,989 $88,653,860 $88,406,636 $88,390,337 $89,969,942

Source: County of Santa Cruz. __________________________________________

(1) Does not reflect amounts paid by the State in-lieu of sales tax. Property taxes paid in lieu of sales tax under the “Triple Flip” are included in the Sales Tax figures.

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State and Federal Funds

A significant source of the County’s revenues comes from State and federal funds. Payment of State funds depends on the adoption by the State of its budget, including the appropriations therein providing for local assistance. These revenues are shown in the accompanying financial statements as “intergovernmental revenues” (see “RISK FACTORS - State Budget” herein). The following table sets forth the State and federal funds the County receives.

TABLE NO. 15 COUNTY OF SANTA CRUZ

STATE AND FEDERAL FUNDS

Budgeted

Source 2009/10 2010/11 2011/12 2012/13 2013/14

State Aid:

In Lieu Taxes $ 7,672,632 $ 7,717,316 $ 6,299,094 $ 5,763,959 $ 5,632,384

Proposition 172 12,638,966 13,589,482 14,073,114 15,749,467 15,703,892

All Other State Aid 82,818,123 84,213,607 93,128,935 100,499,153 114,378,844

Total $103,129,721 $105,520,405 $113,501,143 $122,012,579 $135,715,120

Federal Aid $ 72,206,956 $ 73,850,098 $ 69,172,495 $ 68,554,670 $ 72,175,248

Total All Gov’t Agencies $175,336,677 $179,370,503 $182,673,638 $190,567,249 $207,890,368

Source: County of Santa Cruz.

The significant categories of state aid include additional taxes in-lieu of VLF for a portion of fees realigned to the Health Services Agency, Proposition 172 (sales tax dedicated to public safety uses) and reimbursement for programs such as AFDC, IHSS, Medi-Cal, food stamps, Short/Doyle medical and mental health services, AB 109 realignment, and AB 118 food programs. The significant categories of federal aid include various health programs, foster care programs, AFDC, adoption assistance program, food stamps and child welfare programs.

Other Revenue Sources

Licenses and Permits. These revenues consist primarily of building construction permit fees and franchise fees. The County levies franchise fees on its cable television, trash collection and utility franchises.

Fines, Forfeitures and Penalties. These revenues include parking citations, municipal court fines, asset seizure proceeds and other fines for municipal code violations.

Use of Money and Property. These revenues consist primarily of investment earnings and rental/concession income.

Charges for Services. The County charges recording fees, booking fees, court filing fees, fees for dispatch services and alarm response, plan checking, building inspection and other municipal services.

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Short-Term Tax Exempt Obligations

The following table presents a five-year history of the County’s temporary borrowings. All such notes issued in prior fiscal years have been repaid on their respective maturity dates. The notes issued for Fiscal Year 2013/14 mature on July 2, 2014.

Fiscal Year TRAN Amount 2009/10 $50,000,000 2010/11 50,000,000 2011/12 48,000,000 2012/13 50,000,000 2013/14 50,000,000

_______________________ Source: County of Santa Cruz.

The County expects to borrow a similar amount for working capital for Fiscal Year 2014/15.

Long-Term Tax Exempt Obligations

General Obligation Debt. As of the date hereof, the County has no long-term general obligation bonded indebtedness outstanding and has never defaulted on any of its bonded indebtedness previously issued. The County has no authorized but unissued general obligation debt.

Lease Obligations. The County has made use of various lease arrangements with joint powers authorities to finance capital projects and purchase equipment through the issuance of certificates of participation and lease revenue bonds. Upon expiration of these leases, title to the property or equipment vests in the County. There are currently nine outstanding certificates of participation and lease revenue bonds aggregating $65.2 million in principal amounts. All issues are fixed rate obligations. The County also leases other assets under both operating and capital leases.

In March 2014, the County and the Santa Cruz County Capital Facilities Authority (the “CFA”) approved the issuance by the CFA of 2014 Lease Revenue Bonds (Public Facilities Project) (“2014 Bonds”), in an amount not-to-exceed $14,000,000. The CFA expects to issue approximately $12,500,000 prior to the end of Fiscal Year 2013/14. The 2014 Bonds will be secured by lease payments to be paid by the County to the CFA. The 2014 Bonds will mature in Fiscal Year 2034/35, and the annual payments are expected to be approximately $1,000,000, of which $575,000 will be reimbursed by the County Disposal Sites CSA 9C enterprise fund (“CSA 9C”).

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TABLE NO. 16 COUNTY OF SANTA CRUZ

SUMMARY OF LONG- AND INTERMEDIATE-TERM OBLIGATIONS (in $ millions)

Principal Estimated Original Outstanding 2013/14 Final

Issue as of 1/1/14 Payments Maturity

1996 Certificates of Participation $ 24.855 $15.550 $1.705 2026

2001 Series B Lease Revenue Bonds (1) 11.900 6.220 0.521 2031

2002 Certificates of Participation 5.640 1.960 0.162 2032

2004 Certificates of Participation (2) 23.000 14.095 1.816 2024

2005 Refunding Certificates of Participation 10.580 5.465 0.865 2020

2006 Certificates of Participation (3) 9.000 6.685 0.667 2036

2008 Certificates of Participation 4.625 3.040 0.467 2023

2011 Certificates of Participation 5.605 5.460 0.388 2036

2012 Use Payments 1.885 1.768 0.136 2034

Capital Leases 6.401 4.956 0.500

TOTAL LONG- AND INTERMEDIATE-TERM OBLIGATIONS (4) $103.491 $65.199

$7.227

__________________________________________

(1) To be refunded with the proceeds of the Certificates. Annual debt service on the Certificates (on a fiscal year basis) is approximately $500,000.

(2) Approximately $800,000 annual debt service will be reimbursed by the Santa Cruz County Flood Control and Water Conservation District and the Pajaro Storm Maintenance District.

(3) Approximately $150,000 annual debt service will be reimbursed by CSA 9C.

(4) Does not include the approximate $12.5 million lease revenue bonds expected to be issued in April 2014.

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Retirement Programs

Plan Description. The County contributes to the California Public Employees Retirement System (“PERS”), an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by State statute and County ordinance. Copies of PERS’ annual financial report may be obtained from their Executive Office located at 400 P Street, Sacramento, California 95814.

California Public Employees’ Pension Reform Act of 2013. On September 12, 2012, the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (the “Reform Act”), which makes changes to both PERS and California State Teachers’ Retirement System (“CalSTRS”), most substantially affecting new employees hired after January 1, 2013 (the “Implementation Date”). For non-safety PERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. Among the other changes to PERS and CalSTRS, the Reform Act also: (i) requires all new participants enrolled in PERS and CalSTRS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary, (ii) requires CalSTRS and PERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date, and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for members not participating in social security, while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. Ultimately, the Reform Act will reduce the County’s long-term pension obligation as existing employees retire and new employees are hired to replace them.

Funding Policy. Active plan members are required by State statute to contribute 7% and 9% of annual covered salary for miscellaneous and safety employees respectively. The County currently makes the contributions required of County employees on their behalf and for their account for Service Employees International Union (“SEIU”) employees only (approximately 68% of all County employees), other employees pay their own contributions. The County will phase out its 7% contribution of the employees’ share for the Tier 1 SEIU employees over the next two years, but will provide those employees with offsetting salary adjustments. The County is required to contribute at an actuarially determined rate established by PERS. Separately funded plans have been established for each employee group. Benefit provisions and all other requirements are established by State statute and County contracts with employee bargaining groups.

For Tier 3 active plan members in miscellaneous and safety plans, the State statute requires a contribution of 6.25% and 10%, respectively of annual covered salary. Sheriff Safety employees in Tier 3 continue to contribute 9% of annual covered salary.

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PERS set contribution rates for 2010/11 based on a 4.9% negative return on investments which occurred in 2007/08. For the Fiscal Year 2008/09, the PERS portfolio had lost more than 23% of its value. This loss began affecting PERS contribution rates in 2011/12. A history of the PERS annual portfolio rate of return is shown below. The PERS portfolio rate of return for the most recent fiscal year ending June 30, 2013 was 13.2%, but for the most recent calendar year 2013, a slightly higher rate of return of 16.2% was achieved. Future earnings performance and adjustments of assumptions may increase or decrease future contribution rates for plan participants, including the County.

PERS HISTORICAL INVESTMENT RETURNS

Year Ending June 30

Rate of Return

2004 16.7% 2005 12.6 2006 12.3 2007 19.1 2008 (4.9) 2009 (23.4) 2010 11.6 2011 20.9 2012 1.0 2013 13.2

__________________________________________

Source: California Public Employees’ Retirement System.

The County’s percentage of payroll for PERS payments for each retirement account for 2006/07 through 2014/15 and estimates for 2015/16 through 2019/20 are shown in the table below. These rates do not include the employees’ contribution rates.

Fiscal Year Miscellaneous Safety Sheriff Safety 2006/07 11.926% 14.606% 24.226% 2007/08 12.301 14.239 25.424 2008/09 12.197 14.201 25.642 2009/10 12.051 13.784 25.823 2010/11 12.150 13.989 25.145 2011/12 13.776 17.046 28.749 2012/13 14.253 17.381 29.153 2013/14 15.099 19.094 30.534 2014/15 16.084 20.292 34.020 2015/16* 17.200 21.800 35.300 2016/17* 18.400 23.400 36.600 2017/18* 19.500 24.900 38.000 2018/19* 20.700 26.500 39.300 2019/20* 21.800 28.000 40.600

__________________________________________

* Projected by PERS based on various assumptions, including an investment return of 7.5%.

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In March 2012, PERS voted to decrease the investment rate of return used in future actuarial valuations from 7.75% to 7.5%. This change was implemented over a two year period beginning with the 2013/14 rates.

In April 2013, PERS voted to raise employer rates roughly 50% over the next seven years, replacing current actuarial methods. Over five years, the new method increases employer rates to the level needed to project 100% funding in 30 years.

Also in April 2013, PERS approved a recommendation to change the amortization and smoothing policies. Prior to this change, PERS employed an amortization and smoothing policy, which spread investment returns over a 15-year period while experience gains and losses were amortized over a rolling 30-year period. Effective with the June 30, 2013 valuations, PERS will no longer use an actuarial value of assets and will employ an amortization and smoothing policy that will spread rate increases or decreases over a 5-year period, and will amortize all experience gains and losses over a fixed 30-year period.

The new amortization and smoothing policy will be used for the first time in the June 30, 2013 actuarial valuations. These valuations will be performed in the fall of 2014 and will affect employer contribution rates beginning in Fiscal Year 2015/16.

PERS has told plan participants to expect that the new method would result in contribution rates from 3 to 6% (of pay) higher than the current methods would have produced at the end of either the six or seven-year period.

In February 2014, PERS adopted new demographic assumptions regarding improved mortality rates. According to PERS, this could result in rates as much as 2% to 5% higher. The impact would be phased in and affects rates beginning in Fiscal Year 2016/17.

Benefit Tiers. In 2012 the County established two tiers of benefits for employees in each of the employee plans, based on date of hire. Benefits were reduced for employees in the Safety and Safety Sheriff’s Plans hired on or after June 9, 2012. Benefits were reduced for employees in the Miscellaneous Plan hired on or after December 17, 2012. Effective January 1, 2013 State law went into effect with a third tier. The third-tier benefit levels in place for new hires on or after January 1, 2013 are 2% of salary per year of service at age 62 based on 3 year salary average for Miscellaneous Plan employees, and 2% of salary per year of service at age 57 based on 3 year salary average for Safety and Safety Sheriff employees. Ultimately, the new benefits will reduce the County’s long-term pension obligation as existing employees retire and new employees are hired to replace them.

Annual Pension Costs. A ten-year history of the County’s required annual pension costs and percentage of annual pension costs contributed is shown in the table below. The required contribution was determined as part of an annual actuarial valuation using the entry age normal actuarial cost method. The most recent actuarial assumptions included (a) 7.50% investment rate of return (net of administrative expenses), (b) projected salary increases of 3.30% to 14.20% for miscellaneous employees, 3.30% to 14.20% for safety employees and 3.30% to 14.20% for sheriff safety employees depending on age, service, and type of employment, and (c) 2.75% per year cost-of-living adjustments. Both (a) and (b) included an inflation component of 2.75%. The actuarial value of PERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period. PERS unfunded actuarial accrued liabilities (or surplus) is being amortized as a level percentage of projected payroll on a closed basis. The average remaining amortization period at June 30, 2013 was 23 years for miscellaneous employees and 27 years for safety employees for prior and current service unfunded liability.

Historically, the County paid the employer contribution rate and all or a portion of the employee contribution rate of the annual pension cost. The County began phasing out this practice in recent years for various employee groups. By Fiscal Year 2015/16, the County will no longer make any contributions of the employees’ share on behalf of any employee group.

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The table below presents the total payment to PERS of the Annual Pension Cost, which includes both employer and employee contributions, regardless of whether the County or the employee contributed the employee’s share of the contribution. The County’s budgeted pension costs for Fiscal Year 2013/14 are approximately $30.9 million, of which $5.6 million is allocable to the employees’ contributions funded by the County (approximately 18% of the County’s pension costs) and the employees’ contributions paid by employees are estimated to be another $5.6 million, for a total estimated annual pension cost for Fiscal Year 2013/14 of $36.5 million.

TEN YEAR TREND INFORMATION FOR ANNUAL PENSION COSTS (ALL PLANS COMBINED)

Fiscal Year

Annual Pension

Cost (APC) % of APC

Contributed 2003/04 $17,534,000 100% 2004/05 26,000,000 100 2005/06 31,465,000 100 2006/07 31,079,000 100 2007/08 33,186,000 100 2008/09 33,906,000 100 2009/10 32,055,000 100 2010/11 31,075,000 100 2011/12 33,261,000 100 2012/13 34,366,000 100

__________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Report.

Set forth below is a ten-year analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of June 30 of each year indicated for the County’s combined employee groups.

HISTORICAL FUNDING PROGRESS (ACTUARIAL VALUE) (ALL PLANS COMBINED)

Actuarial Valuation

Date June 30

Actuarial Valuation of

Assets

Entry Age Actuarial Accrued Liability

Unfunded Actuarial Accrued Liability

FundedRatio

Covered Payroll

Unfunded Liability as a

Percent of Covered Payroll

2003 $505,849,810 $ 584,956,648 $ 79,106,838 86.5% $141,293,484 56.0% 2004 543,786,166 640,929,153 97,145,987 84.8 145,451,167 66.8 2005 593,842,088 703,842,376 110,000,288 84.4 148,852,557 73.9 2006 651,395,532 761,510,789 110,115,257 85.5 154,484,172 71.3 2007 717,379,652 830,141,101 112,761,449 86.4 164,873,127 68.4 2008 777,973,719 896,535,343 118,561,624 86.8 172,139,238 68.9 2009 822,938,140 984,786,909 161,848,769 83.6 171,978,231 94.1 2010 868,801,973 1,048,317,826 179,515,853 82.9 171,873,659 104.4 2011 918,402,837 1,117,365,270 198,962,433 82.2 166,062,673 119.8 2012 963,284,767 1,174,156,138 210,871,371 82.0 162,680,146 129.6

__________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Report.

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Set forth below is a three-year analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of June 30 of each year indicated for each of the County’s three individual employee groups:

Safety Employees

Actuarial Valuation

Date June 30

Actuarial Valuation of

Assets

Entry Age Actuarial Accrued Liability

Unfunded Actuarial Accrued Liability

Funded Ratio

Covered Payroll

Unfunded Liability as a

Percent of Covered Payroll

2010 $109,419,543 $124,165,627 $14,746,084 88.1% $15,479,038 95.3% 2011 114,873,164 133,199,435 18,326,271 86.2 14,825,926 123.6 2012 119,179,623 139,059,550 19,879,927 85.7 15,751,689 126.2

__________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Report.

Sheriff Safety Employees

Actuarial Valuation

Date June 30

Actuarial Valuation of

Assets

Entry Age Actuarial Accrued Liability

Unfunded Actuarial Accrued Liability

Funded Ratio

Covered Payroll

Unfunded Liability as a

Percent of Covered Payroll

2010 $76,572,047 $100,814,044 $24,241,997 76.0% $12,459,589 194.1% 2011 81,994,903 108,356,979 26,362,076 75.7 12,207,567 215.9 2012 87,538,086 119,721,273 32,183,187 73.1 12,620,185 255.0

__________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Report.

Miscellaneous Employees

Actuarial Valuation

Date June 30

Actuarial Valuation of

Assets

Entry Age Actuarial Accrued Liability

Unfunded Actuarial Accrued Liability

Funded Ratio

Covered Payroll

Unfunded Liability as a

Percent of Covered Payroll

2010 $682,810,383 $823,338,155 $140,527,772 82.9% $143,904,632 97.7% 2011 721,534,770 875,808,856 154,274,086 82.4 139,029,180 111.0 2012 756,567,058 915,375,315 158,808,257 82.7 134,308,272 118.2

__________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Report.

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A historical comparison of actuarial value of assets to the market value of assets in the plans is shown below.

TEN YEAR TREND INFORMATION FOR ASSET VALUES (ALL PLANS COMBINED)

Actuarial Valuation

Date June 30

Actuarial

Valuation of Assets

Market Value

of Assets

% of Actuarial Value to

Market Value

Funded Ratio

(Actuarial)

Funded Ratio

(Market) 2003 $505,849,810 $459,863,463 110.0% 86.5% 78.6% 2004 543,786,166 535,186,217 101.6 84.8 83.5 2005 593,842,088 609,553,702 97.4 84.4 86.6 2006 651,395,532 690,018,325 94.4 85.5 90.6 2007 717,379,652 829,701,681 86.5 86.4 99.9 2008 777,973,719 791,447,525 98.3 86.8 88.3 2009 822,938,140 600,699,472 137.0 83.6 61.0 2010 868,801,973 681,707,068 127.4 82.9 65.0 2011 918,402,837 817,959,264 112.3 82.2 73.2 2012 963,284,767 804,508,253 119.7 72.0 68.5

_______________________________________________

Source: California Public Employees’ Retirement System.

GASB Statement Nos. 67 and 68. On June 25, 2012, GASB approved two new standards (“Statements”) with respect to pension accounting and financial reporting standards for state and local governments and pension plans. The new Statements, No. 67 and No. 68, will replace GASB Statement No. 27 and most of Statements No. 25 and No. 50. The changes will impact the accounting treatment of pension plans in which state and local governments participate. Major changes include: 1) the inclusion of unfunded pension liabilities on the government’s balance sheet (currently, such unfunded liabilities are typically included as notes to the government’s financial statements); 2) more components of full pension costs will be shown as expenses regardless of actual contribution levels; 3) lower actuarial discount rates will be required to be used for underfunded plans in certain cases for purposes of the financial statements; 4) closed amortization periods for unfunded liabilities will be required to be used for certain purposes of the financial statements; and 5) the difference between expected and actual investment returns will be recognized over a closed five-year smoothing period. In addition, according to GASB, Statement No. 68 means that, for pensions within the scope of the Statement, a cost-sharing employer that does not have a special funding situation is required to recognize a net pension liability, deferred outflows of resources, deferred inflows of resources related to pensions and pension expense based on its proportionate share of the net pension liability for benefits provided through the pension plan. Because the accounting standards do not require changes in funding policies, the full extent of the effect of the new standards on the County is not known at this time. The reporting requirements for pension plans will take effect for the fiscal year beginning after June 15, 2013 July 1, 2013 and the reporting requirements for government employers, including the County, will take effect for the fiscal year beginning after June 15, 2014. See “Financial Statements” below.

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Deferred Compensation Plan

The County offers all of its full-time employees a deferred compensation plan (the Deferred Compensation Plan) created in accordance with Section 457 of the Internal Revenue Code. The Deferred Compensation Plan permits employees to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or emergency. Employees direct the investment of plan assets into certificates of deposits and various mutual funds. The County has insignificant administrative duties.

As of December 31, 2013, the Deferred Compensation Plan’s assets of $132,501,891 were on deposit with a third party administrator independent of the County.

Other Post Employment Benefits

Plan Description. Employees of the County who retire through PERS, their spouse, and eligible dependents may receive health plan coverage through the Public Employees’ Medical & Hospital Care Program (PEMHCA) Plan (Plan). CA Gov. Code 22892 of the Public Employees’ Medical and Hospital Care Act establishes the contracting agencies’ minimum health premium contribution. The monthly employer contribution amount will be determined through PERS regulations and requirements along with a county reimbursement amount as set by relevant longevity schedules which are incorporated in each representation units memorandum of understanding

In subsequent years, the monthly retiree contributions shall increase upon CalPERS calculated adjustments based upon the medical care component of the Consumer Price Index-Urban (CPI-U).

Eligibility. All of the County’s employees became participants in accordance with the Memorandum of Understanding (“MOU”) as negotiated by each group or bargaining unit. In order to receive benefits, eligible employees must meet the minimum requirements defined in their MOU. PEMHCA Plan – the Plan is eligible to Plan members who retire directly from the County through CalPERS at age 50 with at least 5 years of service.

As of January 1, 2012 (the date of the most recent actuarial valuation of the accrued liabilities relating to the Plan) and March 1, 2014, respectively, the numbers of participants in the Plans were 3,183 and 3,000, of which 1,072 and 1,053 were retirees and 2,111 and 1,947 were active.

Funding Policy. The contribution requirements for the County are established by a Memorandum of Understanding as negotiated by each group or bargaining unit. The required contribution is based on projected pay-as-you-go financing requirements. For Fiscal Year 2012/13, the County contributed $4,591,534 to the plan. The County’s budgeted contribution for Fiscal Year 2013/14 is $5.2 million.

Annual OPEB Cost and Net OPEB Obligation. The County’s Annual Other Post-Employment Benefits (“OPEB”) cost (expense) is calculated based on the Annual Required Contribution of the Employer (“ARC”), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excesses) over a period not to exceed thirty years. The following table shows the components of the County’s annual OPEB cost for the Fiscal Years 2010/11 through 2012/13, the amount actually contributed to the Plan, and changes in the County’s net OPEB obligation to the Plan:

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2010/11 2011/12 2012/13 Annual required contribution $22,809,000 (1) $11,254,000 $12,106,000 Interest on net OPEB obligation 2,747,004 3,574,000 3,866,271 Amortization of Net OPEB obligation 0 (3,574,000) (4,177,000) Annual OPEB cost (expense) 25,556,004 11,254,000 11,795,271 Contributions made (4,818,714) (4,822,914) (4,591,534) Increase in net OPEB obligation 20,737,290 6,431,086 7,203,737 Net OPEB obligation - beginning of year 61,044,534 81,781,824 88,212,910 Net OPEB obligation - end of year $81,781,824 $88,212,910 $95,416,647 __________________________________________

(1) The County reduced the Plan benefits in 2011, which resulted in a decrease in the accrued actuarial liability and the ARC.

The County has been contributing to its OPEB costs on a pay-as-you-go basis. The County’s annual OPEB costs, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the last 4 years is as follows:

Fiscal Year Annual

OPEB Cost Annual

Contribution

% of Annual OPEB Cost Contributed

Net OPEB Obligation

2009/10 $20,173,502 $3,998,945 19.8% $61,044,534 2010/11 25,556,004 4,818,714 18.9 81,781,824 2011/12 11,254,000 4,822,914 42.9 88,212,910 2012/13 11,795,271 4,591,534 38.9 95,416,647

The County’s pay-as-you-go contribution to OPEB costs is estimated to be $5.2 million for Fiscal Year 2013/14. This estimated OPEB contribution is factored in to the County’s 2013/14 budget.

Funded Status and Funding Progress. The following table sets forth the schedule of funding progress for the Plan:

Valuation Date

Entry Age Actuarial Accrued Liability

Actuarial Value of Assets

Unfunded Actuarial Accrued Liability (UAAL)

Funded Ratio

Annual Covered Payroll

UAAL as

a % of Covered Payroll

1/1/2007 $216,766,000 $ - $216,766,000 0.00% $153,807,000 140.9% 1/1/2009 181,575,000 - 181,575,000 0.00 161,577,000 112.4 1/1/2012 127,836,000 - 127,836,000 0.00 154,788,000 82.6

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend rate. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress above presents trend information about whether the actuarial value of Plan assets is increasing or decreasing over time relative to the Actuarial Accrued Liabilities for benefits.

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Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

Actuarial assumptions involve estimates and assumptions that extend far into the future. These assumptions are subject to future revisions as new facts become known.

In the January 1, 2012 actuarial valuation, the entry age actuarial cost method was used. The actuarial assumptions include a 4.5% investment rate of return which is based on the expected return on funds invested in County investments, and an annual healthcare cost trend of actual premiums initially and reduced to an ultimate rate of 5% thereafter. The actuarial assumption for inflation was 3%, and the aggregate payroll increases were 3.25%. The Unfunded Actuarial Accrued Liability is being amortized as a level percentage of projected payroll on a closed basis. The remaining amortization as of June 30, 2012 was 28 years.

Employee Relations and Collective Bargaining

County employees are represented by ten bargaining units, the principal one being Service Employees International Union (Local 521) which represents approximately 68% of all County employees. Most County employees are covered by negotiated agreements.

Bargaining Unit Expiration DateMiddle Management September 16, 2017 District Attorney Association June 30, 2017 Sheriff’s Correctional Officers Expired/Under negotiation Law Enforcement Middle Management June 30, 2016 Law Enforcement June 30, 2016 Sheriff Supervisory June 30, 2016 General Representation Unit (SEIU) September 23, 2016 District Attorney Inspectors June 30, 2016 Physicians’ Representation Unit September 11, 2016 Probation Association Expired/Under negotiation

Self-Insurance Program

The County is self-insured for its general and auto liability, workers’ compensation, medical malpractice and employees’ dental coverage. Excess coverage is purchased through the California State Association of Counties Excess Insurance Authority. Each self-insurance program is described below.

Workers’ Compensation. Under the Workers’ Compensation Self-Insurance Program the County is liable for the first $500,000 and carries catastrophic insurance coverage for any amount required by statute. At June 30, 2013, this program had estimated future liabilities of $34.5 million.

Dental. The County’s self-insurance dental program had estimated future liability for dental benefits of $96,053 as of June 30, 2013.

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Liability and Property. The County is self-insured with excess insurance for the general liability program. At June 30, 2013, the County had estimated future liabilities totaling $12.1 million which included estimates for known claims and losses incurred but not reported discounted for present value.

Unemployment Insurance. The estimated future liabilities at June 30, 2013 were $91,466.

Claims Liabilities. The change in the balance of claims liabilities during the fiscal years ended June 30, 2013, and two prior years for all Self-Insurance Internal Service Funds combined is as follows:

2011 2012 2013 Unpaid claims and claim adjustment expenses, beginning of the fiscal year $35,296,149 $36,861,428 $44,287,352 Incurred claims and claim adjustment expenses 13,092,624 23,928,174 15,843,711 Claim payments (11,527,345) (16,502,250) (13,378,635) Unpaid claims and claim adjustment expenses, end of the fiscal year $36,861,428 $44,287,352 $46,752,428

Self-Insurance Funds. The County has established separate self-insurance funds. Summary financial information for the self-insurance funds is shown in Table No. 17. The County’s Worker’s Compensation Self-Insurance Fund accounts for the negative fund balance shown in Table No. 17. However, of the $34.5 million of estimated future liabilities in the Worker’s Compensation Self-Insurance Fund, the County expects that almost half of such claims, if required to be paid, will be charged to the applicable State or federal government program, because the claims relate to employees whose programs are funded by the State or federal government. As of June 30, 2013, the Self-Insurance funds held a total of $23.2 million in cash.

TABLE NO. 17 COUNTY OF SANTA CRUZ SELF-INSURANCE FUNDS

2009/10 2010/11 2011/12 2012/13

Operating Revenues:

Charges for Services $ 14,337,709 $ 14,254,377 $ 15,895,034 $ 17,489,284

Other Revenues 999,072 973,339 18,204 32,750

Total Operating Revenues 15,336,781 15,227,716 15,913,238 17,522,034

Operating Expenses:

Salaries and Employee Benefits 1,132,007 977,416 1,163,742 1,151,897

Services and Supplies 2,899,541 2,879,829 3,470,812 3,823,391

Insurance and Compensation Claims 11,735,027 13,092,624 16,502,250 13,378,635

Total Operating Expenses 15,766,575 16,949,869 21,136,804 18,353,923

Operating Income (Loss) (429,794) (1,722,153) (5,223,566) (831,889)

Non-Operating Revenues:

Interest and Investment Income 176,114 110,018 106,994 (8,494)

Net Income (253,680) (1,612,135) (5,116,572) (840,383)

Net Assets – Beginning (16,250,218) (16,503,898) (18,116,033) (23,232,605)

Net Assets – Ending ($16,503,898) ($18,116,033) ($23,232,605) ($24,072,988)__________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Reports.

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County Treasurer’s Investment Pool

As of December 31, 2013, the market value of the County Treasurer’s investment pool was $707,426,053, compared to a book value of $708,390,171. The diversification of the County Treasurer’s investment pool’s assets as of such date is shown in the following table.

Type of Investment % of Combined Pool

U.S. Government Agencies 29.59% U.S. Treasuries 38.05 Medium-Term Notes 7.34 Money Market Mutual Funds 6.35 Local Agency Investment Fund/Checking 8.08 Negotiable CDs 10.59 100.00%

The weighted average maturity of all County Treasurer’s investment pool moneys was 499 days. The current yield of the County Treasurer’s investment pool at December 31, 2013 was 0.312%.

In general, all depositors in the County Treasurer’s investment pool are required by law to deposit their funds in the County Treasurer’s investment pool. This includes the County, school districts and other special districts in the County.

Financial Statements

The County’s accounting policies conform to generally accepted accounting principles and reporting standards set forth by the State Controller. The audited financial statements also conform to the principles and standards for public financial reporting established by the National Council of Government Accounting and the Governmental Accounting Standards Board.

Basis of Accounting and Financial Statement Presentation. The government-wide financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Governmental fund financial statements are reported using the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due.

The County retained the firm of Marcum LLP Certified Public Accountants, Irvine, California, to examine the general purpose financial statements of the County as of and for the year ended June 30, 2013. See “INTRODUCTION - Professional Services.” The following tables summarize the Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance of the County’s General Fund for the last four fiscal years. The County received a Certificate of Achievement for Excellence in Financial Reporting for the Fiscal Year ended June 30, 2013.

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GASB Statement No. 54. The County was required to implement GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definition, for the Fiscal Year ending June 30, 2011. GASB No. 54 establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds.

The initial distinction that is made in reporting fund balance information is identifying amounts that are considered nonspendable, which are amounts that cannot be spent because they are either (a) not spendable in form or (b) legally or contractually required to be maintained intact. GASB No. 54 also provides for additional classification as “restricted,” “committed,” “assigned,” and “unassigned” based on the relative strength of the constraints that control how specific amounts can be spent.

Restricted - Restricted fund balance includes amounts with constraints placed on their use that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments or (b) improved by law through constitutional provisions or enabling legislation. The County currently has only a minor amount of “Restricted” fund balance.

Committed - Committed fund balance includes amounts that can only be used for a specific purpose determined by formal action of the Board of Supervisors and that remain binding unless removed in the same manner. The establishment of a “committed” fund balance requires (in accordance with the County’s Fund Balance Policy) the passage of a resolution by a simple majority vote before June 30 of the applicable fiscal year.

The Board of Supervisors established a separate Committed fund balance account known as the Reserve for Working Capital. Funding of the Reserve for Working Capital is established by resolution during the annual budget process. The purpose of the reserve is to assist the County in maintaining a minimal fund balance. In accordance with the County’s Fund Balance Policy, any use of funds requires a four-fifths vote of the Board of Supervisors appropriating the funds and a resolution of the Board of Supervisors declaring a Fiscal Emergency.

The Board of Supervisors has also established a separate Committed fund balance account known as the Reserve for Economic Uncertainty. Funding of the Reserve for Economic Uncertainty is established by resolution during the annual budget process. The reserve is to be used only during recessions or periods of economic distress as measured by periods of time when the local unemployment rate exceeds 8% and/or the rate of inflation exceeds the growth in property taxes. In accordance with the County’s Fund Balance Policy, any use of funds requires a four-fifths vote of the Board of Supervisors appropriating the funds.

The Board of Supervisors has also established a separate Committed fund balance account known as the Reserve for Natural Disasters. Funding of the Reserve for Natural Disasters is established by resolution during the annual budget process. The purpose of the reserve is to fund extraordinary operating costs, legal costs and cashflow associated with delays in State and federal reimbursements for any natural disaster. In accordance with the County’s Fund Balance Policy, any use of funds requires a four-fifths vote of the Board of Supervisors appropriating the funds.

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As of June 30, 2013, the County has “committed” fund balances as follows:

Committed to: Working Capital $ 6,000,000 Economic Uncertainty 4,857,787 Natural Disasters 1,251,089 General Government 1,133,234 Public Protection 2,391,987 Public Ways and Facilities 2,564 Health and Sanitation 639 Public Assistance 492,042 Recreation and Cultural Services 37,253 Total committed fund balance $16,166,595

Assigned - Assigned fund balance includes amounts that are constrained by the County’s intent to be used for specific purposes. In accordance with the County’s Fund Balance Policy, the Board of Supervisors has the authority to assign funds for a specific purpose, or change or remove an assignment, with a simple majority vote.

The County Administrative Officer also has the authority to assign funds for specific purposes, and to change or remove the assignment, which action is to be reported to the Board of Supervisors at their next meeting. An appropriation of existing fund balance to eliminate a projected budgetary deficit in the subsequent year’s budget may be classified as Assigned fund balance.

The County Administrative Officer has established and the Board of Supervisors has approved establishment of Assigned fund balance for federally qualified health program. The amount assigned is for revenue already recognized in the General Fund but assigned to (1) provide a cushion to mitigate risk associated with mental health managed care programs, (2) provide an audit reserve for disallowed mental health costs under State or federal programs, and (3) hold for possible future repayment of grant funds.

As of June 30, 2013, the County has “assigned” fund balances as follows:

Assigned to: Federally qualified health program $14,229,750 Eliminate projected budgetary deficit in subsequent year’s budget 5,174,625 Liabilities 1,052,278 Human services 400,000 Total assigned fund balance $20,856,653

The total estimated General Fund revenues for Fiscal Year 2013/14 are $396,380,538. A 7% fund balance reserve would equal $27,746,637. As of June 30, 2013, the combined balance of the General Fund fund balance committed for the Reserve for Working Capital, the Reserve for Economic Uncertainty, the Reserve for Natural Disasters and assigned for federally qualified health program as described above, totals $26,338,626. Total committed and assigned fund balances totaled $37,023,248 as of June 30, 2013. The 2013/14 Budget proposed a total committed and assigned fund balance of 7.1%.

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GASB Statement Nos. 67 and 68. On June 25, 2012, GASB approved two new standards (“Statements”) with respect to pension accounting and financial reporting standards for state and local governments and pension plans. The new Statements, No. 67 and No. 68, will replace GASB Statement No. 27 and most of Statements No. 25 and No. 50. The changes will impact the accounting treatment of pension plans in which state and local governments participate. Major changes include: 1) the inclusion of unfunded pension liabilities on the government’s balance sheet (currently, such unfunded liabilities are typically included as notes to the government’s financial statements); 2) more components of full pension costs will be shown as expenses regardless of actual contribution levels; 3) lower actuarial discount rates will be required to be used for underfunded plans in certain cases for purposes of the financial statements; 4) closed amortization periods for unfunded liabilities will be required to be used for certain purposes of the financial statements; and 5) the difference between expected and actual investment returns will be recognized over a closed five-year smoothing period. In addition, according to GASB, Statement No. 68 means that, for pensions within the scope of the Statement, a cost-sharing employer that does not have a special funding situation is required to recognize a net pension liability, deferred outflows of resources, deferred inflows of resources related to pensions and pension expense based on its proportionate share of the net pension liability for benefits provided through the pension plan. Because the accounting standards do not require changes in funding policies, the full extent of the effect of the new standards on the County is not known at this time. The reporting requirements for pension plans will take effect for the fiscal year beginning after June 15, 2013 and the reporting requirements for government employers, including the County, will take effect for the fiscal year beginning after June 15, 2014.

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TABLE NO. 18 COUNTY OF SANTA CRUZ

GENERAL FUND BALANCE SHEET

As of June 30

2010 2011 2012 2013 Assets Cash and Investments $102,541,391 $ 68,136,786 $105,370,800 $115,202,052 Receivables, Net 20,098,514 24,958,457 26,693,872 26,171,957 Due from Other Funds 409,524 43,443 26,451 18,384 Deposits with Others 92,000 90,000 90,000 90,000 Inventory 28,144 21,643 25,481 27,616 Prepaids 1,448,057 1,436,757 1,474,186 1,343,166 Land Held for Resale - 2,043,970 1,689,135 1,689,135 Total Assets $124,617,630 $ 96,731,056 $135,369,925 $144,542,310 Liabilities Payables $ 17,248,827 $ 21,213,641 $ 17,636,876 $ 15,289,636 Tax and Revenue Anticipation Notes Payable 50,997,222 - (1) 33,658,167 (2) 50,997,222 Due to Other Funds 544,557 - - - Unearned Revenue 27,124,235 (3) 36,150,445 41,906,055 37,686,530 Total Liabilities $ 95,914,841 $ 57,364,086 $ 93,201,098 $103,973,388 Fund Balances (4) Reserved For: Encumbrances $ 4,203,012 $ - $ - $ - Advances and Loans - - - - Inventory, Prepaids and Imprest Cash 1,524,945 - - - Working Capital 5,400,000 - - - Nonspendable - 4,117,547 3,739,439 3,543,674 Unreserved: Designated: Health Services Facility 499,600 - - - Designated for Economic Uncertainty 394,393 - - - Liabilities Reserve 1,200,000 - - - Emergency Reserve 1,251,089 - - - Mental Health and Medicruz 14,229,750 (3) - - - Restricted - - 1,000 2,000 Committed - 12,846,730 13,706,385 16,166,595 Assigned - 22,231,367 24,722,003 20,856,653 Unassigned - 171,326 - - Total Fund Balances $ 28,702,789 $ 39,366,970 $ 42,168,827 $ 40,568,922 Total Liabilities and Fund Liabilities $124,617,630 $ 96,731,056 $135,369,925 $144,542,310 __________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Reports. (1) The County’s tax and revenue anticipation notes for Fiscal Year 2010/11 matured on June 30, 2011. (2) $15,000,000 of the total $48,000,000 tax and revenue anticipation notes issued matured on March 31, 2012.

(3) The County recognized certain deferred revenues in Fiscal Year 2009/10 and designated a portion of fund balance for certain health service costs; such amounts are now included in Assigned Fund Balance.

(4) See “GASB Statement No. 54” above.

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TABLE NO. 19 COUNTY OF SANTA CRUZ

GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE

For the year ended June 30

2010 2011 2012 2013

Revenues:

Taxes $ 87,156,987 $ 88,653,860 $ 88,406,635 $ 88,390,337

Licenses and Permits 9,246,818 9,046,275 10,355,966 9,819,321

Fines, Forfeits and Penalties 5,180,367 5,180,066 4,660,530 4,418,159

Use of Money and Property 1,778,940 1,583,053 1,720,668 1,079,143

Aid from Other Governments 201,982,839 192,247,551 198,723,877 208,953,957

Charges for Services 47,438,213 51,824,875 54,524,658 43,279,759

Other 3,405,555 4,056,259 2,058,972 3,554,348

Total Revenues $356,189,719 $352,591,939 $360,451,306 $359,495,024

Expenditures:

Current:

General Government $ 25,114,281 $ 24,801,509 $ 26,597,298 $ 27,919,587

Public Protection 107,399,908 105,940,805 106,679,270 113,965,861

Public Ways and Facilities 197,129 201,314 190,609 219,847

Health and Sanitation 102,047,638 104,190,892 107,809,876 107,549,603

Public Assistance 99,775,414 98,932,035 98,996,195 101,042,337

Education 157,187 117,724 108,666 115,398

Recreation and Culture 6,276,595 5,822,538 5,800,735 5,663,542

Interest and Fiscal Charges 389,282 2,876 364,502 182,978

Total Expenditures $341,357,434 $340,009,693 $346,547,151 $356,659,153

Excess of Revenues Over

(Under) Expenditures $ 14,832,285 $ 12,582,246 $ 13,904,155 $ 2,835,871

Other Financing Sources (Uses):

Inception of Capital Lease $ - $ 123,484 $ 80,266 $ 35,766

Capital Contributions - - - 232,624

Sale of Capital Assets - - 5,157 -

(Loss) on Land Held for Resale - - (137,065) -

Operating Transfers In 2,734,556 4,712,314 2,569,154 2,073,089

Operating Transfers Out (6,325,784) (6,753,863) (13,619,810) (6,777,255)

Total Other Financing Sources (Uses) $ (3,591,228) $ (1,918,065) $ (11,102,298) ($ 4,435,776)

Net Change in Fund Balances $ 11,241,057 $ 10,664,181 $ 2,801,857 ($ 1,599,905)

Fund Balance - Beginning $ 17,461,732 $ 28,702,789 $ 39,366,970 $ 42,168,827

Fund Balance - Ending $ 28,702,789 $ 39,366,970 $ 42,168,827 $ 40,568,922 __________________________________________

Source: County of Santa Cruz Comprehensive Annual Financial Reports.

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RISK FACTORS The purchase of the Certificates involves investment risk. If a risk factor materializes to a sufficient degree, it could delay or prevent payment of principal and/or interest represented by the Certificates. Such risk factors include, but are not limited to, the following matters and should be considered, along with other information in this Official Statement, by potential investors.

The Lease Payments

County’s Lease Payments and Other Payments. The County’s Lease Payments and other payments due under the Lease Agreement (including the costs of improvement, repair and maintenance of the Leased Property and taxes, other governmental charges and assessments levied against the Leased Property) are not secured by any pledge of taxes or other revenues of the County but are payable from yearly appropriations of any funds lawfully available to the County. If the County’s revenue sources are less than its total obligations, the County could choose to fund other services before making Lease Payments and other payments due under the Lease Agreement. The same result could occur if, because of State Constitutional limits on expenditures, the County is not permitted to appropriate and spend all of its available revenues (see “Constitutional Limitation on Taxes and Expenditures” herein). To the extent these types of events or other events adversely affecting the funds available to the County occur in any year, the funds available to make Lease Payments may be decreased.

The County has the capacity to enter into other obligations which may constitute additional charges against its revenues. To the extent that additional obligations are incurred by the County, the funds available to the County to make Lease Payments may be decreased.

Abatement. Except to the extent that amounts are available (1) in the Reserve Fund or the Lease Payment Fund under the Trust Agreement or (2) from proceeds of rental interruption insurance, the amount of Lease Payments due under the Lease Agreement will be adjusted or abated during any period in which by reason of damage or destruction to the Leased Property or eminent domain proceedings there is substantial interference with the use and possession of the Leased Property. The amount of such abatement shall be such that the resulting Lease Payments, exclusive of the amounts described above, do not exceed the fair rental value for the use and possession of the portion of the Leased Premises not damaged, destroyed, interfered with or taken. Such abatement shall continue for the period commencing with such damage, destruction, interference or taking and ending with the substantial completion of the replacement or work of repair or the removal of the title defect causing such interference with use. The Lease Agreement shall continue in full force and effect following an event of abatement and the County waives any right to terminate the Lease Agreement by virtue of an abatement event. Notwithstanding the provisions of the Lease Agreement and the Trust Agreement specifying the extent of abatement in the event of the County’s failure to have use and possession of all or a portion of the Leased Property by the County, such provisions may be superseded by operation of law, and, in such event, the resulting Lease Payments of the County may not be sufficient to pay all of that portion of the remaining principal and interest represented by the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates.

In the event that such funds are insufficient to make all payments with respect to the Certificates during the period that the Leased Property, or portion thereof, is being restored, then all or a portion of such payments may not be made and no remedy is available to the Trustee or the Owners under the Lease Agreement or the Trust Agreement for nonpayment under such circumstances. Failure to pay principal or interest on to the Certificates as a result of abatement of the County’s obligation to make Lease Payments under the Lease Agreement is not an event of default under the Trust Agreement or the Lease Agreement. In the event that Lease Payments are abated due to damage caused by earthquake or flood, such abatement may continue indefinitely, as no insurance for such damages is required under the Lease Agreement and the County cannot be compelled to repair or replace the damaged Leased Property or to prepay the Certificates but has covenanted in the Lease Agreement to use its best efforts to repair or replace the Leased Property from

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other lawfully available funds to the extent that the Net Proceeds are insufficient. See “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Lease Agreement - Abatement.”

Insurance. The Lease Agreement obligates the County to obtain and keep in force various forms of insurance, to assure repair or replacement of the Leased Property in the event of damage or destruction to the Leased Property (see “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - LEASE AGREEMENT - Insurance” herein). The Lease Agreement does not require earthquake or flood insurance unless the County, in its reasonable discretion, determines that such coverage is available from reputable insurers at commercially reasonable rates. The County makes no representation as to the ability of any insurer to fulfill its obligations under any insurance policy provided for in the Lease Agreement. In addition, certain risks may not be covered by such property insurance (see “SOURCES OF PAYMENT FOR THE CERTIFICATES - Insurance Relating to the Leased Property” herein).

In the event the Leased Property is partially or completely damaged or destroyed due to any uninsured or underinsured event, it is likely that Lease Payments will be partially or completely abated. Apart from the Net Proceeds of insurance, the County and the Authority will have no obligation to expend any funds to repair or replace such damaged or destroyed property. If any Leased Property so damaged or destroyed is not repaired or replaced within the period during which the proceeds of rental interruption insurance or amounts in the Reserve Fund are available, any such abatement could prevent the County from making timely Lease Payments.

Discovery of a Hazardous Substance That Would Limit the Beneficial Use of the Leased Property. In general, the owners and lessees of a parcel may be required by law to remedy conditions of the property relating to the releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or lessee) is obligated to remedy a hazardous substance condition of property whether or not the owner (or lessee) had any involvement in creating or handling the hazardous substance. The effect, therefore, should the Leased Property be affected by a hazardous substance, might be to limit the beneficial use of the Leased Property upon discovery and during remediation. The County is not aware of any such conditions on the Leased Property.

Limited Recourse on Default; No Acceleration

If an event of default occurs and is continuing under the Lease Agreement, there is no remedy of acceleration of any Lease Payments which have not come due and payable in accordance with the Lease Agreement. The County will continue to be liable for Lease Payments as they become due and payable in accordance with the Lease Agreement if the Trustee does not terminate the Lease Agreement, and the Trustee would be required to seek a separate judgment each year for that year’s defaulted Lease Payments. Any such suit for money damages would be subject to limitations on legal remedies against counties in California, including a limitation on enforcement of judgments against funds or property needed to serve the public welfare and interest. In addition, the enforcement of any remedies provided in the Lease Agreement and the Trust Agreement could prove both expensive and time-consuming.

The Lease Agreement permits the Trustee to take possession of and re-lease the Leased Property in the event of a default by the County under the Lease Agreement. However, due to the fact that the Leased Property serves essential governmental purposes and the specialized nature of the Leased Property, it is unlikely that the Trustee could readily re-lease it for rents which are sufficient to enable it to pay principal and interest represented by the Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates in full when due, or that a court would permit such remedy to be exercised on a timely basis.

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State Budget

The following information concerning the State’s budgets has been obtained from publicly available information which the County believes to be reliable; however, the County does not guaranty the accuracy or completeness of this information and has not independently verified such information. Furthermore, it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest with respect to the Certificates is payable by or the responsibility of the State of California.

State Budget. Information about the State budget and State spending is available at various State-maintained websites. Text of proposed and adopted budgets may be found at the website of the State Department of Finance, www.dof.ca.gov, under the heading “California Budget.” An impartial analysis of the budget is posted by the Office of the Legislative Analyst (“LAO”) at www.lao.ca.gov. In addition, various State official statements, many of which contain a summary of the current and past State budgets may be found at the website of the State Treasurer, www.treasurer.ca.gov. None of the websites or webpages referenced above is in any way incorporated into this Official Statement. They are cited for informational purposes only. The County makes no representation whatsoever as to the accuracy or completeness of any of the information on such websites.

According to the State Constitution, the Governor of the State (the “Governor”) is required to propose a budget to the State Legislature (the “Legislature”) by no later than January 10 of each year, and a final budget must be adopted by the vote of each house of the Legislature no later than June 15, although this deadline has been routinely breached in the past. The State budget becomes law upon the signature of the Governor, who may veto specific items of expenditure.

Prior to Fiscal Year 2010/11, the State budget had to be adopted by a two-thirds vote of each house of the Legislature. However, in November 2010, the voters of the State passed Proposition 25, which reduced the vote required to adopt a budget to a majority vote of each house and which provided that there would be no appropriation from the current budget or future budget to pay any salary or reimbursement for travel or living expenses for members of the Legislature for the period during which the budget was presented late to the Governor.

Governor’s Proposed 2014/15 State Budget. The Governor’s proposed 2014/15 State Budget (the “Proposed 2014/15 Budget”) was released on January 9, 2014 and includes: (i) spending of $154.9 billion from all funds, including $106.8 billion from the General Fund; (ii) a proposed reduction in the State’s long-term debt by more than $11 billion in 2014/15, fully eliminating such long-term debt by 2017/18; (iii) proposed repayment of approximately $6 billion in deferred payments to K-12 schools; (iv) a contribution of $1.6 billion to a “rainy day fund” to protect against future economic downturns; (v) an increase in K-12 school funding levels of $3,410 per student through fiscal year 2017/18, including an increase of more than $2,188 per student in fiscal year 2014/15 over fiscal 2011/12 levels; and (vi) $670 million in new General Fund spending to fund the expansion of Medi-Cal benefits, including mental health, substance use disorder, adult dental, and specialized nutrition services. In addition, the Proposed 2014/15 Budget projects $217.8 billion in retirement-related unfunded liabilities. Combined with the other liabilities, the total long term State liabilities stand at $354.5 billion.

The LAO’s Overview of the Proposed 2014/15 Budget (the “LAO Overview”), released January 13, 2014, generally praised the Proposed 2014/15 Budget including the Governor’s focus on deferrals and other means of lowering the State’s “wall of debt.” The LOA Overview includes a revenue forecast of $6.4 billion in higher revenues for the State in Fiscal Years 2012/13 and 2013/14 combined, offset by $5 billion in increased expenditures, almost entirely due to greater required spending for schools and community colleges. Combined with a projected $3.2 billion operating surplus for the State in Fiscal Year 2014/15, the LAO projects that, absent any changes to current laws and policies, the State would end Fiscal Year 2014/15 with a $5.6 billion reserve. The LAO Overview assumes continued economic growth in future years and that State General Fund revenues will grow faster than expenditures through 2017/18, when the State’s projected operating surpluses reach $9.6 billion. The LAO notes that the State’s temporary personal

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income tax rate increases under Proposition 30 expire at the end of 2018, resulting in a more gradual ramping down of these revenues over the last two fiscal years of the LAO forecast.

Despite the large surplus projected by the LAO over the forecast period, the LAO also notes that the fiscal recovery is dependent on a number of assumptions including continuing economic growth and steady growth in stock prices. The LAO cautions that (i) an economic downturn within the next few years could result in a return to operating deficits, (ii) volatility of capital gains could depress annual revenues, and (iii) the LAO forecast assumes the State repays liabilities with payment schedules set in current law. Other liabilities, including certain items on the Governor’s “wall of debt” and the State’s retirement liabilities (particularly those related to the California State Teachers’ Retirement System), remain unpaid under the LAO forecast. If additional payments are made in the future to repay these liabilities or to provide inflation adjustments to universities, the courts, State employees, and other programs, the operating surpluses in the LAO forecast would fall significantly below the LAO’s projections.

The LAO also notes that the 2013/14 State Budget assumed that Fiscal Year 2012/13 would end with a $254 million reserve, however the LAO’s General Fund revenue forecast for Fiscal Year 2012/13 projects $1.65 billion in higher revenues for Fiscal year 2012/13, principally due to personal income tax collections. The LAO’s higher revenue forecast results in $1.75 billion in additional General Fund expenditures under the Proposition 98 minimum guarantee. The LAO recognizes that the 2013/14 State Budget assumed the State would end Fiscal Year 2013/14 with a reserve of $1.1 billion, while the LAO estimates that reserve to be $2.4 billion.

The LAO forecasts that Proposition 98 General Fund spending will be $3.1 billion higher than the amount provided in the Proposed 2014/15 Budget due to the LAO’s forecast of higher State revenues. The LAO notes that per-student spending would rise from $7,936 in the current fiscal year to $8,724 in Fiscal Year 2014/15, an increase of $788 or 10%, while the Proposed 2014/15 Budget includes a lower per-student spending increase from $8,469 to $9,194 for Fiscal Year 2014/15.

Potential Impact of State of California Financial Condition on the County. For several fiscal years during the recent recession the State faced a structural deficit that resulted in substantial annual deficits and reductions in expenditures. Although the State is projecting a budget surplus in the current fiscal year, the State is still facing continuing financial challenges and unfunded long-term liabilities of more than $200 billion, which could result in future reductions or deferrals in amounts payable to the County. The State’s financial condition and budget policies affect local public agencies throughout California. To the extent that the State budget process results in reduced revenues to the County, the County will be required to make adjustments to its budget. State budget policies can also impact conditions in the local economy and could have an adverse effect on the local economy and the County’s major revenue sources.

No prediction can be made by the County as to whether the State will encounter budgetary problems in future fiscal years, and if it were to do so, it is not clear what measures would be taken by the State to balance its budget, as required by law. In addition, the County cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on County finances and operations or what actions will be taken in the future by the State Legislature and the Governor to deal with changing State revenues and expenditures. There can be no assurance that actions taken by the State to address its financial condition will not materially adversely affect the financial condition of the County. Current and future State budgets will be affected by national and State economic conditions and other factors, over which the County has no control.

Enforcement of Remedies

The enforcement of any remedies provided in the Lease Agreement and the Trust Agreement could prove both expensive and time consuming. The rights and remedies provided in the Lease Agreement and the Trust Agreement may be limited by and are subject to the limitations on legal remedies against counties, including State constitutional limits on expenditures, and limitations on the enforcement of judgments

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against funds needed to serve the public welfare and interest; by federal bankruptcy laws, as now or hereafter enacted; applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors’ rights generally, now or hereafter in effect (see “- Bankruptcy of the County” below); equity principles which may limit the specific enforcement under State law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Constitution; the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose; and the limitations on remedies against municipal entities in the State. Bankruptcy proceedings or the exercise of powers by the federal or State government, if initiated, could subject the Owners of the Certificates to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation or modification of their rights.

The legal opinions to be delivered concurrently with the delivery of the Certificates (including Special Counsel’s legal opinion) will be qualified, as to the enforceability of the Certificates, the Trust Agreement, the Lease Agreement, the Assignment Agreement and other related documents, by bankruptcy, insolvency, reorganization, moratorium, arrangement, fraudulent conveyance and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitation on legal remedies against counties in the State. See “- Bankruptcy of the County” below.

Bankruptcy of the County

In addition to the limitations on remedies contained in the Trust Agreement and the Lease Agreement, the rights and remedies in the Lease Agreement may be limited and are subject to the provisions of federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principles that may affect the enforcement of creditors’ rights.

Under Chapter 9 of the Bankruptcy Code (Title 11, United States Code) (the “Bankruptcy Code”), which governs bankruptcy proceedings of public entities such as the County, no involuntary bankruptcy petition may be filed against a public entity. However, upon satisfaction of certain prerequisite conditions, a voluntary bankruptcy petition may be filed by the County. The filing of a bankruptcy petition results in a stay against enforcement of certain remedies under agreements to which the bankrupt entity is a party. A bankruptcy filing by the County could thus limit remedies under the Lease Agreement. A bankruptcy debtor may choose to assume or reject executory contracts and leases, such as the Lease Agreement. However, a debtor may not assume or reject executory contracts to loan money or to make a financial accommodation, such as the Trust Agreement. In the event of rejection of a lease by debtor lessee, the leased property is returned to the lessor and the lessor has a claim for a limited amount of the resulting damages.

Under the Trust Agreement, the Trustee holds a security interest in the revenues in the funds pledged thereunder, including 2014 Lease Payments, for the benefit of the Owners of the Certificates, but such security interest arises only when the 2014 Lease Payments are actually received by the Trustee following payment by the County. The Leased Property itself is not subject to a security interest, mortgage or any other lien in favor of the Trustee for the benefit of Owners. In the event of a bankruptcy filed by the County and the subsequent rejection of the Lease Agreement by the County, the Trustee would recover possession of the Leased Property and would have a claim for damages against the County. The Trustee’s claim would constitute a secured claim only to the extent of revenues in the possession of the Trustee; the balance of such claim would be unsecured.

In a bankruptcy of the County, if a material unpaid liability is owed to PERS or any other pension system (collectively the “Pension Systems”) on the filing date, or accrues thereafter, such circumstances could create additional uncertainty as to the County’s ability to make Lease Payments. Given that municipal pension systems in California are usually administered pursuant to state constitutional provisions and, as applicable, other state and/or city or county law, the Pension Systems may take the position, among other possible arguments, that their claims enjoy a higher priority than all other claims, that Pension Systems

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have the right to enforce payment by injunction or other proceedings outside of a County bankruptcy case, and that Pension System claims cannot be the subject of adjustment or other impairment under the Bankruptcy Code because that would purportedly constitute a violation of state statutory, constitutional and/or municipal law. It is uncertain how a bankruptcy judge in a County bankruptcy would rule on these matters. In addition, this area of law is presently very unsettled because issues of pension underfunding claim priority, pension contribution enforcement, and related bankruptcy plan treatment of such claims (among other pension-related matters) are presently the subject of litigation in the Chapter 9 cases of several California municipalities, including the cities of Stockton and San Bernardino.

Constitutional Limitation on Taxes and Expenditures

State Initiative Measures Generally. Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Voters have exercised this power through the adoption of Proposition 13 (“Article XIIIA”) and similar measures, the most recent of which were approved as Propositions 22 and 26 in the general election held on November 2, 2010.

Any such initiative may affect the collection of fees, taxes and other types of revenue by local agencies such as the County. Subject to overriding federal constitutional principles, such collection may be materially and adversely affected by voter-approved initiatives, possibly to the extent of creating cash-flow problems in the payment of outstanding obligations such as the Lease Agreement.

Article XIIIA. Article XIIIA of the California Constitution limits the taxing powers of California public agencies. Article XIIIA provides that the maximum ad valorem tax on real property cannot exceed 1% of the “full cash value” of the property, and effectively prohibits the levying of any other ad valorem property tax except for taxes above that level required to pay debt service on voter-approved general obligation bonds. “Full cash value” is defined as “the County assessor’s valuation of real property as shown on the 1975/76 tax bill under ‘full cash value’ or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.” The “full cash value” is subject to annual adjustment to reflect inflation at a rate not to exceed 2% or a reduction in the consumer price index or comparable local data. Article XIIIA has subsequently been amended to permit reduction of the “full cash value” base in the event of declining property values caused by substantial damage, destruction or other factors, and to provide that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster and in other special circumstances. There may also be declines in valuations if the California Consumer Price Index is negative.

The foregoing limitation does not apply to ad valorem taxes or special assessments to pay the interest and prepayment charges on any indebtedness approved by the voters before July 1, 1978 or any bonded indebtedness for the acquisition or improvement of real property approved by two-thirds of votes cast by the voters voting on the proposition.

In the general election held November 4, 1986, voters of the State of California approved two measures, Propositions 58 and 60, which further amend the terms “purchase” and “change of ownership,” for purposes of determining full cash value of property under Article XIIIA, to not include the purchase or transfer of (1) real property between spouses, and (2) the principal residence and the first $1,000,000 of other property between parents and children. Proposition 60 amends Article XIIIA to permit the Legislature to allow persons over age 55 who sell their residence and buy or build another of equal or lesser value within two years in the same city, to transfer the old residence’s assessed value to the new residence. In the March 26, 1996 general election, voters approved Proposition 193, which extends the parents-children exception to the reappraisal of assessed value. Proposition 193 amended Article XIIIA so that grandparents may transfer to their grandchildren whose parents are deceased, their principal residences, and the first $1,000,000 of other property without a reappraisal of assessed value.

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Because the Revenue and Taxation Code does not distinguish between positive and negative changes in the California Consumer Price Index used for purposes of the inflation factor, there was a decrease of 0.237% in 2009/10 – applied to the 2010/11 tax roll – reflecting the actual change in the California Consumer Price Index, as reported by the State Department of Finance. For each fiscal year since Article XIIIA has become effective (the 1978/79 Fiscal Year), the annual increase for inflation has been at least 2% except in eight fiscal years (including for the future Fiscal Year 2014/15) as shown below:

Tax Roll Percentage Tax Roll Percentage 1981/82 1.000% 2004/05 1.867% 1995/96 1.190% 2010/11 (0.237)% 1996/97 1.110% 2011/12 0.753% 1998/99 1.853% 2014/15 0.454%

Proposition 8 Adjustments. Proposition 8, approved in 1978, provides for the assessment of real property at the lesser of its originally determined (base year) full cash value compounded annually by the inflation factor, or its full cash value as of the lien date, taking into account reductions in value due to damage, destruction, obsolescence or other factors causing a decline in market value. Reductions based on Proposition 8 do not establish new base year values, and the property may be reassessed as of the following lien date up to the lower of the then-current fair market value or the factored base year value. The State Board of Equalization has approved this reassessment formula and such formula has been used by county assessors statewide. The County has seen Proposition 8 reductions from the maximum amount that could be assessed on property since 2009. See “FINANCIAL INFORMATION - Taxable Property and Assessed Valuation” herein.

Article XIIIB. On November 6, 1979, California voters approved Proposition 4, or the Gann Initiative, which added Article XIIIB to the California Constitution. Article XIIIB limits the annual appropriations of the State and any city, county, city and county, school district, authority or other political subdivision of the State. The “base year” for establishing such appropriations limit is the 1978/79 Fiscal Year, and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by public agencies.

Appropriations subject to Article XIIIB include generally the proceeds of taxes levied by or for the entity and the proceeds of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. “Proceeds of taxes” include, but are not limited to, all tax revenues, certain State subventions, and the proceeds to an entity of government, from (1) regulatory licenses, user charges and user fees, to the extent that such charges and fees exceed the costs reasonably borne in providing the regulation, product or service, and (2) the investment of tax revenues. Article XIIIB includes a requirement that if an entity’s revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules within the next two subsequent fiscal years.

In the June 1990 election, the voters approved Proposition 111 amending the method of calculation of State and local appropriations limits. Proposition 111 made several changes to Article XIIIB. First, the term “change in the cost of living” was redefined as the change in the California per capita personal income (“CPCPI”) for the preceding year. Previously, the lower of the CPCPI or the United States Consumer Price Index was used. Second, the appropriations limit for the fiscal year was recomputed by adjusting the 1986/87 limit by the CPCPI for the three subsequent years. Third and lastly, Proposition 111 excluded appropriations for “qualified capital outlay for fiscal 1990/91 as defined by the legislature” from proceeds of taxes.

Section 7910 of the Government Code requires the County to adopt a formal appropriations limit for each fiscal year. The County’s appropriations limit for 2013/14 is $423,774,995. The County’s appropriations subject to the limit for 2013/14 are $113,178,689. Based on this, the appropriations limit is not expected to

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have any impact on the ability of the County to continue to budget and appropriate the Lease Payments as required by the Lease Agreement.

Proposition 62. Proposition 62 was a statutory initiative adopted in the November 1986 general election. Proposition 62 added Sections 53720 to 53730, inclusive, to the California Government Code. It confirmed the distinction between a general tax and special tax, established by the State Supreme Court in 1982 in City and County of San Francisco v. Farrell, by defining a general tax as one imposed for general governmental purposes and a special tax as one imposed for specific purposes. Proposition 62 further provided that no local government or district may impose (i) a general tax without prior approval of the electorate by majority vote or (ii) a special tax without such prior approval by two-thirds vote. It further provided that if any such tax is imposed without such prior written approval, the amount thereof must be withheld from the levying entity’s allocation of annual property taxes for each year that the tax is collected. By its terms, Proposition 62 applies only to general and special taxes imposed on or after August 1, 1985. Proposition 62 was generally upheld in Santa Clara County Local Transportation Authority v. Guardino, a California Supreme Court decision filed September 28, 1995.

Proposition 218. On November 5, 1996, California voters approved Proposition 218 – Voter Approval for Local Government Taxes – Limitation on Fees, Assessments, and Charges – Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. Proposition 218 states that all taxes imposed by local governments shall be deemed to be either general taxes or special taxes. Special purpose districts, including school districts, have no power to levy general taxes. No local government may impose, extend or increase any general tax unless and until such tax is submitted to the electorate and approved by a majority vote. No local government may impose, extend or increase any special tax unless and until such tax is submitted to the electorate and approved by a two-thirds vote.

Proposition 218 also provides that no tax, assessment, fee or charge shall be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except: (i) the ad valorem property tax imposed pursuant to Article XIII and Article XIIIA of the California Constitution, (ii) any special tax receiving a two-thirds vote pursuant to Section 4 of Article XIIIA the California Constitution, and (iii) assessments, fees, and charges for property related services as provided in Article XIIID. Proposition 218 added voter requirements for assessments and fees and charges imposed as an incident of property ownership, other than fees and charges for sewer, water, and refuse collection services. In addition, all assessments and fees and charges imposed as an incident of property ownership, including sewer, water, and refuse collection services, are subjected to various additional procedures, such as hearings and stricter and more individualized benefit requirements and findings. The effect of such provisions will presumably be to increase the difficulty a local agency will have in imposing, increasing or extending such assessments, fees and charges.

Proposition 218 also extended the initiative power to reducing or repealing any local taxes, assessments, fees and charges. This extension of the initiative power is not limited to taxes imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees and charges, subject to overriding federal constitutional principles relating to the impairment of contracts. In fact, the County began levying a utility tax in 1991 and pursuant to Proposition 218, voters in the County qualified a measure to be placed on the March 2002 ballot to eliminate the utility tax. This measure was approved by the voters and the County stopped levying the utility tax in April 2002.

Proposition 218 provides that, effective July 1, 1997, fees that are charged “as an incident of property ownership” may not “exceed the funds required to provide the property related services” and may only be charged for services that are “immediately available to the owner of the property.”

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In November 2012, voters in the County approved an increase in the transient occupancy tax rate from 9.5% to 11%.

The County does not expect the application of Proposition 218 will have a material adverse impact on its ability to pay Lease Payments.

Proposition 1A. Proposition 1A (“Proposition 1A”), proposed by the Legislature in connection with the 2004/05 Budget Act and approved by the voters in November 2004, restricts State authority to reduce major local tax revenues such as the tax shifts permitted to take place in Fiscal Years 2004/05 and 2005/06. Proposition 1A provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year, as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues among local governments within a county must be approved by two-thirds of both houses of the Legislature.

Proposition 1A provides, however, that beginning in Fiscal Year 2008/09, the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two-thirds of both houses and certain other conditions are met. Such a shift may not occur more than twice in any 10-year period. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county.

For Fiscal Year 2009/10, 8% of the County’s property tax revenues were diverted to the State as a result of a Proposition 1A suspension. The County participated in a Proposition 1A Securitization Program (the “Program”) sponsored by the California Statewide Communities Development Authority. The Program allowed the County to exchange its anticipated State property tax receivable for cash.

Proposition 1A also provides that if the State reduces the vehicle license fee rate below 0.65% of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates.

Proposition 22. On November 2, 2010, voters in the State approved Proposition 22. Proposition 22, known as the “Local Taxpayer, Public Safety, and Transportation Protection Act of 2010,” eliminates or reduces the State’s authority to (i) temporarily shift property taxes from cities, counties and special districts to schools, (ii) use vehicle license fee revenues to reimburse local governments for State-mandated costs (the State will have to use other revenues to reimburse local governments), (iii) redirect property tax increment from redevelopment agencies to any other local government, (iv) use State fuel tax revenues to pay debt service on State transportation bonds, or (v) borrow or change the distribution of State fuel tax revenues.

Proposition 26. On November 2, 2010, voters in the State also approved Proposition 26. Proposition 26 amends Article XIIIC of the State Constitution to expand the definition of “tax” to include “any levy, charge, or exaction of any kind imposed by a local government” except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of

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government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity. The County does not expect the provisions of Proposition 26 to materially impede its ability to pay Lease Payments when due.

Future Initiatives. From time to time other initiative measures could be adopted, affecting the ability of the County to increase revenues and appropriations.

Early Prepayment Risk

Early payment of the 2014 Lease Payments and early prepayment of the Certificates may occur in whole on any date or in part on any Interest Payment Date, without premium, if the Leased Property or a portion thereof is lost, destroyed or damaged beyond repair or taken by eminent domain and from the proceeds of title insurance (see “THE CERTIFICATES - Prepayment - Extraordinary Prepayment”), or on any date if the County exercises its right to prepay 2014 Lease Payments in whole or in part pursuant to the provisions of the Lease Agreement and the Trust Agreement.

Loss of Tax Exemption

As discussed under the caption “LEGAL MATTERS - Tax Matters” herein, the interest component of the 2014 Lease Payments could become includable in gross income for purposes of federal income taxation retroactive to the date the Certificates were executed and delivered as a result of future acts or omissions of the County in violation of its covenants contained in the Trust Agreement and the Lease Agreement. Should such an event of taxability occur, the Certificates are not subject to special prepayment or any increase in interest rate and will remain outstanding until maturity or until prepaid under one of the prepayment provisions contained in the Trust Agreement.

In addition, Congress has considered in the past, is currently considering and may consider in the future, legislative proposals, including some that carry retroactive effective dates, that, if enacted, would alter or eliminate the exclusion from gross income for federal income tax purposes of interest on municipal bonds, such as the Certificates. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal tax legislation. The County can provide no assurance that federal tax law will not change while the Certificates are outstanding or that any such changes will not adversely affect the exclusion of the interest component of the 2014 Lease Payments from gross income for federal income tax purposes. If the exclusion of the interest component of 2014 Lease Payments from gross income for federal income tax purposes were amended or eliminated, it is likely that the market price for the Certificates would be adversely impacted.

IRS Audit of Tax-Exempt Bond Issues

The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Certificates will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the Certificates might be affected as a result of such an audit of the Certificates (or by an audit of similar bonds).

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Seismic Considerations

According to the Public Safety and Noise Element of the County’s General Plan, the County is located in a seismically active region and could be impacted by a major earthquake originating from the numerous faults in the area. Surface rupture, ground shaking and liquefaction are the primary seismic risk to Santa Cruz County from a major earthquake along the San Andreas fault or within the Butano, Sargent, Zayante and Corralitos fault zones. Slope instability could result in landslides during ground shaking in some portions of the County. The epicenter of the 7.1 magnitude Loma Prieta earthquake, which struck in 1989, was located approximately 10 miles east-northeast of the City of Santa Cruz. In Santa Cruz County, 674 dwelling units, 32 mobile homes and 310 businesses were destroyed in the earthquake, with an estimate of $274 million in damages. By January 1991, the County had issued 7,460 building permits for reconstruction or repair of damaged structures. Repair of infrastructure was financed in part by a voter-approved one-half cent sales tax levied over six years.

The Leased Property is located in an area classified as Seismic Risk Zone 4 by the Uniform Building Code. Seismic Risk Zone 4 includes the greater San Francisco Bay Area and all of coastal California. It is the highest risk zone classification of the Uniform Building Code. If there were to be an occurrence of severe seismic activity in the County, there could be substantial damage to and interference with the County’s right to use and occupy all or a portion of the Leased Property, which could result in Lease Payments being subject to abatement. See “The Lease Payments - Abatement” above. However, there was no damage to the Leased Property as a result of the Loma Prieta earthquake in 1989. Under the Lease Agreement, the County is required to obtain earthquake coverage only if it is available at reasonable cost from reputable insurers in the reasonable opinion of the County. The County currently maintains earthquake insurance on the Leased Property, (see “THE LEASED PROPERTY”), but may not maintain such coverage in the future.

A major earthquake could cause widespread destruction and significant loss of life in a populated area such as the County. If an earthquake were to substantially damage or destroy taxable property within the County, a reduction in taxable values of property in the County and a reduction in revenues available to the General Fund to make Lease Payments would be likely to occur. Seismic activity may also reduce or eliminate the use and occupancy of the Leased Property by the County. There is no assurance that, in the event of a natural disaster, sufficient County reserves or Federal Emergency Management Agency assistance would be available for the repair or replacement of any Leased Property.

Other Natural Hazards

The County has adopted a Natural Hazards Mitigation Plan. This plan includes a hazard analysis for earthquake, flood, landslide and fire risk, and is required to comply with Federal Emergency Management Agency requirements for disaster relief funding.

If such events described above under the caption “Seismic Conditions” or events described below occur, the County’s emergency response to such an event may add unanticipated expenditures to the General Fund budget, some or all of which may not be reimbursed by federal or state disaster funding, and, if reimbursed, may not be received by the County in a timely manner. This could lead to reduced ability by the County to make Lease Payments. Such event could also result in substantial damage to properties in the County, which, in turn, could substantially reduce the value of such properties and could affect the ability or willingness of the property owners to pay their property taxes.

Wildfire Conditions. The County includes areas where there is high or extreme danger of wildfires during dry months and during periods of prolonged drought. In May 2008, 35 residences and several outbuildings were lost and 4,270 acres were burned in the Summit fire. In June 2008, 3 residences and several outbuildings were lost and 520 acres were burned in the Martin fire.

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Flooding and Tsunamis. Portions of the County are located in a 100-year flood plain. A flood occurred in 1995 when storm water breached the protective levees of the Pajaro River, and flooded approximately 3,280 acres adjacent to the river. Portions of the County are located along the Pacific Ocean. The County could be subject to impacts from tsunamis in the event of an earthquake occurring off-shore.

Secondary Market Risk

There can be no assurance that there will be a secondary market for purchase or sale of the Certificates, and from time to time there may be no market for them, depending upon prevailing market conditions, the financial condition or market position of firms who may make the secondary market and the financial condition of the County.

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LEGAL MATTERS

Enforceability of Remedies

The remedies available to the Trustee and the Owners of the Certificates upon an event of default under the Trust Agreement, the Lease Agreement, the Assignment Agreement or any other document described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. In the case of any bankruptcy proceeding involving the County, the rights of the Owners could be modified at the direction of the court. The various legal opinions to be delivered concurrently with the delivery of the Certificates will be qualified to the extent that the enforceability of certain legal rights related to the Trust Agreement, the Lease Agreement, the Assignment Agreement and other pertinent documents is subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally.

Approval of Legal Proceedings

Rutan & Tucker, LLP, Costa Mesa, California, as Special Counsel, will render an opinion which states that the Lease Agreement represents a valid and binding obligation of the County and is enforceable against the County in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights, by equitable principles, by the exercise of judicial discretion and by limitations on legal remedies against municipalities in the State. See “APPENDIX D” hereto for the proposed form of Special Counsel’s opinion.

The County has no knowledge of any fact or other information which would indicate that the Trust Agreement, the Lease Agreement or the Certificates are not so enforceable against the County, except to the extent such enforcement is limited by principles of equity and by state and federal laws relating to bankruptcy, reorganization, moratorium or creditors’ rights generally and by limitations on legal remedies against municipalities in the State.

Certain legal matters will be passed on for the County by Fulbright & Jaworski LLP, a member of Norton Rose Fulbright, Los Angeles, California, as Disclosure Counsel and by the County Counsel and for the Underwriter by Nossaman LLP, Irvine, California, as Underwriter’s Counsel. Fees payable to Special Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Certificates.

Tax Matters

Federal tax law contains a number of requirements and restrictions which apply to the Lease Agreement and the use and investment of proceeds from the sale of the Certificates, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of Certificate proceeds and the facilities financed therewith, and certain other matters. The County has covenanted to comply with all requirements that must be satisfied in order for the interest component of the Lease Payments, and amounts thereof distributed with respect to the Certificates be excluded from the gross income of the owners thereof for federal income tax purposes. Failure to comply with certain of such covenants could cause interest components of the Lease Payments, and the amounts thereof distributed with respect to the Certificates, to become includable in gross income for federal income tax purposes retroactively to the date of delivery of the Lease Agreement.

Subject to the County’s compliance with the above referenced covenants, under present law, in the opinion of Rutan &Tucker, LLP, Special Counsel, that portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986, as amended (the “Tax Code”) from the gross income of the owners thereof for

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federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, receipt or accrual of such interest in respect of a Certificate owned by a corporation may affect the computation of its alternative minimum taxable income. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Tax Code will be computed.

In rendering its opinion, Special Counsel will rely upon certifications of the County with respect to certain material facts within the County’s knowledge. Special Counsel’s opinion represents its legal judgment based upon its review of the law and the facts that it deems relevant to render such opinion and is not a guarantee of a result.

The Tax Code includes provisions for an alternative minimum tax (“AMT”) for corporations in addition to the corporate regular tax in certain cases. The AMT, if any, depends upon the corporation’s alternative minimum taxable income (“AMTI”), which is the corporation’s taxable income with certain adjustments. One of the adjustment items used in computing the AMTI of a corporation (with certain exceptions) is an amount equal to 75% of the excess of such corporation’s “adjusted current earnings” over an amount equal to its AMTI (before such adjustment item and the alternative tax net operating loss deduction). “Adjusted current earnings” would include certain tax exempt interest, including interest with respect to the Certificates.

Ownership of the Certificates may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers of the Certificates should consult their tax advisors as to applicability of any such collateral consequences.

The issue price (the “Issue Price”) for each maturity of the Certificates is the price at which a substantial amount of such maturity of the Certificates is first sold to the public. The Issue Price of a maturity of the Certificates may be different from the price set forth, or the price corresponding to the yield set forth, on the inside front cover page hereof.

Owners of Certificates who dispose of Certificates prior to the stated maturity (whether by sale, redemption or otherwise), purchase Certificates in the initial public offering, but at a price different from the Issue Price, or purchase Certificates subsequent to the initial public offering, should consult their own tax advisors.

If a Certificate is purchased at any time for a price that is less than the Certificate’s stated redemption price at maturity (the “Reduced Issue Price”), the purchaser will be treated as having purchased a Certificate with market discount subject to the market discount rules of the Tax Code (unless a statutory de minimis rule applies). Accrued market discount is treated as taxable ordinary income and is recognized when a Certificate is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser’s election, as it accrues. Such treatment would apply to any purchaser who purchases a Certificate for a price that is less than its Revised Issue Price. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such Certificate. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates.

An investor may purchase a Certificate at a price in excess of its stated principal amount. Such excess is characterized for federal income tax purposes as “bond premium” and must be amortized by an investor on a constant yield basis over the remaining term of the Certificate in a manner that takes into account potential call dates and call prices. An investor cannot deduct amortized bond premium relating to a Certificate. The amortized bond premium is treated as a reduction in the tax-exempt interest received. As bond premium is amortized, it reduces the investor’s basis in the Certificate. As a consequence, an investor may realize gain on the disposition of a Certificate acquired with bond premium notwithstanding that the disposition is for a

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price lower than the price at which the Certificate was acquired. Investors who purchase a Certificate at a premium should consult their own tax advisors regarding the amortization of bond premium and its effect on the Certificate’s basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the Certificate.

There are or may be pending in the Congress of the United States legislative proposals, including some that carry retroactive effective dates, that, if enacted, could alter or amend the federal tax matters referred to above or affect the market value of the Certificates. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to Certificates issued prior to enactment. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal tax legislation. Special Counsel expresses no opinion regarding any pending or proposed federal tax legislation.

The Internal Revenue Service (the “Service”) has an ongoing program of examining tax exempt obligations to determine whether, in the view of the Service, interest on such tax exempt obligations is includable in the gross income of the owners thereof for federal income tax purposes. It cannot be predicted whether or not the Service will commence an examination of the Certificates. If an examination is commenced, under current procedures the Service may treat the Issuer as a taxpayer and the Certificate owner may have no right to participate in such procedure. The commencement of an examination could adversely affect the market value and liquidity of the Certificates until the examination is concluded, regardless of the ultimate outcome.

Payments of interest on, and proceeds of the sale, redemption or maturity of, tax exempt obligations, including the Certificates, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Certificate owner who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Certificate owner who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. The reporting and backup withholding requirements do not affect the excludability of such interest from gross income for federal tax purposes.

In the further opinion of Special Counsel, the portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is exempt from personal income taxation imposed by the State of California.

Ownership of the Certificates may result in other state and local tax consequences to certain taxpayers. Special Counsel expresses no opinion regarding any such collateral consequences arising with respect to the Certificates. Prospective purchasers of the Certificates should consult their tax advisors regarding the applicability of any such state and local taxes.

The complete text of the final opinion that Special Counsel expects to deliver upon the execution and delivery of the Certificates is set forth in “APPENDIX D - FORM OF SPECIAL COUNSEL OPINION.”

Absence of Litigation

The County and the Authority will furnish a certificate dated as of the date of delivery of the Certificates that there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the Trust Agreement, the Lease Agreement or the sale or delivery of the Certificates or in any manner questioning the proceedings and authority under which the Trust Agreement, the Sublease and the Lease Agreement are to be executed or delivered or the Certificates are to be delivered or affecting the validity thereof.

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CONCLUDING INFORMATION

Ratings on the Certificates

Standard & Poor’s and Moody’s Investors Service have assigned their municipal bond ratings of “A+ (stable)” and “A2”, respectively to the Certificates. Such ratings reflects only the views of the rating agencies and any desired explanation of the significance of such ratings should be obtained from the rating agencies. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that the ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of the rating agencies, circumstances so warrant. Except as otherwise required in the Continuing Disclosure Certificate, the County undertakes no responsibility either to bring to the attention of the owners of any Certificates any downward revision or withdrawal of any rating obtained or to oppose any such revision or withdrawal. Any such downward revision or withdrawal of a rating may have an adverse effect on the market price of the Certificates. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time.

Underwriting

The Certificates were sold to Stifel, Nicolaus & Company, Incorporated (the “Underwriter”). The Underwriter is offering the Certificates at the prices set forth on the inside front cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Underwriter has purchased the Certificates at a price equal to $6,553,602.16, which amount represents the principal amount of the Certificates ($6,285,000), plus a net original issue premium of $297,706.65, and less an Underwriter’s discount of $29,104.49. The Underwriter will pay certain of its expenses relating to the offering.

The Financial Advisor

The material contained in this Official Statement was prepared by the County with the assistance of the Financial Advisor who advised the County as to the financial structure and certain other financial matters relating to the Certificates. The information set forth herein The information set forth herein received from sources other than the County has been obtained by the County from sources which are believed to be reliable, but such information is not guaranteed by the Financial Advisor as to accuracy or completeness, nor has it been independently verified. Fees paid to the Financial Advisor are contingent upon the sale and delivery of the Certificates.

Verifications of Mathematical Computations

Grant Thornton LLP will verify from the information provided to it the mathematical accuracy as of the date of the closing on the Certificates of (1) the computations contained in the provided schedules to determine that the deposits listed in the schedules prepared by the Financial Advisor, to be held in escrow, together with earnings thereon will be sufficient to pay, when due, the principal, prepayment premium and interest requirements of the 2001 Bonds, and (2) the computation of yield on the Certificates contained in the provided schedules used by Special Counsel in its determination that the interest with respect to the Certificates is exempt from federal taxation. Grant Thornton LLP will express no opinion on the assumptions provided to it, nor as to the exemption from taxation of the interest with respect to the Certificates.

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Continuing Disclosure

The County will covenant to provide certain annual financial information (the “Annual Reports”) and notices of the occurrence of certain enumerated events in accordance with Rule 15c2-12 of the Securities Exchange Act of 1934 as amended (the “Rule”). The Annual Reports and the notices will be filed by the County on the Electronic Municipal Market Access Website (“EMMA”) operated by the Municipal Securities Rulemaking Board (www.emma.msrb.org). The required content of the Annual Reports and the specific nature of the notices of enumerated events and certain other terms of the continuing disclosure obligation are included in “APPENDIX C - FORM OF CONTINUING DISCLOSURE CERTIFICATE.” These covenants will be made in order to assist the Underwriter in complying with the Rule. In the past five years the County has complied, in all material respects, with its undertakings to provide continuing disclosure under the Rule. The County intends to adopt disclosure compliance procedures and assign a specific person to coordinate and monitor compliance with the Rule.

Additional Information

The summaries and references contained herein with respect to the Trust Agreement, the Sublease, the Lease Agreement, the Assignment Agreement, the Certificates, statutes and other documents, do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute and references to the Certificates are qualified in their entirety by reference to the form hereof included in the Trust Agreement. Copies of the Trust Agreement and the Lease Agreement may be obtained after delivery of the Certificates from the County at Government Center, 701 Ocean Street, Santa Cruz, California 95060, telephone (831) 454-2100.

References

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the County and the purchasers or Owners of any of the Certificates.

Execution

The execution of this Official Statement by the Assistant County Administrative Officer has been duly authorized by the County of Santa Cruz.

COUNTY OF SANTA CRUZ

By: /s/ Carol D. Kelly Assistant County Administrative Officer

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APPENDIX A

SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following are brief summaries of the provisions of the Sublease, the Lease Agreement, the

Trust Agreement and the Assignment Agreement. These summaries are not intended to be definitive. Reference is made to the actual documents (copies of which are available from the County) for the complete terms thereof.

DEFINED TERMS

The following terms have the following meanings, notwithstanding that any such terms may be elsewhere defined in this Official Statement. Any terms not expressly defined in this Summary but previously defined in this Official Statement have the respective meanings previously given.

“Additional Sublease Payment” means the amount of $6,285,000 which is payable by the Authority to the County on the Closing Date under the Lease Agreement, in consideration of the sublease of the Leased Property by the County to the Authority thereunder.

“Business Day” means a day other than a Saturday, Sunday or legal holiday, on which banking institutions are not closed in the State of California or in any state in which the Office of the Trustee is located.

“Closing Date” means April 10, 2014, being the day when the Certificates, duly executed by the Trustee, are delivered to the original purchaser thereof.

“Federal Securities” means any of the following which at the time of investment are legal investments under the laws of the State of California for the funds purported to be invested therein: (a) direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America); and (b) obligations of any agency, department or instrumentality of the United States of America the timely payment of principal of and interest on which are fully guaranteed by the United States of America.

“First Supplement to Sub-Sublease” means the First Supplement to Sub-Sublease dated as of August 1, 2006 between the Authority and the County.

“Fiscal Year” means the twelve-month period beginning on July 1 of any year and ending on June 30 of the next succeeding year, or any other twelve-month period by the County as its fiscal year under written notice filed with the Trustee.

“Information Services” means the Electronic Municipal Market Access System (referred to as “EMMA”), a facility of the Municipal Securities Rulemaking Board (at http://emma.msrb.org) or, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other national information services providing information with respect to called bonds as the County may designate in a Certificate of the County delivered to the Trustee.

“Lease Agreement” means the Sub-Sublease as amended by the First Supplement to Sub-Sublease, the Second Supplement to Sub-Sublease and the Third Supplement to Sub-Sublease.

“Lease Payment Date” means, with respect to any Interest Payment Date, the 15th calendar day (or, if such day is not a Business Day, on the immediately preceding Business Day) of the month immediately preceding such Interest Payment Date.

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“Leased Property” means all of the real property described more fully in Appendix A attached to the Sublease and the Lease Agreement, and all related land, improvements and facilities. The Leased Property consists generally of County’s Water Street detention facility and Blaine Street detention facility as described more fully elsewhere in this Official Statement.

“Moody’s” means Moody’s Investors Service, of New York, New York, its successors and their assigns, or any other nationally recognized securities rating agency designated by the County if such corporation is dissolved, liquidated or no longer performs the functions of a securities rating agency.

“Net Proceeds” means any insurance proceeds or eminent domain award (including any proceeds of sale to a governmental entity under threat of the exercise of eminent domain powers), paid with respect to the Leased Property, to the extent remaining after payment therefrom of all expenses incurred in the collection thereof.

“Office” means the corporate trust office of the Trustee in Los Angeles, California, and such office as the Trustee may designate in writing to the County from time to time as the place for transfer, exchange or payment of the Certificates.

“Owner,” when used with respect to a Certificate, means the person in whose name the ownership of such Certificate is registered on the registration books maintained by the Trustee.

“Permitted Encumbrances” means, as of any time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the County may permit to remain unpaid under the Lease Agreement; (b) the Sublease, the Lease Agreement and the Assignment Agreement; (c) any right or claim of any mechanic, laborer, materialman, supplier or vendor which is secured by a lien on the Leased Property; (d) the exceptions disclosed in the title insurance policy with respect to the Leased Property issued as of the Closing Date by First American Title Company; and (e) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record and which the County certifies in writing will not materially impair the use of the Leased Property for its intended purposes.

“Permitted Investments” means any of the following:

A. The following obligations may be used as Permitted Investments for all purposes, including defeasance investments in refunding escrow accounts.

(1) Cash (insured at all times by the Federal Deposit Insurance Corporation),

(2) Obligations of, or obligations guaranteed as to principal and interest by, the U.S. or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the U.S. including:

• U.S. treasury obligations • All direct or fully guaranteed obligations • Farmers Home Administration • General Services Administration • Guaranteed Title XI financing • Government National Mortgage Association (GNMA) • State and Local Government Series

Any security used for defeasance must provide for the timely payment of principal and interest and cannot be callable or prepayable prior to maturity or earlier redemption of the rated debt (excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date).

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B. The following Obligations may be used as Permitted Investments for all purposes other than defeasance investments in refunding escrow accounts.

(1) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including:

- Export-Import Bank - Rural Economic Community Development Administration - U.S. Maritime Administration - Small Business Administration - U.S. Department of Housing & Urban Development (PHAs) - Federal Housing Administration - Federal Financing Bank

(2) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America:

- Senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) - Obligations of the Resolution Funding Corporation (REFCORP) - Senior debt obligations of the Federal Home Loan Bank System

(3) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances with domestic commercial banks, including the Trustee and its affiliates, which have a rating on their short term certificates of deposit on the date of purchase of “P-1” by Moody’s and “A-1” or “A-1+” by S&P and maturing not more than 360 calendar days after the date of purchase. (Ratings on holding companies are not considered as the rating of the bank);

(4) Commercial paper which is rated at the time of purchase in the single highest classification, “P1” by Moody’s and “A-l+” by S&P and which matures not more than 270 calendar days after the date of purchase;

(5) Investments in a money market fund rated “AAAm” or “AAAm-G” or better by S&P, including funds for which the Trustee or its affiliates provide investment advisory or other management services;

(6) Pre-refunded Municipal Obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and

(A) which are rated, based on an irrevocable escrow account or fund (the “escrow”), in the highest rating category of Moody’s or S&P or any successors thereto; or

(B) (i) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or obligations described in paragraph A(2) above, which escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate,

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and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate;

(7) Municipal obligations rated “Aaa/AAA” or general obligations of States with a rating of “A2/A” or higher by both Moody’s and S&P;

(8) Investment agreements with a domestic or foreign bank or corporation the long-term debt of which or, in the case of a guaranteed corporation the long-term debt, or, in the case of an insurance company, the long-term debt paying ability, of the guarantor is rated at least “AA” by S&P and “Aa” by Moody’s; provided that, by the terms of the investment agreement:

(A) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the Project Fund, construction draws) on the Certificates;

(B) the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven days’ prior notice; the County and the Trustee hereby agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid;

(C) the investment agreement shall state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof;

(D) the County and the Trustee receives the opinion of domestic counsel (which opinion shall be addressed to the County and the Trustee) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to the County, and the Trustee;

(E) the investment agreement shall provide that if during its term

(1) the provider’s rating by either S&P or Moody’s falls below “AA-” or “Aa3”, respectively, the provider shall, at its option, within 10 days of receipt of publication of such downgrade, either (i) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider’s books) to the Trustee or a third party acting solely as agent therefor (the “Holder of the Collateral”) collateral free and clear of any third-party liens or claims the market value of which collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody’s to maintain an “A” rating in an “A” rated structured financing (with a market value approach); or (ii) repay the principal of and accrued but unpaid interest on the investment; and

(2) the provider’s rating by either S&P or Moody’s is withdrawn or suspended or falls below “A-” or “A3”, respectively, the provider must, at the direction of the County or the Trustee, within 10 days of receipt of such direction, repay the principal of and accrued but unpaid

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interest on the investment, in either case with no penalty or premium to the County or Trustee;

(F) The investment agreement shall state and an opinion of counsel shall be rendered, in the event collateral is required to be pledged by the provider under the terms of the investment agreement at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); and

(G) The investment agreement must provide that if during its term

(1) the provider shall default in its payment obligations, the provider’s obligations under the investment agreement shall, at the direction of the County or the Trustee be accelerated and amounts invested and accrued, but unpaid interest thereon shall be repaid to the County or Trustee, as appropriate; and

(2) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. (“event of insolvency”), the provider’s obligations shall automatically be accelerated and amounts invested and accrued, but unpaid interest thereon shall be repaid to the County or Trustee, as appropriate.

(9) The State of California’s Local Agency Investment Fund (“LAIF”) established by Government Code Section 16429.1. The Trustee may restrict investments in LAIF if required to keep money available for the purposes of the Trust Agreement.

“Record Date” means the close of business on the 15th day of the month preceding each Interest Payment Date, whether or not such 15th day is a Business Day.

“Reserve Requirement” means, as of the date of calculation thereof, an amount equal to the lesser of (a) 10% of the initial offering price to the public of the Certificates as determined by the Tax Code, (b) maximum amount of 2014 Lease Payments coming due in the current or any future Certificate Year, or (c) 125% of average annual 2014 Lease Payments as of the date of issuance.

“Second Supplement to Sub-Sublease” means the Second Supplement to Sub-Sublease dated as of June 1, 2008 between the Authority and the County.

“Securities Depositories” means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax-(516) 227-4171; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the County may designate in a written request of the County delivered to the Trustee.

“Surety Bond” means an irrevocable standby or direct pay letter of credit or surety bond issued by a commercial bank or insurance company and deposited with the Trustee pursuant to the Trust Agreement, provided that all of the following requirements are met at the time the County determines delivery thereof to the Trustee: (a) the long-term credit rating of such bank or the claims paying rating of such insurance company is AA or better from each Rating Agency which then maintains a rating on the Certificates; (b) such letter of credit or surety bond has a term of at least twelve (12) months; (c) such letter of credit or surety bond has a stated amount at least equal to the portion of the Reserve Requirement with respect to which funds are proposed to be released pursuant to the Trust Agreement; and (d) the Trustee is authorized pursuant to the terms of such letter of credit or surety bond to draw thereunder an amount equal to any

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deficiencies which may exist from time to time in the Lease Payment Fund or the purpose of making payments required pursuant to the Lease Agreement or the Trust Agreement.

“S&P” means Standard & Poor’s Rating Services, of New York, New York, its successors and assigns, or any other nationally recognized securities rating agency designated by the County if such corporation is dissolved, liquidated or no longer performs the functions of a securities rating agency.

“Special Counsel” means any attorney or firm of attorneys of nationally recognized expertise with respect to legal matters relating to obligations the interest on which is excludable from gross income pursuant to Section 103 of the Tax Code.

“Tax Code” means the Internal Revenue Code of 1986 as in effect on the Closing Date, or (except as otherwise referenced in the Trust Agreement) as it may be amended to apply to obligations issued on the Closing Date, together with applicable temporary and final regulations promulgated, and applicable official public guidance published, under said Tax Code.

“Third Supplement to Sub-Sublease” means the Third Supplement to Sub-Sublease dated as of March 1, 2014 between the Authority and the County.

SUBLEASE

The County subleases the Leased Property to the Authority under the Sublease. The term of the Sublease commenced as of the date of recordation of the Sublease in the office of the Santa Cruz County Recorder. The Sublease will end, and the right of the Authority thereunder to possession of the Leased Property will thereupon cease, on the date on which the Lease Agreement terminates in accordance with its terms.

The Authority agrees to pay an Additional Sublease Payment to the County as and for additional rental of the Leased Property under the Sublease. The Additional Sublease Payment is due and payable upon the execution and delivery of the amendment to the Sublease, and will be paid by the Authority from a portion of the proceeds of sale of the Certificates under the Trust Agreement. No other amounts of rental are due and payable by the Authority for the use and occupancy of the Leased Property under the Sublease.

The Authority agrees, upon the termination of the Sublease, to quit and surrender the Leased Property in the same good order and condition as the Leased Property was in at the time of commencement of the term hereof, reasonable wear and tear excepted, and agrees that all buildings, improvements and structures then existing upon the Leased Property will remain thereon and title thereto will vest thereupon in the County for no additional consideration.

LEASE AGREEMENT

Sub-Sublease of Leased Property

The Authority sub-subleases the Leased Property back to the County under the Lease Agreement. The Lease Agreement commenced on the date of execution and delivery of the 2005 Certificates and terminates on the date on which all the outstanding certificates are paid or deemed to have been paid in full, except under certain circumstances such as the taking of all or any portion of the Leased Property in eminent domain proceedings. Under any circumstances, the Lease Agreement terminates ten years following the final stated maturity date of any series of certificates.

Lease Payments

The County agrees to pay semiannual Lease Payments, subject to abatement as described below, as the rental for the use and occupancy of the Leased Property under the Lease Agreement. On each Lease Payment Date, the County is obligated to deposit with the Trustee the full amount of the Lease Payments coming due and payable on the next Interest Payment Date, to the extent required to be paid by the County

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under the Lease Agreement. Any amount on deposit in the Lease Payment Fund on any Lease Payment Date is required to be credited towards the payment then required to be deposited by the County with the Trustee.

The County is required to pay the Lease Payments from any source of available funds, subject to the provisions of the Lease Agreement relating to abatement due to damage or eminent domain with respect to the Leased Property. The County agrees to take such actions as may be necessary to include all Lease Payments required to be paid by it under the Lease Agreement in its annual budgets and to appropriate such Lease Payments in each Fiscal Year during the term of the Lease Agreement. In addition, the County agrees to pay compensation due to the Trustee and all costs and expenses of auditors, engineers and accountants, and costs of issuance to the extent not paid out of Certificate proceeds.

Abatement of Lease Payments

The Lease Payments are subject to abatement under the Lease Agreement during any period in which due to damage or destruction of the Leased Property in whole or in part, due to material title defect in any portion of the Leased Property or due to taking in eminent domain proceedings of the Leased Property in whole or in part, there is substantial interference with the County’s use and occupancy of all or any portion thereof. The amount of such abatement will be determined by the County such that the resulting Lease Payments represent fair consideration for the use and occupancy of the portions of the Leased Property not damaged or destroyed. In the event of such abatement, the County will have no obligation to pay abated Lease Payments and there is no remedy available to Certificate Owners arising from such abatement.

Additional Rent

In addition to the Lease Payments, the County agrees to pay when due, as additional rental for the Leased Property, certain amounts including all costs and expenses incurred by the Authority to comply with the provisions of the Trust Agreement and amounts due and owing to the Trustee.

Maintenance, Utilities, Taxes and Modifications

The County, at its own expense, has agreed to maintain or cause to be maintained the Leased Property in good repair; the Authority has no responsibility for such maintenance. The County is also obligated to pay all taxes and assessments charged to the Leased Property. The County has the right under the Lease Agreement to remodel the Leased Property and to make additions, modifications and improvements to the Leased Property, so long as those additions, modifications and improvements are of a value which is not substantially less than such value of the Leased Property immediately prior to making the additions, modifications and improvements. The County will not permit any mechanic’s or other lien to be established or to remain against the Leased Property, except that the County has the right in good faith to contest any such lien.

Insurance

The Lease Agreement requires the County to maintain or cause to be maintained the following insurance against risk of physical damage to the Leased Property and other risks for the protection of the Certificate Owners, the Authority and the Trustee:

Public Liability and Property Damage Insurance. The County is required to maintain or cause to be maintained throughout the term of the Lease Agreement, but only if and to the extent available from reputable insurers at reasonable cost in the reasonable opinion of the County, a standard comprehensive general insurance policy or policies in protection of the Authority, the County, and their respective members, officers, agents, employees and assigns. Said policy or policies must provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the operation of the Leased Property. Such policy or policies

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must provide coverage in such liability limits and be subject to such deductibles as the County deems adequate and prudent. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the County, and may be maintained in whole or in part in the form of self-insurance by the County, or in the form of the participation by the County in a program of pooled insurance. The proceeds of such liability insurance will be applied toward extinguishment or satisfaction of the liability with respect to which the proceeds of such insurance have been paid.

Fire and Extended Coverage Insurance. The County is required to maintain, or cause to be maintained, throughout the term of the Lease Agreement, casualty insurance against loss or damage to all buildings which constitute a part of the Leased Property, in an amount at least equal to the lesser of (a) 100% of the replacement value of the insured buildings, or (b) 100% of the aggregate principal amount of the outstanding Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates. Such insurance must, as nearly as practicable, cover loss or damage by fire, explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance, and shall include earthquake coverage if such coverage is available at reasonable cost from reputable insurers in the reasonable opinion of the County. Such insurance shall be subject to such deductibles as are customarily maintained by municipalities with respect to works and properties of a like character, but in any case shall not exceed 5% of the coverage amount. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the County, (and may be maintained in whole or in part in the form of the participation by the County in a program of pooled insurance). Such insurance may not be maintained by the County in the form of self-insurance. The Net Proceeds of any such insurance will be deposited by the Trustee in the Insurance and Condemnation Fund and applied at the election and direction of the County either to the repair or reconstruction of the damaged Leased Property or to the prepayment of the Lease Payments and the corresponding prepayment of outstanding Certificates, the 2005 Certificates, the 2006 Certificates and the 2008 Certificates.

Rental Interruption Insurance. The County is required to maintain, throughout the term of the Lease Agreement, rental interruption or use and occupancy insurance to cover loss, total or partial, in an amount at least equal to the maximum Lease Payments coming due and payable during the current or any future twenty-four month period, as a result of any of the hazards covered in the fire and extended coverage insurance described above. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the County (and may be maintained in whole or in part in the form of the participation by the County in a program of pooled insurance). Such insurance may not be maintained by the County in the form of self-insurance. The Net Proceeds of such insurance will be paid to the Trustee and deposited in the respective lease payment funds on a pro-rata basis, and will be credited towards the payment of the Lease Payments which would otherwise be abated as a result of insured damage to or destruction of the Leased Property.

Title Insurance. On or before the Closing Date the County will, at its expense, (a) cause the Assignment Agreement, the Sublease and the Lease Agreement, or a memorandum thereof in form and substance approved by Special Counsel, to be recorded in the office of the Santa Cruz County Recorder with respect to the Leased Property, and (b) obtain a CLTA title insurance policy insuring the County’s subleasehold estate in the Leased Property, subject only to Permitted Encumbrances, in an amount equal to the aggregate original principal amount of the Certificates. All Net Proceeds received under such title insurance policy will be deposited by the Trustee in the Lease Payment Fund and be credited towards the prepayment of the remaining Lease Payments.

All policies of insurance (other than the policy of public liability and property damage insurance) must provide that the Net Proceeds thereof are payable to the Trustee for application as provided in the Lease Agreement and the Trust Agreement. If the County maintains public liability insurance in whole or in part in the form of self-insurance, the County must cause to be filed annually with the Trustee, within 90 days following the close of each Fiscal Year, a statement of the County’s risk manager or an independent insurance adviser engaged by the County identifying the extent of such self-insurance and stating such person’s determination that the County maintains sufficient reserves with respect thereto. In the event that

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any such insurance is provided in the form of self-insurance by the County, the County is not obligated to make any payment with respect to any insured event except from such reserves.

Option to Prepay

The County has the option to prepay the 2014 Lease Payments or post a security deposit to pay the 2014 Lease Payments, in whole or in part, in the amounts and on the dates set forth in the Lease Agreement. The optional prepayment dates and prices have been determined to correspond to the optional prepayment dates and prices applicable to the Certificates under the Trust Agreement.

Assignment; Subleases

The Authority has assigned certain of its rights under the Lease Agreement to the Trustee, including but not limited to its rights to receive the 2014 Lease Payments, under the Assignment Agreement. The County may not assign any of its rights in the Lease Agreement. The County may sublease all or a portion of the Property only with the prior written consent of the Authority, and only under the conditions contained in the Lease Agreement, including the condition that such sublease not cause the interest component of the Lease Payments to become subject to federal or State of California personal income taxes.

Amendment of Lease Agreement

The Authority and the County may at any time amend or modify any of the provisions of the Lease Agreement, but only: (a) with the prior written consents of the bond insurer of the 2005 Certificates and 2006 Certificates and the Owners of a majority in aggregate principal amount of the outstanding Certificates; or (b) with the prior written consent of the bond insurer of the 2005 Certificates and 2006 Certificates but without the consent of the Trustee or any of the Certificate Owners, if such amendment or modification is for any one or more of the following purposes:

(a) to incorporate additional covenants and agreements of the County or to limit or surrender any rights or power therein reserved to or conferred upon the County;

(b) to cure any ambiguity, or cure, correct or supplement any defective provision contained in the Lease Agreement, to conform to the original intention of the County and the Authority;

(c) to amend any provision thereof relating to the Tax Code, if in the opinion of Special Counsel such amendment will not adversely affect the exclusion from gross income of interest represented by any of the Certificates under the Tax Code;

(d) to amend the description of the Leased Property to reflect accurately the property originally intended to be included therein;

(e) To substitute an alternative facility for the Leased Property with a fair market value, as determined by a MAI appraiser, with notice to Standard & Poor’s.

(f) in any respect whatsoever as the Authority and the County may deem necessary or desirable, if in the opinion of Special Counsel such modifications or amendments do not materially adversely affect the interests of the Owners of the Certificates; or

(g) to provide for additional Lease Payments securing Additional Certificates as described elsewhere in this Official Statement.

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Events of Default; Remedies

Each of the following constitutes an event of default under the Lease Agreement:

(a) Failure by the County to pay any Lease Payment or other payment required to be paid under the Lease Agreement at the time specified in the Lease Agreement.

(b) Failure by the County to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in the preceding clause (a), for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the County by the bond insurer of the 2005 Certificates and 2006 Certificates , the Authority or the Trustee; provided, however, that if the County notifies the Authority and the Trustee that in its reasonable opinion the failure stated in the notice can be corrected, but not within such 30 day period, such failure will not constitute an event of default if the County commences to cure such failure within such 30 day period and thereafter diligently and in good faith cures such failure in a reasonable period of time.

(c) Certain events relating to the bankruptcy of the County.

Upon the occurrence and continuance of any event of default described above, the Authority has the right to terminate the Lease Agreement or, with or without such termination, re-enter, take possession of and re-let the Leased Property. When the Authority does not elect to terminate the Lease Agreement, the County remains liable to pay all Lease Payments as they come due and liable for damages resulting from such event of default. Any amounts collected by the Authority from the reletting of the Leased Property will be credited towards the County’s unpaid Lease Payments. Any net proceeds of re-leasing or other disposition of the Leased Property are required to be deposited in the Lease Payment Fund and applied to Lease Payments in order of payment date. Under the Assignment Agreement, the Authority assigns all of its rights with respect to remedies in an event of default to the Trustee, so that all such remedies will be exercised by the Trustee, the bond insurer of the 2005 Certificates and 2006 Certificates and the Certificate Owners as provided in the Trust Agreement.

The Trustee has no right to accelerate Lease Payments and, due to the governmental purposes which are served by the use of the Leased Property, it is uncertain whether a court would permit the exercise of the remedies of re-entry, repossession or re-letting.

TRUST AGREEMENT

Trustee

The Trustee is appointed under the Trust Agreement and is authorized to prepare, execute and deliver the Certificates thereunder, and to act as a depository of amounts held thereunder. The Trustee is required to make deposits into and withdrawals from funds, and invest amounts held under the Trust Agreement in accordance with the County’s instructions.

Establishment of Funds

The Trust Agreement creates the Lease Payment Fund, the Reserve Fund and the Costs of Issuance Fund. The Trust Agreement also establishes the Insurance and Condemnation Fund to be held in trust by the Trustee for the benefit of the Certificate Owners, which is described below under the heading “Application of Insurance and Eminent Domain Proceeds.”

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Lease Payment Fund. There will be deposited in the Lease Payment Fund, when received by the Trustee, all 2014 Lease Payments and prepayments thereof (except reimbursement for funds drawn from the Reserve Fund, as described below). Moneys on deposit in the Lease Payment Fund will be used to pay principal, interest and premium (if any) represented by the Certificates. Any earnings on investment of moneys in the Lease Payment Fund will remain therein and will be credited towards payment of the next 2014 Lease Payments. Any surplus remaining in the Lease Payment Fund after the payment of all Certificates, or after provision for their payment has been made, will be paid to the County.

Costs of Issuance Fund. The Trustee will deposit a portion of the proceeds of the Certificates in the Costs of Issuance Fund, to be expended to pay costs of issuance relating to the Certificates. All amounts remaining on deposit in the Costs of Issuance Fund and not required to pay costs of issuing the Certificates will be transferred to the Lease Payment Fund to be applied as a credit towards the 2014 Lease Payment next required to be paid by the County.

Reserve Fund. The Trustee will establish a special fund designated as the “Reserve Fund” to be held by the Trustee in trust for the benefit of the County and the Owners of the Certificates, as a reserve for the payment when due of the 2014 Lease Payments on behalf of the County. The Reserve Fund will be maintained by the County in an amount equal to the Reserve Requirement. The Trustee will transfer all amounts on deposit in the Reserve Fund at any time in excess of the Reserve Requirement, including amounts derived from the investment of amounts in the Reserve Fund which are not required to be retained therein to maintain the Reserve Requirement, to the Lease Payment Fund semiannually on or before each Lease Payment Date.

If on any Interest Payment Date the moneys available in the Lease Payment Fund do not equal the amount of the 2014 Lease Payment then coming due and payable, the Trustee will apply the moneys available in the Reserve Fund to make such payments on behalf of the County by transferring the amount necessary for this purpose to the Lease Payment Fund. Upon receipt of any delinquent 2014 Lease Payment with respect to which moneys have been advanced from the Reserve Fund, such 2014 Lease Payment shall be deposited in the Reserve Fund to the extent of such advance.

Application of Insurance and Eminent Domain Proceeds

Any Net Proceeds of insurance collected by the County in the event of accident to or destruction of the Leased Property will be paid to the Trustee under the Lease Agreement and deposited by the Trustee on a pro-rata basis promptly upon receipt thereof in a special fund designated as the “Insurance and Condemnation Fund.”

If the County determines and notifies the Trustee in writing of its determination, within 45 days following the date of such deposit, that the replacement, repair, restoration, modification or improvement of such improvements is not economically feasible or in the best interests of the County, then such Net Proceeds will be promptly transferred by the Trustee to the Lease Payment Fund and applied to the prepayment of Lease Payments and the corresponding prepayment of Certificates, 2005 Certificates, 2006 Certificates and 2008 Certificates. In the event of damage or destruction of the Leased Property in full, such Net Proceeds may be transferred to the Lease Payment Fund to be used to prepay outstanding Certificates, 2005 Certificates, 2006 Certificates and 2008 Certificates only if such Net Proceeds, together with other available moneys, are sufficient to cause the corresponding prepayment of all Lease Payments.

Any Net Proceeds deposited in the Insurance and Condemnation Fund and not applied to prepay the Lease Payments and the Certificates, 2005 Certificates, 2006 Certificates and 2008 Certificates will be applied to replace, repair, restore, modify or improve the Leased Property. Payments will be made by the Trustee for such purpose upon receipt of written requisitions of the County filed with the Trustee. Any balance of the Net Proceeds remaining after the County files a written certificate with the Trustee stating that such work has been completed will be paid to the County.

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If all or any part of the Leased Property is taken by eminent domain proceedings (or sold to a government threatening to exercise the power of eminent domain) the Net Proceeds therefrom will be deposited with the Trustee in the Insurance and Condemnation Fund and will be applied and disbursed by the Trustee either to replace the Leased Property or prepay the Lease Payments and the Certificates, 2005 Certificates, 2006 Certificates and 2008 Certificates, as set forth in the Trust Agreement.

Investment of Funds

The Trustee is required to invest and reinvest all moneys held under the Trust Agreement, at the written direction of the County, in Permitted Investments maturing not later than the date moneys are expected to be required for expenditure. All income or profit on any investments of funds held by the Trustee under the Trust Agreement will be deposited in the respective funds from which such investments were made, except that all amounts derived from the investment of amounts in the Reserve Fund will be transferred to the Lease Payment Fund to the extent not required to be retained in the Reserve Fund to maintain the Reserve Requirement. Permitted Investments will be valued at the market value thereof in accordance with the procedures set forth in the Trust Agreement, except that Permitted Investments credited to the Reserve Fund will be valued at the cost thereof.

Remedies Upon Event of Default

Exercise of Remedies; Limitation on Certificate Owners’ Rights. Upon the occurrence of an event of default by the County under the Lease Agreement, the Trustee has the right to exercise any and all remedies available at law or under the Lease Agreement. The Trustee is granted the power to control the proceedings in the event of a default for the equal benefit of the Certificate Owners and the Owners of the 2005 Certificates, 2006 Certificates and 2008 Certificates, and no Certificate Owner has the right to institute any suit, action or proceeding at law or in equity, unless (a) such Owner has previously notified the Trustee of the occurrence of an event of default, (b) the Owners of a majority in aggregate principal amount of the outstanding Certificates have requested the Trustee in writing to exercise its powers, (c) said Owners have tendered the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in complying with such request, and (d) the Trustee has failed to comply with such request for 60 days after receipt of such request and tender of such indemnity.

Application of Amounts Collected. Any amounts collected by the Trustee in an event of default are required to be applied first to the payment of the fees and expenses of the Trustee incurred in connection with such event of default and second to the payment of principal and interest represented by the Certificates (including interest on overdue installments of interest at the net effective rate of interest per annum then represented by the outstanding Certificates, but only to the extent funds are available for such purpose after payment of all other overdue amounts), ratably if necessary. Upon an event of default, the Trustee has a first lien on the amounts held under the Trust Agreement for its fees, charges and expenses.

Amendment of Trust Agreement

The Trust Agreement may be amended by agreement among the parties thereto without the consent of the Owners of the Certificates, but only:

(a) to add to the covenants and agreements of any party, other covenants to be observed, or to surrender any right or power reserved to the Authority or the County,

(b) to cure, correct or supplement any ambiguous or defective provision,

(c) in regard to questions arising under the Lease Agreement, as the parties may deem necessary or desirable and which amendment does not, in the opinion of Special Counsel, materially adversely affect the interests of the Owners of the Certificates,

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(d) if and to the extent permitted in the opinion of Special Counsel filed with the Trustee, the County and the Authority, to delete or modify any provisions relating to the exclusion from gross income of interest represented by the Certificates under the Tax Code,

(e) to issue additional debt pursuant to the Lease Agreement,

(f) to conform to any amendments of the Lease Agreement which are permitted to be made under the terms of the Lease Agreement as described above.

Any other amendment requires the approval of Owners of a majority in aggregate principal amount of the Certificates then outstanding, provided that no such amendment may (a) extend the maturity or time of interest payment, or reduce the interest rate, amount of principal or premium payable on, any Certificate without such Owner’s consent; (b) reduce the percentage of Owners of Certificates required to consent to any amendment or modification; or (c) modify any of the Trustee’s rights or obligations without its consent.

Defeasance

Upon payment of the outstanding Certificates in whole, or upon the deposit of cash or non-callable Federal Securities with the Trustee sufficient with other available funds to retire the obligations represented by such Certificates at or before maturity, all rights thereunder of the Owners of such Certificates and all obligations of the Authority, the Trustee and the County with respect to the Certificates ceases and terminates, except only the obligation of the Trustee to pay or cause to be paid, from 2014 Lease Payments paid by or on behalf of the County from funds so deposited, all sums represented thereby when due.

ASSIGNMENT AGREEMENT

The Authority and the Trustee will enter into the Assignment Agreement under which the Authority assigns and sets over to the Trustee, for the benefit of the Owners of the Certificates, substantially all of the Authority’s rights under the Lease Supplement (subject to certain exceptions), including the right of the Authority to receive and collect 2014 Lease Payments, its right to receive and collect proceeds of condemnation and insurance awards and the right to exercise rights and remedies of the Authority in the Lease Agreement to enforce 2014 Lease Payments, subject to the provisions of the Trust Agreement.

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APPENDIX B

COUNTY AUDITED FINANCIAL STATEMENTS

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COUNTY OF SANTA CRUZ STATE OF CALIFORNIA

COMPREHENSIVE

ANNUAL

FINANCIAL

REPORT

Prepared Under the Direction of Mary Jo Walker, CPA AUDITOR-CONTROLLER

FISCAL YEAR ENDED JUNE 30, 2013

Walton Lighthouse The Walton Lighthouse, also known as the Santa Cruz Breakwater Lighthouse, is located on the west breaker at the entrance to Santa Cruz Harbor. Designed by Mark Mesiti-Miller, the lighthouse weighs 350,000 pounds, stands 41 ½ feet tall, is 59 ½ feet above the mean low water mark and was built to withstand a quarter million pounds of wave energy. Prior to construction of the lighthouse, the harbor entrance had been marked by a light on a pipe. The proposal to replace the light with a classically designed lighthouse came from the community in 1998. By 2001, enough contributions had been raised to begin construction. The completed lighthouse was dedicated and the green signal activated on June 9, 2002. It was named Walton Lighthouse, in honor of Derek Walton, the late brother of major donor, Charles Walton. Derek served in the merchant marines and was lost at sea during World War II. The green lighthouse beacon flashes every four seconds. Today the lighthouse also sports a green band day marker. However, it had originally been painted red. Since the color of beacons and day markers serve as navigational aids, green and red signaling opposite messages, this was a problem and the band was painted green in March, 2003. Cover Photo by Ronald Cyzman

County of Santa Cruz, California

Comprehensive Annual Financial Report For the Fiscal Year Ended

June 30, 2013

Prepared Under the Direction of Mary Jo Walker

Auditor-Controller

County of Santa Cruz For the year ended June 30, 2013

Table of Contents

Page

INTRODUCTORY SECTION Letter of Transmittal ................................................................................................................................................. i

Organization Chart ................................................................................................................................................ xii

Principal Officials of the County of Santa Cruz, California ............................................................................ xiii

Certificate of Achievement for Excellence in Financial Reporting -

Government Finance Officers Association ................................................................................................. xiv

FINANCIAL SECTION Independent Auditors’ Report ............................................................................................................................... 1 Management Discussion and Analysis ................................................................................................................. 6 Basic Financial Statements:

Government-Wide Financial Statements:

Statement of Net Position ......................................................................................................................... 23

Statement of Activities and Changes in Net Position .......................................................................... 24

Fund Financial Statements: Governmental Fund Financial Statements:

Balance Sheet – Governmental Funds .............................................................................................. 31

Reconciliation of the Governmental Funds Balance Sheet to the

Government-Wide Statement of Net Position .......................................................................... 32

Statement of Revenues, Expenditures and Changes in Fund Balances ...................................... 33

Reconciliation of the Governmental Funds Statement of Revenues,

Expenditures and Changes in Fund Balances to the Government-Wide

Statement of Activities ................................................................................................................. 34 Proprietary Fund Financial Statements:

Statement of Net Position .................................................................................................................. 37

Statement of Revenues, Expenses and Changes in Fund Net Position ....................................... 38

Statement of Cash Flows .................................................................................................................... 40

Fiduciary Fund Financial Statements:

Statement of Fiduciary Net Position ................................................................................................ 45 Statement of Changes in Fiduciary Net Position ............................................................................ 47

Notes to Basic Financial Statements .............................................................................................................. 52

County of Santa Cruz For the year ended June 30, 2013

Table of Contents, Continued

Page

FINANCIAL SECTION, Continued

Required Supplementary Information (Unaudited):

Budgetary Principles ............................................................................................................................... 109

Budgetary Comparison Schedule:

General Fund .............................................................................................................................. 112

Reconciliation of Classification Differences between Budgetary Comparison Schedule

and the Statement of Revenues, Expenditures and Changes in Fund Balances ......... 122

Housing Fund ............................................................................................................................. 123

Public Employees Retirement System (PERS) and Other Post Employment Obligations Schedules of Funding Progress .................................................................... 124

Supplementary Information: Non-Major Governmental Funds:

Combining Fund Statements and Schedules:

Combining Balance Sheet ....................................................................................................................... 132

Combining Statement of Revenues, Expenditures and

Changes in Fund Balances ............................................................................................................... 133

Budgetary Comparison Schedule:

Major Fund - Capital Project Fund ....................................................................................................... 134

Non-Major Special Revenue Funds:

Combining Balance Sheet ....................................................................................................................... 137

Combining Statement of Revenues, Expenditures and

Changes in Fund Balances ............................................................................................................... 141

Combining Statement of Revenues, Expenditures and

Changes in Fund Balances – Budget and Actual:

Library Special Revenue Fund ................................................................................................. 145

Fire Special Revenue Fund ........................................................................................................ 146

Off-Highway Road and Transportation Special Revenue Fund.......................................... 147

Fish and Game Special Revenue Fund .................................................................................... 148

Park Dedication and State Park Bonds Special Revenue Fund ........................................... 149

Santa Cruz Flood Control & Water Conservation –

Zone 7 Special Revenue Fund ............................................................................................ 150

County of Santa Cruz For the year ended June 30, 2013

Table of Contents, Continued

Page

FINANCIAL SECTION, Continued

Supplementary Information, Continued:

Non-Major Special Revenue Fund, Continued:

Combining Statement of Revenues, Expenditures and

Changes in Fund Balances – Budget and Actual, Continued:

Districts Governed by the Board of Supervisors:

Public Protection Special Revenue Fund .......................................................................... 151

Health and Sanitation Special Revenue Fund.................................................................. 152

Recreation and Culture Special Revenue Fund ............................................................... 153

Public Ways and Facilities Special Revenue Fund .......................................................... 154

Nonmajor Enterprise Funds:

Combining Statement of Net Position .................................................................................................. 157 Combining Statement of Revenues, Expenses and Changes in Net Position ................................. 159 Combining Statement of Cash Flows ................................................................................................... 161

Internal Service Funds:

Combining Statement of Net Position .................................................................................................. 167 Combining Statement of Revenues, Expenses and Changes in Net Position ................................. 169 Combining Statement of Cash Flows ................................................................................................... 171

Agency Funds:

Combining Balance Sheet ....................................................................................................................... 178 Combining Statement of Changes in Net Position ............................................................................. 179 Santa Cruz County Redevelopment Successor Agency

Statement of Net Position ................................................................................................................ 180 Santa Cruz County Redevelopment Successor Agency Statement of Changes in Net Position............................................................................................ 181

County of Santa Cruz For the year ended June 30, 2013

Table of Contents, Continued

STATISTICAL SECTION (UNAUDITED) Net Position by Component ................................................................................................................................ 184

Government Wide Changes in Net Position .................................................................................................... 185

General Fund Tax Revenues by Source ............................................................................................................. 187

Fund Balances of Governmental Funds ............................................................................................................ 188

Changes in Fund Balances of Governmental Funds ....................................................................................... 189

Property Tax Levies and Collections ................................................................................................................. 190

Assessed Value of Taxable Property and Actual Value of Property ............................................................. 191

Property Tax Rates - Direct and Overlapping Governments ......................................................................... 192

Ratios of Outstanding Debt by Type ................................................................................................................. 193

Computation of Legal Debt Margin ................................................................................................................... 194

Statement of Direct and Overlapping Debt ...................................................................................................... 195

Outstanding Debt of the Public Financing Authority ..................................................................................... 196

General Information ............................................................................................................................................. 197

Property Value, Construction and Bank Deposits ........................................................................................... 198

Special Assessment Billings and Collections .................................................................................................... 199

Principal Taxpayers .............................................................................................................................................. 200

Principal Employers ............................................................................................................................................. 201

Operating Indicators by Function ...................................................................................................................... 202

Budgeted Positions ............................................................................................................................................... 204

Schedule of Insurance in Effect .......................................................................................................................... 205

Capital Assets Statistics by Function ............................................................................................................... 206

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 ....................................................................................................... 207

Glossary (Unaudited) ........................................................................................................................................... 210

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COUNTY OF SANTA CRUZ AUDITOR-CONTROLLER’S OFFICE

701 OCEAN STREET, SUITE 100, SANTA CRUZ, CA 95060-4073 (831) 454-2500 FAX: (831) 454-2660

December 18, 2013 The Honorable Board of Supervisors County of Santa Cruz 701 Ocean Street Santa Cruz, CA 95060 Members of the Board and Fellow Citizens: The Comprehensive Annual Financial Report (CAFR) of the County of Santa Cruz for the fiscal year ended June 30, 2013 is hereby submitted, in accordance with the statutes of the State of California. Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the County of Santa Cruz. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the various funds and account groups of the County. All disclosures necessary to enable the reader to gain an understanding of the County’s financial activity have been included. The independent auditors, Marcum LLP, who have rendered an unqualified opinion thereon, have audited these statements. Their report is provided herein. In addition, the Governmental Accounting Standards Board 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 the MD&A and should be read in conjunction with it. The County of Santa Cruz’s MD&A can be found immediately following the report of the independent auditors. The CAFR represents the culmination of all budgeting and accounting activities during the year, covering all funds of the County, its component units and its financial transactions. The County is required to undergo an annual single audit in conformity with the provisions of the Single Audit Act of 1984 as amended and U.S. Office of Management and Budget Circular A-133, Audits of State and Local Governments. Information related to this single audit, including the schedule of federal financial assistance, findings and recommendations, and auditors’ reports on the internal control structure and compliance with applicable laws and regulations are included in the single audit report, which is issued as a separate document. This report includes all funds and account groups of the County. The County provides the full range of services contemplated by statute or ordinance. These services include public protection, public ways and facilities, health and sanitation, public

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assistance, recreation and culture, education, and general government. In addition, various utility, maintenance, redevelopment and capital acquisition entities are included as part of the reporting entity based on financial accountability. School districts and autonomous special districts have not met the established criteria for inclusion in the reporting entity, and are therefore reported under the category of fiduciary fund types.

FINANCIAL INFORMATION

Management of the County is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the County are protected from loss, theft or misuse and to ensure that adequate accounting data is compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. Internal controls are designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) The cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management.

In accordance with the County Budget Act in the California Government Code, the County prepares and adopts a budget on or before October 2 for each fiscal year. Budgets are adopted for the General Fund and Special Revenue Funds. In addition to the controls mentioned above, the County maintains budgetary controls, whose objective is to ensure compliance with legal provisions embodied in the annual appropriated budget. The level of budgetary control (that is, the level at which expenditures cannot legally exceed the appropriated amount) is at the character level of salaries and benefits, services and supplies for each budget unit within each budgeted fund. Other charges, land, plant and improvements, and equipment are controlled by line item within each budget unit. The County also maintains an encumbrance accounting system as one technique for accomplishing budgetary control. At year-end, encumbrances lapse, but may be re-appropriated in the following year’s budget. The encumbrance system is employed to record amounts committed for purchase orders or contracts. If appropriations are not sufficient, Board of Supervisors-approved appropriation transfers are required before commitments or expenditures are permitted. Encumbrances outstanding at year-end are shown as commitments of fund balance, except for grants. Grant encumbrances are canceled at year-end and re-budgeted with revenues in the new fiscal year.

PROFILE OF THE COUNTY

The County of Santa Cruz was established by an act of the State Legislature in 1850 as one of the original 27 counties of the State of California. The County is a general law county and is governed by a five-member Board of Supervisors who are elected by district to serve alternating four-year terms. The Board of Supervisors appoints a County Administrative Officer (Chief Executive) to carry out its policies as set forth by County Ordinance. The Assessor-Recorder, Auditor-Controller, County Clerk, Treasurer-Tax-Collector, District Attorney and Sheriff-Coroner are elected officials and all other departments’ heads are appointed officials. As required by County ordinance or by state or federal law, the County’s principal functions include seven major areas: general government, public protection, public ways and facilities, health and sanitation, public assistance, education, and recreation and cultural services. In the

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public assistance and health areas, the state and federal governments mandate certain minimum levels of service. Santa Cruz is located on the Central Coast of California, and is bordered by San Mateo County to the north, Santa Clara County to the east, San Benito and Monterey Counties to the South and the Monterey Bay National Marine Sanctuary to the West. The County of Santa Cruz is the second smallest county in California in terms of land mass and the 23rd of 58 counties in terms of population. The County’s population is 266,662. Approximately half live in one of the County’s four cities; Capitola, Santa Cruz, Scotts Valley, or Watsonville, with the other half living in the unincorporated County area. ECONOMIC CONDITIONS AND OUTLOOK The Santa Cruz area is similar to many parts of the country in that the local economy has continued to recover after the global recession in the real estate and construction industry and the financial market meltdown. The Santa Cruz area had enjoyed a fairly healthy economy after recovering from the economic downturn in 2001. Beginning in 2007, the subprime mortgage lending crisis significantly reduced home sales across the nation, including those in Santa Cruz County. While the assessed values of real property in the county had increased by an average of about 8% per year from fiscal year 2001-02 through 2007-08, assessed values slowed the following year to 3.3% growth, and then actually declined by 3.0% for fiscal year 2009-10, which was the first decline since the County began tracking property tax growth in 1968. Assessed values continued to decline but at a much slower pace during fiscal years 2010-11 through 2012-13 by an average of about 0.6% annually. The trend finally reversed in fiscal year 2013-14 as the economy began to recover, with an increase in assessed values of 3.8% over the prior year. Every indication is that assessed values will remain stable or continue to increase for fiscal year 2014-15. Property-related tax revenues comprise about 79% of the County’s total tax revenues, so changes have a dramatic effect not only on the County, but also on every local agency and special district, as well as the State since over half of local property tax revenues are earmarked for K-12 education, which is a State obligation. Another indicator of the local economy is retail sales. Sales tax receipts in the unincorporated County comprise about 9% of the County’s total tax revenues. Sales tax receipts declined during fiscal years 2008-09 and 2009-10 by a total of 20%, but then revitalized by increasing 25% during the next three fiscal years through 2012-13. Sales tax receipts have continued to increase during fiscal year 2013-14, which is another signal that the economy is stabilizing. Tourism is also important to the local economy. The Santa Cruz area experienced lower occupancy and weaker tourist spending for a few years, but has bounced back. Transient Occupancy Tax collections, which comprise about 4% of the County’s total tax revenues, ebb and flow with the economy, but have increased about 24% over the past seven years since the low in fiscal year 2005-06. On November 6, 2012, County voters elected to increase the Transient Occupancy Tax effective July 1, 2013, on lodging facilities in the unincorporated area from 9.5% to 11%. This is estimated to generate approximately $600,000 of additional revenues annually to the County General Fund. Unemployment in the County is slowly returning to normal levels. The unemployment rate at June 30, 2013 was 7.9%, which is lower than it was one year ago at 10.3%, and much lower than the record high of 15.5% in February 2010, but still not down to the area’s historical

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average of about 6.5%. The decline in the unemployment rate is another indication that the local economy is slowly normalizing. The County’s General Fund revenues decreased by $1.0 million from $360.5 million in fiscal year 2011-12 to $359.5 million in fiscal year 2012-13, a decrease of about 0.3%. There were reductions in licenses and permits sold and lower interest earnings. Intergovernmental revenue increased by $10 million primarily due to Assembly Bill 109, the Public Safety Realignment Act, mentioned later. But this increase was offset by an $11 million reduction in Charges for Services due to a change in accounting accruals for Health Clinic reimbursements.

The County General Fund increased its expenditures by $10.1 million from $346.5 million in fiscal year 2011-12 to $356.7 million in fiscal year 2012-13, or about 3%. The increases were primarily in public protection. Assembly Bill 109, the Public Safety Realignment Act, shifted responsibility for lower-level inmates to local governments. The Sheriff’s office is also in the process of transitioning to a new facility in 2013-14. To maintain cost controls, employees agreed to continue the furloughs at approximately 5% during fiscal year 2012-13, along with various other concessions. A number of programs and services were eliminated or reduced, and 412 positions were eliminated over the past four years, representing about 15% of the workforce.

Despite the difficult economic climate, the County has maintained its General Fund reserves within the minimum level. Total General Fund balance was $40.6 million at June 30, 2013, a decrease of $1.6 million from $42.2 million at June 30, 2012. General Fund committed and assigned designations totaled $27.8 million at June 30, 2013, an increase of $0.9 million from $26.9 million at June 30, 2012, not including $4.0 million in encumbrance reserves for future purchase orders or contracts, or $5.2 million assigned to fund next year’s budget. The increases in the committed and assigned designations were made to remain in compliance with the County’s Fund Balance Reserve Policy. In June 2011, the County Board of Supervisors adopted a Fund Balance Reserve Policy in compliance with Governmental Accounting Standards Board Statement (GASB) 54, and established a minimum balance in the committed and assigned categories for the County General Fund at 7% of the upcoming budget year’s estimated revenues. This policy has helped the County maintain a stronger fiscal position to weather negative economic trends while still preserving flexibility. The committed and assigned fund balance designations of the County’s General Fund at June 30, 2013, of $27.8 million (excluding encumbrances and the amount assigned to fund the fiscal year 2013-14 budget) were at 7.0% of fiscal year 2013-14 budgeted revenues. The County’s fiscal year 2013-14 adopted budget continues to reflect the impact of the recession and the slow recovery experienced by all private and public sectors. For Santa Cruz County government, the result is that property related revenues, interest earnings, and charges for services in the land use area are projected to remain essentially flat, but sales tax revenues and program revenues from federal and state agencies are projected to increase somewhat. While the County receives only 13% of the property tax dollar, approximately 79% of the County’s general purpose revenues are related to real estate, either through property tax revenues or vehicle license fee revenues which change in lock-step with property tax revenues. The recession officially ended in the United States in June 2009, and

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although the local economy is in recovery, the County continues to employ strict cost control measures to balance its budget, including employee furloughs and concessions, hiring freezes, and ongoing service reductions. At the State level, California voters approved Proposition 30 in November 2012 to temporarily increase the statewide sales tax rate and the income tax rates on wealthier individuals, projected to raise about $6 billion a year. Voters also approved Proposition 39 to close a loophole for out-of-state businesses, projected to raise about $1 billion a year. These tax measures, coupled with the State’s economic recovery and past budget cuts, give California a positive economic outlook for fiscal year 2013-14 and beyond. The independent California Legislative Analyst’s Office (LAO) is projecting a $2.2 billion operating surplus in fiscal year 2013-14, resulting in a $2.4 billion reserve at June 30, 2014. For the following fiscal year 2014-15, the LAO is projecting $3.2 billion operating surplus, netting a $5.6 billion reserve at June 30, 2015. The LAO projects the State’s revenues will grow faster than expenditures through fiscal year 2017-18 when the temporary personal income tax rate increase expires under Proposition 30, resulting in a more gradual ramping down of state revenues at that point. Statewide unemployment remains fairly high at about 8.9% at June 30, 2013, which is better than the record high of 12.2% three years ago, and is projected to continue declining over the next few years. Assembly Bill 109, the Public Safety Realignment Act, is a sweeping reform which transferred responsibility to counties, instead of the California Department of Corrections and Rehabilitation, for supervising specified lower-level inmates and parolees, in exchange for increased funding. This initiative, which became effective on October 1, 2011, has allowed the County to provide a higher level of justice system effectiveness and improved public safety. To date, 269 inmates and parolees have been served by the County’s local law enforcement and public safety partners under this new law. The State legislature also adopted Assembly Bill (AB) X1 26 in June 2011. AB X1 26 required each California redevelopment agency to suspend nearly all activities except to implement existing contracts and prepare for dissolution. As the operations of the former redevelopment agencies wind down, their resources are redistributed to other local agencies such as cities, counties, special districts and schools. This largest portion of the redistribution goes to the schools which offsets required State education spending, thereby creating savings for the State. Through June 30, 2013, $20.3 million of former redevelopment funds has been redistributed from the five redevelopment agencies within the County and its cities, and into the general funds of the local cities, county, special districts and schools. Statewide, $4.0 billion of former redevelopment funds have been redistributed. The California Public Employees Retirement System (CalPERS) pension fund, which Santa Cruz County employees participate in, has made significant and important changes in costs and benefits. In August 2012, the State legislature adopted a number of changes for state and local employees who participate in the CalPERS program. The changes include an increase in the retirement age and a lower benefit formula for new employees, a cap on the annual pension payout, and the requirement for workers to pay half of their costs. CalPERS

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estimates the State will save approximately $50 billion over 30 years. It is more difficult to estimate the future savings to the County. CalPERS realized a gain of 13.2% on its investments for the year ended June 30, 2013, following gains of 1.0%, 20.9% and 11.6% in the three prior years, preceded by a loss of -23.4% the year before. CalPERS believes that its long-term 20-year investment return remains at 7.75%. In 2005, CalPERS approved a rate smoothing policy to reduce rate volatility caused in prior years by poor actuarial projections of the cost of plan amendments and investment losses. CalPERS adopted additional rate smoothing policies in June 2010 and April 2013, the most recent of which is designed to amortize investment gains and losses from earlier fiscal years over a fixed 30-year period, rather than the current rolling 30-year amortization period, with the increases and decreases in the rate spread over a five year period. County employees also participate in the CalPERS health insurance program, whose average premiums increased by 9.6% in 2013, and will increase by 3.0% for 2014. The upcoming fiscal year will be another challenging one for the County, but the County’s management and staff have done an excellent job under difficult fiscal conditions in the past, and will continue to do so. The State’s improved financial condition will go a long way in allowing the County to more effectively manage its financial decisions at the local level. MAJOR INITIATIVES The Agricultural Commissioner’s Department, working closely with the State, enforces

laws and regulations that promote and protect the agricultural industry, people, and the environment. Our County was removed from quarantine for the European Grape Vine Moth effective December of 2012, but remains under quarantine for the Light Brown Apple Moth. We work to prevent the spread of that pest and protect the ability of the industry to export commodities.

The Assessor’s Office, along with staff from the Tax Collector, Auditor and Information

Services Department, completed the replacement of the mainframe tax cycle programs. The work included data conversion and program testing. The new tax system went live in October 2012. It is expected that program testing and refinements will continue through the next fiscal year.

The County Recorder’s Office installed a new electronic recording system and continued its goal of restoring historical official record books. A total of 43 Deed books were restored and filmed.

The Auditor Controller’s Office continued work on the fine tuning of the new Property

Tax System, working with applicable departments, as well as beginning the process to replace the County’s financial and procurement system expected to go live in the spring of 2015. In addition, the Payroll Division worked with the Personnel and Information Services department to implement changes in response to recent pension reform.

Child Support Services continued to focus on improving customer service and program

priorities. The department exceeded the child support collections goals set by the State

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Department of Child Support Services. As a region, Santa Cruz-San Benito achieved its best-ever performance on the key federal performance measures.

The County Administrative Office continues its primary focus as administrator of

policies and procedures to enforce the policies established by the Board of Supervisors and as the representative of the Board in intergovernmental relationships. Significant efforts in 2013-14 include work on the Santa Cruz County Library Joint Powers Authority Facilities Plan; consolidation of the Treasurer/Tax Collector and the Auditor/Controller offices to achieve operational and financial efficiencies; economic development including the Redevelopment Successor Agency Long Range Plan; reopening of the Veteran’s Building; Redevelopment Successor Agency Tax Allocation Bonds refunding; labor negotiations; legislative monitoring; and contract administration.

In fiscal year 2012-13, the County Clerk/Elections Office conducted the November 6,

2012 Presidential Election, which saw record numbers in voter registration, vote-by-mail ballots, and provisional voting. The General Election was conducted under the “Top Two” law where the top two candidates with the most votes cast from the Primary are in the run-off in November. The election was also conducted using the newly drawn district boundaries. Two Special Elections were also conducted, one in May for the Lakeside and Soquel School Districts, and one in June for the City of Watsonville.

The Department continues to provide services in many areas such as issuing marriage licenses (1,545 issued), performing marriage ceremonies (310 performed), accepting passport applications (3,418 accepted), and issuing fictitious business statements (2,241 issued). The Department continues to offer Saturday passport hours at least quarterly and has expanded clerk services to Watsonville one Wednesday a month.

The Office of the County Counsel continues to provide civil legal representation to every

County department and several special districts. This past year, the Office contributed significantly to the Board’s medical marijuana regulation efforts and the issues flowing from the mandatory dissolution of Redevelopment Agencies. This Office also won several motions for summary judgment in tort cases that saved the County from further litigating these high value cases.

The District Attorney’s Office continued to face an unprecedented number of homicides

which occurred and went to trial. The investigation and prosecution of many of these cases will continue through the current year, limiting resources available for other types of cases. The Office was a key member of the team formed to establish the Countywide Gang Task force to combat violent gang activities. In addition, the Office is an integral member of the Community Corrections Partnership which was established to develop and implement plans for dealing with the financial and operational effects of Assembly Bill 109, the Public Safety Realignment Act, which allows specified lower-level inmates and parolees to serve their sentence in county jails instead of state prisons.

The General Services Department continues its diligence in addressing the operational needs of the County, despite significant cutbacks in staffing and funding. Accomplishments include installation of additional electric vehicle charging stations at the Emeline campus and in South County, completion of the repair of the Santa Cruz

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Veterans’ Memorial Building in November 2013 and working with other County Departments, furthering the goals of the Climate Action Strategy by participating in the Community Choice Aggregation (CCA) program. The Facilities Division continues to scope additional energy efficiency projects for competitive and grant funding opportunities within the next couple of years. The Department’s Purchasing Division continues to focus on procurement of environmental and energy-friendly products and services, as well as implementing cooperative purchasing with local governments to increase efficiencies and reduce costs.

The Health Services Agency provides numerous services designed to promote and protect

the health of the community and the environment. Service areas include Public Health, Environmental Health, Mental Health, Primary Care medical clinics, Emergency Medical Services, and Substance Abuse Treatment. These services are provided directly by the County and through contract providers. As in prior years the Agency faces numerous challenges including the threat of loss of Health Realignment funds, which would impact Public Health, Indigent Care, and Primary Care medical clinics. In addition the county will see an increased demand for services related to implementation of the Affordable Care Act and the completion of construction of the new Behavioral Health Center, housing the County’s Psychiatric Health Facility and Crisis Stabilization Program.

The Human Services Department is heavily leveraged by federal and state funding and

provides a wide range of safety net services to protect the county’s most vulnerable populations and provide assistance to individuals and families struggling financially. Economic woes continue in Santa Cruz County in FY 2012-13. Approximately 59,000 people within the county struggle with poverty and receive benefits from one or more public assistance programs, including food assistance (CalFresh), medical insurance (Medi-Cal) and cash aid (CalWORKs and General Assistance). The average unemployment rate for the County is 10%, which is higher than the California average, and the Watsonville rate is double the countywide rate. In partnership with the local business community, the Department created new paths to employment and job training opportunities by increasing access to subsidized employment and launching a marketing campaign to local businesses to promote direct job placements, on-the-job training opportunities, and layoff aversion services. The most comprehensive initiative facing the Human Services Department is the full implementation of the Patient Protection and Affordable Care Act (ACA) on January 1, 2014. This act provides an unprecedented opportunity to ensure that over 28,000 Santa Cruz County previously uninsured or underinsured residents will now have access to health care either through the California Health Benefit Exchange or through Medi-Cal expansion. Through increased state and federal allocations, additional staffing and technology resources as well as comprehensive facilities improvements and service redesign efforts have been implemented to ensure that the newly eligible Medi-Cal population is enrolled for both health insurance and CalFRESH benefits. In addition, the department has been awarded a Covered California grant to conduct outreach and education activities for individuals and families eligible for Advanced Premium Tax Credit through the Health Exchange in the tri-county Monterey, San Benito and Santa Cruz region. The Department is also pursuing a grant from the California Department of

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Health Care Services to conduct similar activities to reach the newly expanded Medi-Cal population in Santa Cruz County. Through all these changes, we will continue to focus on our commitment to protect the most vulnerable, lift individuals and families out of poverty, and improve the quality of life for residents of Santa Cruz.

The Information Services Department’s focus remains on modernizing the County’s technology infrastructure and service, with an eye to mobile and cloud solutions. The migration of business processes off the mainframe computer is in its final phase; the vendor selection for the General Ledger and Purchasing replacement system is scheduled for January 2014. Upgrading the network infrastructure while expanding our internet speed and throughput lays the groundwork to allow us to replace our aged telephony system. This modern framework is required for us to meet the pressing business needs of our user departments.

The Parks, Open Space and Cultural Services Division of the Public Works Department

continued to work in collaboration with other agencies, departments and non-profit organizations to improve park facilities and arts within the community, and offer quality recreation and nature programs at Simpkins Family Swim Center, at youth programs and camps, and at Quail Hollow Ranch as well as manage major capital improvements for the County. Completed park projects include the Carmichael Property - Nisene to the Sea Trail, a bike pump track installed by volunteers and interim parking at Chanticleer Avenue Neighborhood Park, and Phase One of the Farm Park Habitat Restoration Project. Public art was installed at the Behavioral Health Center and Phases Three and Four of the Traffic Box Art Program were completed. Construction of the Behavioral Health Center for the Health Services Agency will be completed in December 2013, as will the Forensic Sciences building, the first of three buildings that comprise the Sheriff's Office Center for Public Safety Project.

Over the past four fiscal years, the Personnel and Risk Management Department has worked closely with other departments and employee unions to retain as many employees as possible while budgets have been reduced and to restructure pension and health benefit programs in order to reduce costs and improve the sustainability of these programs. More recently, the department has focused their efforts towards: 1.) meeting the requirements of the Affordable Care Act through specialize recruitments for both the Health and Human Services Agencies: 2.) achieving long term collective bargaining agreements with our labor unions that recognize the sacrifices of the past few years while at the same time increasing the County’s ability to quickly adjust to future economic emergencies: 3.) re-inventing and modernizing our internal employee training programs and recruitment efforts to focus upon career development and transitional leadership planning: and 4.) implementing the provisions of the California Public Employees’ Pension Reform Act of 2013 (PEPRA).

The Planning Department continued work on the “Sustainable Santa Cruz County” /

Transit Corridors Plan, which will result in proposed amendments to the General Plan land use, circulation and housing elements. The effort to prepare an Economic Vitality Strategy was initiated, and a public-private planning process occurred to identify future

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opportunities for the East Cliff Drive shopping center. Work continued to modernize and simplify the County’s land use regulations and associated processes, including adoption of updated Coastal Regulations. The Climate Action Strategy was completed and adopted. The Minto/Schapiro Knolls and Canterbury affordable housing projects were completed. Economic development activities were initiated, with a variety of assistance provided to businesses and developments, including but not limited to cottage food businesses.

The Probation Department operates pursuant to Section 1203.5 of the California Penal

code and Section 270 of the Welfare and Institutions Code. The Department is responsible for services required by the Adult and Juvenile Courts. The Department is divided into three divisions: Adult, Juvenile, and Institutions (Juvenile)Hall). The Adult and Juvenile divisions perform both investigative and supervision functions. The Department also staffs and administers the Juvenile Hall, the Work Furlough Program, and Pretrial Services.

The Department of Public Works is responsible for administration, engineering,

maintenance and construction of the County’s roads, bridges, bikeways, sanitation, drainage, and flood control facilities, as well as oversight and engineering for solid waste disposal services and recycling programs. The Department administers the real property, surveyor, and development review programs, as well as manages various Board-governed special districts and County road and sanitation service areas and the Live Oak Parking Program.

The Sheriff’s Office continues to take a progressive approach to implementing AB 109, The California Public Safety Realignment Act, including the submittal of a grant for repurposing Rountree Facilities for inmate success upon release. The Sheriff’s Office has completed the first phase of moving its’ operations to the centrally located Center for Public Safety in Live Oak. This central location will dramatically improve operational efficiencies as well as our ability to respond to countywide calls for service. The Sheriff’s Office continues to work with the District Attorney’s Office and other law enforcement agencies to proactively investigate, apprehend, and prosecute criminal street gang members for violation of state and federal laws. The Santa Cruz County Gang Task Force was formed during September 2011. Now in its third year, the Task Force continues to have a significant impact on gang violence by removing violent offenders and weapons from our streets.

The Treasurer-Tax Collector’s Administration division continues its work to expand a delinquent court fine collection program as prescribed by the State of California. This comprehensive collection program provides appropriate follow-up activities for debt collection as well as additional revenues for the County and other local agencies. The Tax division has continued its work in implementing the County’s new property tax system and has also implemented a Low Income Senior and Disabled Property Tax Postponement Pilot Program. The Central Collections division is beginning its implementation of the Franchise Tax Board Court Order Debt collections program for appropriate client departments.”

OTHERINFO~TION

State statutes require an annual audit by independent Certified Public Accountants. The fmn of Marcum LLP was selected to audit the financial statements of the County's various funds and account groups, and has issued an unqualified opinion thereon. In addition to meeting the requirements of State law, the audit was also designed to comply with the federal Single Audit Act of 1984, and related OMB Circular A-133. The auditors' report on the financial statements is included in the financial section of this report. The auditors' reports related specifically to the single audit are included in a separate Single Audit Report. 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 of Santa Cruz for its Comprehensive An11.ual Financial Report for the fiscal year ended June 30, 2012. The Certificate of Achievement is a prestigious national award recogmzmg conformance with the highest standards for preparation of state and local government financial reports.

To be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized Comprehensive Annual Financial Report. The 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 that our current Comprehensive Annual Financial Report continues to meet the Certificate of Achievement program requirements, and we are submitting it to the GFOA·to determine its eligibility for another certificate.

AUDITOR-CONTROLLER ACKNOWLEDGMENTS

I wish to express my appreciation to my Accounting Division and Audit Div1sion, the County · departments that participated in the audit process, and Marcum LLP for their contributions, assistance, and guidance in the preparation of this report.

Respectfully submitted,

{!f/':talkf: WdL!t-u-Auditor-controner

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COUNTY OF SANTA CRUZ

*Elected Official **Appointed by the Board of Supervisors ***Contract

Board of Supervisors*

Assessor / Recorder*

Auditor-Controller*

Clerk of the Board

County Administrative Office

County Clerk / Elections*

County Counsel **

General Services / Emergency Services

Information Services

Personnel

Treasurer/Tax Collector*

District Attorney*

Probation

Public Defender***

Sheriff-Coroner*

AgriculturalCommissioner

County Fire*Contract***

Health Services Agency

Environmental Health Services

Human Services Department

Child Support Services

Veteran Services

Agricultural Extension

Parks, Open Space and Cultural Services

Planning

Public Works

CountyAdministrative

Officer**

GeneralGovernment

Criminal Justice

Other Public Protection

Health and Human Services

Land Use andPublic Projects

Electorate

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Directory of Public Officials

Elective Officers Term ends Supervisor, 1st District Supervisor, 2nd District Supervisor, 3rd District Supervisor, 4th District Supervisor, 5th District State Senator, 17th District State Assemblyman, 29th District State Assemblyman, 30th District U.S. Congressman, 17th District U.S. Senator U.S. Senator U.S. Congresswoman Assessor-Recorder Auditor-Controller Treasurer-Tax Collector County Clerk-Elections District Attorney-Public Administrator Sheriff-Coroner

John Leopold Zach Friend Neal Coonerty Greg Caput Bruce McPherson Bill Monning Mark Stone Luis A. Alejo Sam Farr Dianne Feinstein Barbara Boxer Anna G. Eshoo Sean Saldavia Mary Jo Walker Fred Keeley Gail Pellerin Bob Lee Phil Wowak

January 2017 January 2017 January 2015 January 2015 January 2017 December 2016 December 2014 December 2014 January 2015 January 2019 January 2017 January 2015 January 2015 January 2015 January 2015 January 2015 January 2015 January 2015

Appointed Officers Administrative Officer Agricultural Commissioner County Counsel Director of Agricultural Extension Director of Child Support Services Director of General Services Director of Information Services Director of Human Services Department Director of Planning Director of Public Works/Road Commissioner Director of Parks, Recreation and Cultural Services Health Officer Health Services Administrator Personnel Director Probation Officer Veteran’s Services Officer

Susan A. Mauriello MaryLou Nicoletti Dana McRae Mark Bolda Kathy Sokolik Nancy Gordon Kevin Bowling Cecilia Espinola Kathy Previsich John J. Presleigh John J. Presleigh Dr. Lisa Hernandez Giang Nguyen Michael McDougall Scott MacDonald Allan Moltzen

Certificate of

Presented to

Santa Cruz County

For its Comprehensive Annual

June 30, 2012

Executive Director/CEO

Financial Reportfor the Fiscal Year Ended

Reportingin Financial

for ExcellenceAchievement

Text38: California

Government Finance Officers Association

Marcum LLP n 2 Park Plaza n Suite 1200 n Irvine, California 92614 n Phone 949.236.5600 n Fax 949.236.5601 n marcumllp.com

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INDEPENDENT AUDITORS’ REPORT

To the Honorable Board of Supervisors of the County of Santa Cruz Santa Cruz, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the discretely presented component units, each major fund, and the aggregate remaining fund information of the County of Santa Cruz, California (County), as of and for the year ended June 30, 2013, 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. Auditors’ Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted 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 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 auditors’ 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 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.

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To the Honorable Board of Supervisors of the County of Santa Cruz Santa Cruz, California 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 material respects, the respective financial position of the governmental activities, the business-type activities, the discretely presented component units, each major fund, and the aggregate remaining fund information of the County of Santa Cruz, as of June 30, 2013, 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. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis and budgetary comparison information on pages 6-22 and 108-121 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 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 combining and individual nonmajor fund financial statements are presented for purposes of additional analysis and are not a required part of the basic financial statements.

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To the Honorable Board of Supervisors of the County of Santa Cruz Santa Cruz, California The combining and individual nonmajor fund financial statements 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. In our opinion, the combining and individual nonmajor fund financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory section and statistical section 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. Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated December 18, 2013 on our consideration of the County's internal control over financial reporting and 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 to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on 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 County’s internal control over financial reporting and compliance. Irvine, California December 18, 2013

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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This section of the County of Santa Cruz (the “County”) Comprehensive Annual Financial Report presents a discussion and analysis of the County’s financial performance during the fiscal year ended June 30, 2013. Please read it in conjunction with the transmittal letter at the front of this report and the County’s basic financial statements following this section.

FINANCIAL HIGHLIGHTS

The assets plus deferred outflows of resources of the County exceeded liabilities plus deferred inflows of resources at the close of the 2012-2013 fiscal year by $483,239,029 (net position). Of this amount, a negative amount of $57,499,444 is unrestricted, $67,057,800 is restricted for specific purpose (restricted net position), and $473,680,673 is the net investment in capital assets.

The government’s total net position decreased by $34,771,678. This decrease was primarily due to an increase in the OPEB liability by $7 million, a decrease in property tax revenues by $13 million from the prior year, and an extraordinary loss of $16 million due to the transfer of assets back to the County Redevelopment Successor Agency.

As of June 30, 2013, the County’s governmental funds reported combined ending fund balances of $163,659,051, a decrease of $26,194,106 in comparison with the prior year. Revenues decreased by approximately $5 million, primarily from Property Taxes and Charges for Services, offset by increases in Aid from other governments. Expenditures increased by $11 million, mainly in Public Protection and Public Ways. An extraordinary loss of $7 million was recorded, which was the non-capital asset portion of the loss recorded in the government-wide section due to the Successor Agency transfer.

At the end of the fiscal year, the general fund reported an ending fund balance of $40,568,922, of which $3,543,674 was nonspendable, $2,000 was restricted, $16,166,595 was committed, and $20,856,653 was assigned as shown on page 31.

The County’s total long-term liabilities are $214,662,975, an increase of $12.8 million in comparison with the prior year. The increase resulted primarily from an increase in estimated claims by $11 million, mostly from the Workers Compensation internal service fund, and from the $7 million increase due to the OPEB liability. The increase was offset by a decrease in compensated absences of $1.2 million and a decrease in other long term debt in the amount of $4.4 million.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the County’s basic financial statements. The County’s basic financial statements are comprised of three components: (1) Government-wide 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. Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the County’s finances, in a manner similar to a private-sector business.

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The statement of net position presents information on all County assets, deferred outflows of resources, liabilities and deferred inflows of resources, with the difference in assets plus deferred outflows of resources and liabilities plus deferred inflows of resources reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether or not the financial position of the County is improving or deteriorating. The statement of activities presents information showing how the County’s 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 the related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods, such as revenues pertaining to uncollected taxes and expenses pertaining to earned but unused vacation and sick leave.

Both of these 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 the County Disposal Sites CSA 9C, and the following Board of Supervisor Governed Districts: Boulder Creek CSA 7, Rolling Woods CSA 10, Septic Tank Maintenance CSA 12, Freedom County Sanitation District, Davenport Sanitation District, Place de Mer CSA 2, Sand Dollar Beach CSA 5, Trestle Beach CSA 20, Summit West CSA 54, and Graham Hill CSA 57 operations.

Component units are included in our basic financial statements and consist of legally separate entities for which the County is financially accountable and that have substantially the same board as the County or provide services entirely to the County. The Santa Cruz County Sanitation District is reported as a discretely presented component unit of the County. The District is managed by the County Department of Public Works and provides sanitation services to a portion of the unincorporated areas of the County. For more detail, please refer to the Sanitation District’s separately issued financial statements.

The government-wide financial statements can be found on pages 21-25 of this report.

Fund Financial Statements

The fund financial statements are designed to report information about groupings of related funds which are used to account for 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 compliance with finance-related legal requirements. All of the funds of the County can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds.

Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. Most of the County’s basic services are reported in the governmental funds. The governmental funds financial statements focus on (1) how cash and other financial assets can readily be converted to available resources and (2) the balances left at year-end that are available for spending. Such information may be useful in determining what financial resources are available in the near future to finance the County’s programs.

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, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental funds balance sheet and the statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between the governmental funds and governmental activities.

The County maintains several individual governmental funds organized according to their type (general,

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special revenue, and capital projects). Information is presented separately in the governmental funds balance sheet and the statement of revenues, expenditures, and changes in fund balances for the General Fund, Housing Fund, and the Capital Projects Fund, which are considered to be major funds. Data from the remaining governmental funds are combined into a single, aggregated presentation. Individual fund data for each of the non-major governmental funds is provided in the form of combining statements elsewhere in this report.

The governmental funds financial statements can be found on pages 29-34 of this report. Proprietary funds are used to account for services for which the County charges customers—either outside customers or internal units or departments of the County. Proprietary funds provide the same type of information as shown in the government-wide financial statements, only in more detail. The County maintains the following two types 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 enterprise funds used to account for the operations of the County include the County Disposal Sites CSA 9C, and the following Board of Supervisor Governed Districts: Boulder Creek CSA 7, Rolling Woods CSA 10, Septic Tank Maintenance CSA 12, Freedom County Sanitation District, Davenport Sanitation District, Place de Mer CSA 2, Sand Dollar Beach CSA 5, Trestle Beach CSA 20, Summit West CSA 54, and Graham Hill CSA 57 operations.

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 central duplicating, information services, public works, service center, and insurance (risk management, dental and health, liability and property, workers’ compensation, employee benefit staffing, and state unemployment insurance) functions. Because these services predominantly benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. The internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report.

The proprietary funds financial statements can be found on pages 35-42 of this report. 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 fiduciary funds the County maintains are agency, investment trust funds and private purpose trust funds. Since these funds are custodial in nature, they do not involve the measurement of results of operations. The fiduciary funds financial statements can be found on pages 43-47 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 to the basic financial statements can be found on pages 48-106 of this report.

Required Supplementary Information (other than MD&A) In addition to the basic financial statements and accompanying notes, this report presents certain required supplementary information concerning the County’s general fund budgetary comparison schedule and progress in funding its obligation to provide pension benefits to its employees and other post-employment

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obligations to retirees.

The County adopts an annual budget, which is a compilation of operating budgets from individual functional units within the General Fund, Special Revenue Funds, Capital Projects Funds and Proprietary Funds. Budgets are adopted for all funds except for Fiduciary Funds and certain special revenue funds, namely the Public Finance Authority, Geological Hazard Abatement Districts, and Health Realignment Funds. A budgetary comparison schedule has been provided for the General Fund and Housing Fund to demonstrate compliance with these budgets. These can be found on pages 111-124 of this report. Combining Statements and Schedules The combining and individual fund statements and schedules referred to earlier in connection with non-major governmental funds, enterprise and internal service funds, and fiduciary funds are presented immediately following the required supplementary information.

2013 2012 2013 2012 2013 2012 Dollar ChangeAssets:Current and other assets 307,567,139$ 314,671,370$ 14,500,111$ 13,723,821$ 322,067,250$ 328,395,191$ (6,327,941)$ Capital assets 496,342,314 503,433,421 25,324,157 25,767,490 521,666,471 529,200,911 (7,534,440)

Total assets 803,909,453 818,104,791 39,824,268 39,491,311 843,733,721 857,596,102 (13,862,381)$

Deferred Outflow of Resources 1,203,993 - - - 1,203,993 - 1,203,993

Liabilities:Current and other liabilities 146,515,568 136,860,615 520,142 899,157 147,035,710 137,759,772 9,275,938 Long-term liabilities 208,060,326 195,450,978 6,602,649 6,374,645 214,662,975 201,825,623 12,837,352

Total liabilities 354,575,894 332,311,593 7,122,791 7,273,802 361,698,685 339,585,395 22,113,290

Deferred Inflow of Resources - - - - - - -

Net Position:Net investment in capital assets 448,657,370 455,726,517 25,023,303 25,441,909 473,680,673 481,168,426 (7,487,753) Restricted 67,013,454 96,979,978 44,346 256,081 67,057,800 97,236,059 (30,178,259) Unrestricted (65,133,272) (66,913,297) 7,633,828 6,519,519 (57,499,444) (60,393,778) 2,894,334

Total net position 450,537,552$ 485,793,198$ 32,701,477$ 32,217,509$ 483,239,029$ 518,010,707$ (34,771,678)$

Governmental Activities Business-Type Activities Total

Net Position

Analysis of Net Position As noted earlier, net position may serve over time as a useful indicator of a government’s financial position. For the County, assets plus deferred outflows of resources exceed liabilities plus deferred inflows of resources by $483,239,029 at the close of the 2012-2013 fiscal year. The portion of the County’s net investment in capital assets, $473,680,673 (98%), reflects its investment in capital assets (e.g., land, building and structures, and equipment), less accumulated depreciation in the amount of $521,666,471, less the related debt of $47,985,798 used to acquire those assets that is still outstanding. The County uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the County’s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.

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An additional portion of the County’s net position, $67,057,800 (13.9%), represents resources that are subject to external restrictions on how they may be used. Of the total, 67% is restricted for capital asset acquisition, 19.5% is dedicated to public roads and facilities, 8% is restricted for public safety and the rest is restricted for debt service, health and various county imposed purposes. The County’s unrestricted net position of -$57,499,445 increased slightly by $2.89 million from the prior year. This amount consists of all net position that does not meet the definition of restricted net position or net investment in capital assets. Internal service funds, general governmental funds and business-type activities increased due to unrestricted revenues exceeding operating expenses.

2013 2012 2013 2012 2013 2012 Dollar Change %

Revenues

Program Revenues:

Charges for services 70,919,816$ 80,758,934$ 13,136,923$ 13,313,017$ 84,056,739$ 94,071,951$ (10,015,212)$ -10.6%

Operating grants and contributions 219,341,110 207,264,093 207,824 572,873 219,548,934 207,836,966 11,711,968 5.6%

Capital grants and contributions 10,677,759 8,015,684 60,071 345,142 10,737,830 8,360,826 2,377,004 28.4%

General Revenues: - - - - -

Property taxes 84,795,154 97,715,702 25,410 25,155 84,820,564 97,740,857 (12,920,293) -13.2%

Other taxes 17,201,238 16,043,928 - - 17,201,238 16,043,928 1,157,310 7.2%

Investment earnings 1,253,704 2,740,937 (24,240) 45,512 1,229,464 2,786,449 (1,556,985) -55.9%

Miscellaneous 4,971,878 52,099,146 608,671 704,517 5,580,549 52,803,663 (47,223,114) -89.4%

Gain (Loss) on sale of assets 25,472 1,004,899 1,955 25,472 1,006,854 (981,382) -97.5%

Total revenues 409,186,131 465,643,323 14,014,659 15,008,171 423,200,790 480,651,494 (57,450,704)$ -12.0%

Expenses:

General government 22,735,367 27,417,095 - - 22,735,367$ 27,417,095$ (4,681,728)$ -17.1%

Public protection 127,639,841 124,721,303 - - 127,639,841 124,721,303 2,918,538 2.3%

Public ways and facilities 47,166,719 32,192,222 - - 47,166,719 32,192,222 14,974,497 46.5%

Health and sanitation 111,369,828 113,241,653 - - 111,369,828 113,241,653 (1,871,825) -1.7%

Public assistance 104,960,517 105,834,823 - - 104,960,517 105,834,823 (874,306) -0.8%

Education 5,004,928 5,032,815 - - 5,004,928 5,032,815 (27,887) -0.6%

Recreation and cultural services 5,867,061 6,669,621 - - 5,867,061 6,669,621 (802,560) -12.0%

Interest on long-term debt 3,321,366 10,262,013 - - 3,321,366 10,262,013 (6,940,647) -67.6%

County Disposal Sites CSA - - 10,903,896 10,506,363 10,903,896 10,506,363 397,533 3.8%

Boulder Creek CSA - - 343,857 294,996 343,857 294,996 48,861 16.6%

Rolling Woods CSA - - 14,435 13,783 14,435 13,783 652 4.7%

Septic Tank Maintenance CSA - - 1,016,649 943,587 1,016,649 943,587 73,062 7.7%

Freedom County Sanitation District - - 441,425 857,006 441,425 857,006 (415,581) -48.5%

Davenport Sanitation District - - 458,073 531,693 458,073 531,693 (73,620) -13.8%

Place De Mer CSA - - 21,395 37,481 21,395 37,481 (16,086) -42.9%

Sand Dollar Beach CSA - - 259,799 264,900 259,799 264,900 (5,101) -1.9%

Trestle Beach CSA - - 35,634 40,637 35,634 40,637 (5,003) -12.3%

Summit West CSA - - 131 145 131 145 (14) -9.7%

Graham Hill CSA - - 35,397 33,543 35,397 33,543 1,854 5.5%

Total expenses 428,065,627 425,371,545 13,530,691 13,524,134 441,596,318 438,895,679 2,700,639 0.6%

Revenues over/(under) expenditures (18,879,496) 40,271,778 483,968 1,484,037 (18,395,528) 41,755,815 (60,151,343) -144.1%

Extraordinary Gain(Loss) (16,376,150) 174,032,971 - - (16,376,150) 174,032,971 (190,409,121) -109.4%

Change in net position (35,255,646) 214,304,749 483,968 1,484,037 (34,771,678) 215,788,786 (250,560,464) -116.1%

Net position, beginning of year 485,793,198 271,488,449 32,217,509 30,733,472 518,010,707 302,221,921 215,788,786 71.4%

Net position, end of year 450,537,552$ 485,793,198$ 32,701,477$ 32,217,509$ 483,239,029$ 518,010,707$ (34,771,678)$ -6.7%

Governmental Activities Business-Type Activities Total

Change in Net Position

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Analysis of Change in Net Position The County’s net position decreased by $34,771,678 during the current fiscal year. These decreases are explained in the government and business-type activity discussion below.

Governmental activities decreased the County’s net position by $35,255,646, accounting for 101.4% of the total decrease in net position of the County. This decrease resulted from property tax revenues, which were down by 13.2% over the prior year, and Health Services charges to clients, which were down by 30% from 2011-12 due to an accounting change from cash basis to accrual. Investment earnings decreased by 56% from the prior year due to a decline in the fair value of investments. Operating grants and capital grants improved by $14.7 million over the prior year due primarily to additional revenues from State realignment programs for public safety and mental health.

Expenditures overall were relatively even compared to the prior year. General government expenses decreased by $4.7 million from the prior year due to changes in cost allocations. Public Ways and Facilities expenses increased by $15 million over the prior year attributable to other non-capital project expenditures for the Behavioral Health Facility (see Note 22) and other projects. In addition, there was an extraordinary loss of $16.4 million due to a transfer of assets back to the County RDA Successor Agency (see Note 23).

Business-type activities increased by $483,968 over the prior year. Miscellaneous recycling revenue

from the County Disposal site in the amount of $608,671 was primarily responsible for the increase. Revenues were down by $994 thousand over the prior year because of grants received by Davenport Sanitation in the prior year that were not received in the current year. The Freedom County Sanitation District reduced its expenses by 48.5% due to a reduction in utility fees from the City of Watsonville. Place de Mer CSA 2 had a 42.9% decrease in expenses over the prior year, due to a reduction in indirect cost allocations in the current fiscal year.

FINANCIAL ANALYSIS OF THE COUNTY’S FUNDS As noted earlier, the County uses fund accounting to ensure and demonstrate compliance with financial related legal requirements. Governmental Funds The focus of the County’s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the County’s financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government’s net resources available for spending at the end of the fiscal year. Types of governmental funds reported by the County include the general fund, special revenue funds, debt service funds, and capital project funds. At June 30, 2013, the County’s governmental funds reported combined ending fund balances of $163,659,051, a decrease of $26,194,106 in comparison with the prior year. The components of total fund balance are as follows (see Note 21 – Fund Balances).

Nonspendable fund balance, $59,620,349, are amounts that are not spendable in form, or are legally or contractually required to be maintained intact, and are made up of (1) inventory, prepaids, and imprest cash of $1,419,261, (2) advances and loans of $56,511,953, and (3) assets held for resale of $1,689,135.

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Restricted fund balance, $67,032,604, consists of amounts with constraints put on their use by externally imposed creditors, grantors, contributions, laws, regulations, or enabling legislation. Examples of restrictions on funds are those for (1) purpose of fund (i.e., flood control, library) of $19,400,517, (2) debt service of $2,739,533, and (3) amounts restricted for capital asset acquisition of $44,892,554.

Committed fund balance, $16,166,595, are amounts for specific purposes determined by the Board of Supervisors, such as Working Capital of $6,000,000, Natural Disasters of $1,251,089, Economic Uncertainty of $4,857,787, and General Government, Public Protection, Health and Sanitation and Public Assistance of $4,057,719 in total.

Assigned fund balance of $20,856,653 represents amounts that are intended for specific purposes and are established by the Board of Supervisors or an official or body delegated by the governing body. Examples of assigned fund balances are (1) federally qualified health programs of $14,229,750, (2) projected budgetary deficit of $5,174,625, (3) liabilities of $1,052,278, and (4) human services of $400,000.

Unassigned fund balance of negative $17,150 in a nonmajor special revenue fund represents the amounts of expenditures for specific purposes that exceeded the amounts that were restricted, committed or assigned for those purposes.

Revenues for governmental functions totaled $409,518,934 in fiscal year 2012-2013, which represents a decrease of $5,188,641, or 1.25% from fiscal year 2011–2012. Expenditures for governmental functions totaling $428,044,414 increased by $11,452,316, or 2.75%, from fiscal year 2011–2012. In the fiscal year 2012-2013, expenditures for governmental functions exceeded revenues by $18,525,480. Other financing uses, including interfund transfers, exceeded other financing sources by $489,901. An extraordinary loss related to the dissolution of the Redevelopment Agency and transfers of assets was recorded in the amount of $7,178,725. The general fund is the primary operating fund of the County. At June 30, 2013, the general fund’s total fund balance was $40,568,922 of which $3,543,674 was nonspendable, and $37,025,248 was spendable. The spendable fund balance consists of $2,000 in restricted fund balance, $16,166,595 in committed fund balance, $20,856,653 in assigned fund balance, and $0 in unassigned. As a measure of the general fund’s liquidity, it may be useful to compare both total fund balance and spendable fund balance to total fund expenditures. Total fund balance is 11.4% of total General Fund expenditures while spendable fund balance is 10.4% of total General Fund expenditures. The Housing Fund is a major fund of the County. At June 30, 2013, the nonspendable fund balance amount was $56,076,675, a 12.4% increase over the prior year, due to an increase in loans receivable. The spendable (restricted) fund balance amount was $2,745,075, an increase of $1,589,216 from the prior year. This increase is mainly attributed to an increase in state aid. The Capital Projects Fund is also a major fund of the County. The total fund balance of $40,053,013 was spendable (restricted) at June 30, 2013, a decrease of $25,325,744 from the prior year. The decrease was due to significant expenditures for the Behavioral Health facility, major remodel expenses for a new Public Safety facility, Veteran’s Building reconstruction, and infrastructure project costs.

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The following table presents the amount of revenues from various sources as well as increases or decreases from the prior year for all governmental funds:

2013 % of Total 2012 % of Total ChangeTaxes and assessments 101,996,392$ 24.91 113,759,630$ 27.43 (11,763,238)$ Licenses and permits 9,819,321 2.40 10,355,966 2.50 (536,645) Fines and forfeitures 4,474,318 1.09 4,736,919 1.14 (262,601) Use of money and property 1,263,829 0.31 2,635,573 0.64 (1,371,744) Intergovernmental 230,018,869 56.17 215,279,777 51.91 14,739,092 Charge for services 56,626,177 13.83 65,666,049 15.83 (9,039,872) Other revenues 5,320,028 1.30 2,273,661 0.55 3,046,367

Total 409,518,934$ 100% 414,707,575$ 100% (5,188,641)$

Revenues Classified by SourceGovernmental Funds

Property values and property tax revenues decreased by approximately $11.8 million over the prior year. Charges for services also decreased due to a change in accounting accruals in the Health Services clinic reimbursements. This was offset by an increase in intergovernmental revenues of $14.7 million from AB109 revenue and Health Services sales tax realignment, and an increase in other revenue of $3 million, mostly from interfund contributions. The following table presents expenditures by function compared to prior year amounts for all governmental funds:

2013 % of Total 2012 % of Total ChangeGeneral government 28,311,047$ 6.61 26,747,368$ 6.42 1,563,679$ Public protection 129,561,769 30.27 118,671,033 28.48 10,890,736 Public ways and facilities 41,231,941 9.63 32,073,605 7.70 9,158,336 Health and sanitation 108,688,411 25.39 107,809,876 25.88 878,535 Public assistance 101,437,540 23.70 101,203,719 24.29 233,821 Education 4,780,590 1.12 4,810,199 1.15 (29,609) Recreation and culture 6,900,013 1.61 7,004,272 1.68 (104,259) Capital outlay - 0.00 - 0.00 - Debt service - bond redemption 3,815,000 0.89 7,790,000 1.87 (3,975,000) Debt service - issue cost - 0.00 - 0.00 - Debt service - interest and fiscal charges 3,318,103 0.78 10,482,026 2.52 (7,163,923)

Total 428,044,414$ 100% 416,592,098$ 100% 11,452,316$

Expenditures Classified by FunctionGovernmental Funds

Overall expenditures increased by $11.5 million. Public protection professional services and salaries increased by $10.9 million, related to the AB109 State shift of inmate care. Public ways and facilities expenditures increased significantly by $9 million due to project expenditures for affordable housing programs and interfund agency contributions. This was offset by decreases in debt service of $11.1 million, due to the elimination of the former RDA debt service which was included in the 2011-2012 financial statements. Other financing sources and uses are presented below, including changes from the prior year. There were no new bond issues for 2012-2013 and no other entries related to the dissolution of the Redevelopment Agency as in the previous year.

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2013 % of Total 2012 % of Total ChangeProceeds of long-term debt -$ 0.00 7,489,565$ 13.00 (7,489,565)$ Bond Premium/Discount - 0.00 (23,157) (0) 23,157 Inception of Capital Lease 35,766 (7.30) 80,266 0.14 (44,500) Original issue costs - 0.00 (247,884) (0.43) 247,884 Payment to Refunding Escrow Agent - 0.00 (1,399,253) (2) 1,399,253 Sale of Capital Assets - 0.00 1,138,814 2 (1,138,814) Gain/(Loss) on land held for resale - 0.00 (137,065) (0.24) 137,065 Gain on Conversion of Receivables - 0.00 5,024,265 - (5,024,265) Transfers in 17,620,574 (3596.76) 37,590,848 65.26 (19,970,274) Transfers out (18,378,865) 3751.55 (37,620,328) (65.32) 19,241,463 Capital Contributions 232,624 (47.48) 45,701,407 - (45,468,783)

Total (489,901)$ 100% 57,597,478$ 100% (58,087,379)$

Other Financing Sources/(Uses)Governmental Funds

The current year excess of revenues and other financing sources over expenditures and other financing uses is presented below:

Nonmajor FundsGeneral

FundHousing

FundCapital Projects

FundSpecial Revenue

Funds TotalRevenues 359,495,024$ 2,412,735$ 1,891,724$ 45,719,451$ 409,518,934$ Expenditures (356,659,153) (395,203) (17,801,022) (53,189,036) (428,044,414) Net other financing sources/(uses) (4,435,776) 5,765,426 (2,237,721) 418,170 (489,901) Extrordinary Loss - - (7,178,725) (7,178,725) Net Change in Fund Balances (1,599,905) 7,782,958 (25,325,744) (7,051,415) (26,194,106) Fund balances, beginning (restated) 42,168,827 51,038,792 65,378,757 31,266,781 189,853,157 Fund balances, ending 40,568,922$ 58,821,750$ 40,053,013$ 24,215,366$ 163,659,051$

Statement of Revenues, Expenditures, and Changes in Fund BalancesGovernmental Funds

Major Funds

Proprietary Funds The County’s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. The County Disposal Sites CSA 9C had total net position of $16,917,003 at June 30, 2013, of which $2,435,848 was unrestricted. The following table shows the enterprise funds’ actual revenues, expenses and results of operations for the current fiscal year:

Major FundsCounty Disposal

Sites CSA 9CNonmajor

Funds TotalInternal Service

FundOperating revenues 10,732,799$ 3,012,795$ 13,745,594$ 64,996,676$ Operating expenses (11,258,579) (2,670,362) (13,928,941) (64,538,981)

Net operating income (525,780) 342,433 (183,347) 457,695

Net non-operating revenues/(expenses) 201,115 67,950 269,065 891,054 Change in net position (324,665)$ 410,383$ 85,718$ 1,348,749$

Beginning of year 17,241,668 14,680,038 31,921,706 (17,248,263) End of year 16,917,003 15,090,421 32,007,424 (15,899,514)$

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Total enterprise fund net position increased by $85,718. Operating revenues of $13,745,594 decreased by $1,189,955 over the prior fiscal year due to a decrease and reclassification of aid from other governments. Operating expenses of $13,928,941 increased by $1,131,862 over the prior year because of a post-closure liability adjustment made in the prior year that resulted in a $1.2 million reduction in expenses. Internal Service fund net position increased by $1,348,749 over the prior fiscal year. This was due to decreases in liability claims expenses compared to the prior year.

GENERAL FUND BUDGETARY HIGHLIGHTS After the adoption of the 2012–2013 fiscal year budget, the original General Fund budget was increased by $10,006,382 during the year, not including transfers out, primarily due to additional financial resources made available from State and Federal Agencies for Public Protection, Public Assistance, and Health Services. Actual expenditures in the General Fund were $30,278,065 less than the original budget, including transfers out. The 2012–2013 total expenditures were $9,974,937, or 2.88%, greater than the prior fiscal year, not including transfers. This was largely due to increased spending in Public Protection due to additional funding from public safety realignment. General Fund actual revenues were $21,705,166 lower than the original budget. The majority of this was due to a difference of $26 million from the original budget originating from Transfers In and $8 million from Charges for services, offset by an $11 million increase in revenue over budget from Aid from other Governments. For additional information, readers should refer to the letter of transmittal.

CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets The County’s capital assets for its governmental and business-type activities as of June 30, 2013 totaled $521,666,471 (net of accumulated depreciation of $380,247,574). These capital assets include land, construction in progress, infrastructure, buildings and structures, and equipment. The decrease in the County’s capital assets for the 2012–2013 fiscal year was $7,534,440, or 1.4%. For government-wide financial statement presentation, all depreciable capital assets were depreciated from acquisition date to the end of the 2012-2013 fiscal year. Fund financial statements record capital asset purchases as expenditures. Capital assets for the governmental and business-type activities are presented below to illustrate changes from the prior year:

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2013 2012 2013 2012 2013 2012Land 50,122,478$ 59,319,954$ 1,858,849$ 1,858,849$ 51,981,327$ 61,178,803$ Construction in progress 44,907,791 36,060,149 1,223,856 136,993 46,131,647 36,197,142 Infrastructure 574,889,300 567,500,776 - - 574,889,300 567,500,776 Buildings and structures 130,195,693 127,648,142 42,798,919 42,586,352 172,994,612 170,234,494 Equipment 45,596,208 42,349,698 10,320,951 10,252,677 55,917,159 52,602,375 Accumulated depreciation (349,369,156) (329,445,298) (30,878,418) (29,067,381) (380,247,574) (358,512,679) Total 496,342,314$ 503,433,421$ 25,324,157$ 25,767,490$ 521,666,471$ 529,200,911$

TotalGovernmental Activities Business-Type Activities

Capital Assets decreased in Governmental Activities by $7 million over the prior fiscal year. Land in the amount of $9 million was transferred back to the Redevelopment Successor Agency as the result of a State Department of Finance decision (see Note 23). There was an $8.8 million increase in Construction in Progress due to the construction of the Behavioral Health Unit, reconstruction of the Sheriff’s facility and the Veteran’s building, and various other uncompleted projects. Infrastructure increased by $7.4 million over the prior year for roads and drainage. Building and jail improvements were responsible for increases in the other categories. These were offset by an increase of approximately $20 million in depreciation charges. Business-type capital assets decreased by $443,333 primarily due to increases in Construction in Progress offset by an increase in accumulated depreciation. Additional information on the County’s capital assets can be found in Note No. 7 on pages 79-81 of this report. Long-term Debt The County’s long-term debt for governmental and business-type activities is presented below to illustrate changes from the prior year:

2013 2012 2013 2012 2013 2012Refunding certificates of participation 24,534,509$ 25,959,378$ - - 24,534,509$ 25,959,378$ Lease revenue bonds 6,450,000 6,670,000 - - 6,450,000 6,670,000 Lease revenue refunding bonds 1,812,279 1,866,100 - - 1,812,279 1,866,100 Certificates of participation 31,278,200 33,024,107 - - 31,278,200 33,024,107 Revenue bonds 225,000 655,000 - - 225,000 655,000 Mandated payment 1,450,147 2,175,220 - - 1,450,147 2,175,220 Loans payable 173,494 33,175 530,658 569,941 704,152 603,116 Capital leases 5,090,588 5,365,598 2,951 - 5,093,539 5,365,598 Total 71,014,217$ 75,748,578$ 533,609$ 569,941$ 71,547,826$ 76,318,519$

TotalGovernmental Activities Business-Type Activities

For the governmental activities, the County had total long-term debt outstanding of $71,014,217 as compared to $75,748,578 the prior year (excluding compensated absences and estimated claims), a decrease of $4,734,361. There was a small loan payable issued during the year, but the overall decrease was due to bond redemptions. For the business-type activities, the County had total long-term debt outstanding of $533,609 as compared to $569,941 in the prior year (excluding post-closure liability), a decrease of $36,332, which represented the amount of retirement of debt for the year, offset by a minor increase in capital leases. The County’s total debt for all primary government activities decreased by $4,770,693 or 6.25%, during the current fiscal year (excluding compensated absences, estimated claims, and post-closure liability).

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The County maintains a Standard & Poor’s ‘SP-1+’ and a Moody’s ‘MIG 1’ rating for short term notes. Moody’s has assigned its long-term rating on the County’s general fund certificates of participation and lease revenue bonds of “A2.” This rating was last reviewed by Moody’s in June 2011. Standard & Poor’s has assigned its long-term rating on the County’s general fund certificates of participation and lease revenue bonds of “A+.” This rating was last reviewed by Standard & Poor’s in September 2011. Such ratings reflect only the views of the rating agency and any desired explanation of the significance of such ratings should be obtained from the rating agency. The component unit, Santa Cruz Sanitation District, had total long-term debt outstanding of $21,484,035 as compared to $23,742,590 in the prior year. This amount was comprised of $4,710,000 of Waste Water Revenue Refunding Bonds, $23,370 of unamortized bond premium, $475,000 of Limited Obligation Refunding Improvement Bonds, and $16,275,665 of Loans Payable. During the year, retirement of debt amounted to $2,462,058 and a loan payable was increased by $203,503. Additional information on the County’s long-term debt can be found in Note No. 10 on pages 85-93 of this report.

FISCAL YEAR 2013-2014 BUDGET AND ECONOMIC CONDITIONS

The 2013-2014 County Budget reflects another difficult year resulting from the slow economic recovery. The budget calls for a 2.61% increase over the prior year for General and Special Revenue funds.

There was an increase in property assessed values for the 2013-2014 fiscal year, resulting in a modest increase in budgeted property tax revenues of 1.56% over the prior fiscal year actual revenue.

An increase of 9% from general fund intergovernmental revenues is based on increases in Prop 172 half cent sales tax for public safety, increases in Mental Health Services Act and other intergovernmental revenues related to Behavioral Health, Social Service realignment revenue, and increases in State AB118 local revenue fund program for Health and Human Services.

There is continued reduction in payroll costs of approximately $5.9 million through negotiated furloughs in 2013-2014.

The Patient Protection and Affordable Care Act (ACA) goes into effect in January 2014, and approximately 10,000 County residents will be eligible for Medi-Cal and approximately 12,000 County residents will purchase health insurance with a federal subsidy, significantly impacting direct and indirect services at County clinics and through County contracted services.

The effects of the Federal sequestration and temporary government shutdown are still not finalized at the federal level. These reductions impact County discretionary programs, such as Substance Abuse Prevention and Treatment Block Grants and Workforce Investment Act grants.

REQUEST FOR INFORMATION

This financial report is designed to provide a general overview of the County’s finances for all those with an interest in the government’s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Auditor-Controller’s Office, County of Santa Cruz, 701 Ocean Street, Room 100, Santa Cruz, CA 95060.

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BASIC FINANCIAL STATEMENTS

19

20

GOVERNMENT-WIDEFINANCIAL STATEMENTS

21

22

County of Santa CruzStatement of Net PositionJune 30, 2013

Governmental Business-Type Component Activities Activities Total Unit

ASSETS

Cash and investments 211,487,624$ 8,232,528$ 219,720,152$ 22,722,985$ Restricted cash 6,582,547 5,861,316 12,443,863 1,622,865 Loans receivable 56,088,593 135,190 56,223,783 - Receivables, net 29,025,401 606,484 29,631,885 - Deposits with others 240,000 - 240,000 - Inventory 594,689 128,852 723,541 14,190 Prepaid items 1,394,891 - 1,394,891 - Land held for resale 1,689,135 - 1,689,135 - Notes receivable - - - 55,077 Internal balances 464,259 (464,259) - - Capital Assets:

Nondepreciable assets 95,030,269 3,082,705 98,112,974 10,779,667 Depreciable assets, net 401,312,045 22,241,452 423,553,497 108,430,594

Total assets 803,909,453 39,824,268 843,733,721 143,625,378

DEFERRED OUTFLOWS OF RESOURCESDeferred bond issuance costs 1,203,993 - 1,203,993 72,275

Total deferred outflows of resources 1,203,993 - 1,203,993 72,275

LIABILITIES

Payables 21,621,802 478,739 22,100,541 333,931 Accrued interest payable 935,437 - 935,437 351,204 Tax and revenue anticipation notes payable 50,997,222 - 50,997,222 - Unearned revenue 41,764,564 - 41,764,564 - Compensated absences:

Due within one year 18,278,012 - 18,278,012 - Due in more than one year 7,795,565 - 7,795,565 -

Estimated claims:Due within one year 8,021,852 - 8,021,852 - Due in more than one year 38,730,576 - 38,730,576 -

Other long-term liabilities:Due within one year 4,896,679 41,403 4,938,082 2,545,822 Due in more than one year 66,117,538 6,602,649 72,720,187 18,938,213

OPEB Liability 95,416,647 - 95,416,647 - Pollution remediation obligation - - - 4,848

Total liabilities 354,575,894 7,122,791 361,698,685 22,174,018

NET POSITION

Net investment in capital assets 448,657,370 25,023,303 473,680,673 97,726,226 Restricted for:

Debt service 2,739,533 - 2,739,533 1,255,964 Capital asset acquisition 44,892,554 - 44,892,554 - Public safety 5,416,221 - 5,416,221 - Health and public assistance 874,483 - 874,483 - Public ways and facilities 13,090,663 - 13,090,663 - Other - 44,346 44,346 -

Unrestricted (65,133,272) 7,633,828 (57,499,444) 22,541,445

450,537,552$ 32,701,477$ 483,239,029$ 121,523,635$

See accompanying Notes to Basic Financial Statements.

Primary Government

Total net position

23

County of Santa CruzStatement of ActivitiesFor the year ended June 30, 2013

Fees, Fines & Operating CapitalCharges for Grants and Grants and

Functions/Programs Expenses Services Contributions Contributions Total

Primary government:

Governmental activities:General government 22,735,367$ 18,070,855$ 3,188,508$ -$ 21,259,363$ Public protection 127,639,841 20,741,564 42,875,119 2,940,089 66,556,772 Public ways and facilities 47,166,719 5,993,575 6,593,382 7,705,152 20,292,109 Health and sanitation 111,369,828 22,888,777 90,514,720 32,518 113,436,015 Public assistance 104,960,517 349,613 76,083,937 - 76,433,550 Education 5,004,928 - 44,561 - 44,561 Recreation and cultural services 5,867,061 2,875,432 2,884 - 2,878,316

Debt Service 3,321,366 - 37,999 - 37,999

Total governmental activities 428,065,627 70,919,816 219,341,110 10,677,759 300,938,685

Business-type activities:County Disposal Sites CSA 9C 10,903,896 10,124,128 207,824 - 10,331,952 Boulder Creek CSA 7 343,857 427,195 - - 427,195 Rolling Woods CSA 10 14,435 11,569 - - 11,569 Septic Tank Maintenance CSA 12 1,016,649 967,929 - - 967,929 Freedom County Sanitation District 441,425 701,770 - - 701,770 Davenport Sanitation District 458,073 426,401 - 60,071 486,472 Place de Mer CSA 2 21,395 82,964 - - 82,964 Sand Dollar Beach CSA 5 259,799 249,991 - - 249,991 Trestle Beach CSA 20 35,634 54,252 - - 54,252 Summit West CSA 54 131 - - - - Graham Hill CSA 57 35,397 90,724 - - 90,724

Total business-type activities 13,530,691 13,136,923 207,824 60,071 13,404,818

Total primary government 441,596,318$ 84,056,739$ 219,548,934$ 10,737,830$ 314,343,503$

Component unit:

Santa Cruz County Sanitation District 19,371,707$ 21,326,540$ 347,000$ -$ 21,673,540$

General Revenues:

Taxes:Property taxesProperty transfer feesSales and use taxesTransient occupancy taxesOther taxes

Total taxesGrants and contributions not restricted for specific purposesInterest and investment earningsGain/(loss) on disposal of capital assetsMiscellaneous

Total general revenues

Change in net position before extraordinary item

Extraordinary Item

Change in net position

Net position - beginning of year

Net position - end of year

See accompanying Notes to Basic Financial Statements.

Program Revenues

24

Governmental Business-Type ComponentActivities Activities Total Unit

(1,476,004)$ -$ (1,476,004)$ (61,083,069) - (61,083,069) (26,874,610) - (26,874,610)

2,066,187 - 2,066,187 (28,526,967) - (28,526,967)

(4,960,367) - (4,960,367) (2,988,745) - (2,988,745) (3,283,367) - (3,283,367)

(127,126,942) - (127,126,942)

- (571,944) (571,944) - 83,338 83,338 - (2,866) (2,866) - (48,720) (48,720) - 260,345 260,345 - 28,399 28,399 - 61,569 61,569 - (9,808) (9,808) - 18,618 18,618 - (131) (131) - 55,327 55,327

- (125,873) (125,873)

(127,126,942)$ (125,873)$ (127,252,815)$

2,301,833$

84,795,154 25,410 84,820,564 92,170 1,935,643 - 1,935,643 - 9,128,895 - 9,128,895 - 4,515,035 - 4,515,035 - 1,621,665 - 1,621,665 -

101,996,392 25,410 102,021,802 92,170 117,416 - 117,416 -

1,253,704 (24,240) 1,229,464 34,891 25,472 - 25,472 31,819

4,854,462 608,671 5,463,133 -

108,247,446 609,841 108,857,287 158,880

(18,879,496) 483,968 (18,395,528) 2,460,713

(16,376,150) - (16,376,150) -

(35,255,646) 483,968 (34,771,678) 2,460,713

485,793,198 32,217,509 518,010,707 119,062,922

450,537,552$ 32,701,477$ 483,239,029$ 121,523,635$

and Changes in Net PositionNet (Expense) Revenue

25

26

FUND FINANCIAL STATEMENTS

27

28

General Fund - The General Fund is used to account for sources and uses of financial resourcestraditionally associated with governments, and which are not required to be accounted for in anotherfund.

Housing Fund - The Housing Fund is primarily used to account for Community Development BlockGrant Programs. The principal sources of revenues are state grants and housing rehabiliation loanrepayments.

Capital Project Funds - The Capital Project Funds are used to account for financial resources to be usedfor the acquisition of land, and acquisition and construction of major facilities other than those financedby the proprietary funds.

Nonmajor Governmental Funds - Nonmajor Governmental funds is the aggregate of all the nonmajorgovernmental funds

GOVERNMENTAL FUNDFINANCIAL STATEMENTS

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30

County of Santa CruzBalance SheetGovernmental FundsJune 30, 2013

Nonmajor Total General Housing Capital Projects Governmental Governmental

Fund Fund Fund Funds Funds

ASSETS

Cash and investments 115,202,052$ 2,644,665$ 42,423,325$ 20,877,905$ 181,147,947$ Restricted cash and investments - - - 6,582,547 6,582,547 Receivables, net 26,171,957 185,208 15,000 2,032,915 28,405,080 Due from other funds 18,384 - 15,000 - 33,384 Loans receivable - 56,088,593 - - 56,088,593 Deposits with others 90,000 - - - 90,000 Inventory 27,616 - - - 27,616 Prepaids 1,343,166 - - - 1,343,166 Land held for resale 1,689,135 - - - 1,689,135 Advances to other funds - - - 997,761 997,761

Total assets 144,542,310$ 58,918,466$ 42,453,325$ 30,491,128$ 276,405,229$

LIABILITIES

Payables 15,289,636$ 96,716$ 2,385,312$ 2,179,344$ 19,951,008$ Tax and revenue anticipation notes payable 50,997,222 - - - 50,997,222 Due to other funds - - 15,000 18,384 33,384 Unearned revenue 37,686,530 4,078,034 41,764,564

Total liabilities 103,973,388 96,716 2,400,312 6,275,762 112,746,178

FUND BALANCES

Nonspendable 3,543,674 56,076,675 - - 59,620,349 Restricted 2,000 2,745,075 40,053,013 24,232,516 67,032,604 Committed 16,166,595 - - - 16,166,595 Assigned 20,856,653 - - - 20,856,653 Unassigned - - - (17,150) (17,150)

- Total fund balance 40,568,922 58,821,750 40,053,013 24,215,366 163,659,051

Total liabilities and fund balances 144,542,310$ 58,918,466$ 42,453,325$ 30,491,128$ 276,405,229$

See accompanying Notes to Basic Financial Statements.

Major Funds

31

County of Santa CruzReconciliation of the Governmental Funds Balance Sheet

to the Government-Wide Statement of Net PositionJune 30, 2013

Total Fund Balances - Total Governmental Funds 163,659,051$

Capital assets used in governmental activities are not financial resources and therefore are notreported in governmental funds. (Net of $5,061,691 of internal service fund capital assets) 491,280,623

Bond issuance costs from issuing debt are reported in the governmental funds when the debt isfirst issued. However, these amounts are deferred and subject to capitalization andamortization in the Government-Wide Financial Statements (Statement of Changes in NetPosition). 1,203,993

Internal service funds are used by management to charge the costs of certain activities toindividual funds. The assets, deferred outflows of resources, liabilities and deferred inflows ofresources of the internal service funds are included in governmental activities in theGovernment-Wide Statement of Net Position:

Internal service funds included in governmental activities (15,899,514)

Transfer of internal service funds to business-type activities (694,053)

Long-term liabilities were not due and payable in the current period. Therefore, they were notreported in the governmental funds.

Refunding certificates of participation, including premium (24,534,509)

Lease revenue bonds (6,450,000)

Lease revenue refunding bonds, including premium (1,812,279)

Certificates of participation, including premium (31,278,200)

Revenue bonds (225,000)

California Energy Resources Conservation and Development Commission (172,837)

McGaffigan Mill Road Association (657)

Scotts Valley Writ of Mandate (1,450,147)

OPEB Liability (95,416,647) Compensated absences (21,661,789)

Capital leases (5,075,046) (188,077,111)

Interest payable on long-term debt did not require current financial resources. Therefore,interest payable was not reported as a liability in the governmental funds. (935,437)

Net Position of Governmental Activities 450,537,552$

See accompanying Notes to Basic Financial Statements.

Amounts reported for Governmental Activities in the Statement of Net Position were different because:

32

County of Santa CruzStatement of Revenues, Expenditures and Changes in Fund BalancesGovernmental FundsFor the year ended June 30, 2013

Nonmajor Total General Housing Capital Projects Governmental Governmental

Fund Fund Fund Funds Funds

REVENUES:

Taxes 88,390,337$ -$ -$ 13,606,055$ 101,996,392$ Licenses and permits 9,819,321 - - - 9,819,321 Fines, forfeits and penalties 4,418,159 - 49,557 6,602 4,474,318 Use of money and property 1,079,143 97,891 90,010 (3,215) 1,263,829 Aid from other governments 208,953,957 1,525,127 117,192 19,422,593 230,018,869 Charges for services 43,279,759 277,033 1,634,907 11,434,478 56,626,177 Other 3,554,348 512,684 58 1,252,938 5,320,028

Total revenues 359,495,024 2,412,735 1,891,724 45,719,451 409,518,934

EXPENDITURES:

Current:General government 27,919,587 - - 391,460 28,311,047 Public protection 113,965,861 - - 15,595,908 129,561,769 Public ways and facilities 219,847 - 17,801,022 23,211,072 41,231,941 Health and sanitation 107,549,603 - - 1,138,808 108,688,411 Public assistance 101,042,337 395,203 - - 101,437,540 Education 115,398 - - 4,665,192 4,780,590 Recreation and culture 5,663,542 - - 1,236,471 6,900,013

Debt service:Principal - - - 3,815,000 3,815,000 Interest and fiscal charges 182,978 - - 3,135,125 3,318,103

Total expenditures 356,659,153 395,203 17,801,022 53,189,036 428,044,414

REVENUES OVER (UNDER) EXPENDITURES 2,835,871 2,017,532 (15,909,298) (7,469,585) (18,525,480)

OTHER FINANCING SOURCES (USES):

Transfers in 2,073,089 5,830,738 3,295,487 6,421,260 17,620,574 Transfers out (6,777,255) (65,312) (5,533,208) (6,003,090) (18,378,865) Inception of capital lease 35,766 - - - 35,766 Capital contributions 232,624 - - - 232,624

Total other financing sources (uses) (4,435,776) 5,765,426 (2,237,721) 418,170 (489,901)

Change in Fund Balance Before Extraordinary Item (1,599,905) 7,782,958 (18,147,019) (7,051,415) (19,015,381)

Extraordinary Item - - (7,178,725) - (7,178,725)

Net change in fund balances (1,599,905) 7,782,958 (25,325,744) (7,051,415) (26,194,106)

Fund balances - beginning 42,168,827 51,038,792 65,378,757 31,266,781 189,853,157

Fund balances - ending 40,568,922$ 58,821,750$ 40,053,013$ 24,215,366$ 163,659,051$

See accompanying Notes to Basic Financial Statements.

Major Funds

33

County of Santa CruzReconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in

Fund Balances to the Government-Wide Statement of ActivitiesFor the year ended June 30, 2013

Net Change in Fund Balances - Total Governmental Funds (26,194,106)$

Governmental funds reported acquisitions of capital assets as part of capital outlay expenditures.However, in the Government-Wide Statement of Activities, the cost of those assets was allocated overtheir estimated useful lives as depreciation expense:

Expenditures for general capital assets, infrastructure, and other related capital assets 29,521,093 Retirement of capital assets (8,245,122) Less current year depreciation (19,375,422) 1,900,549

Issuance of long-term debt provided current financial resources to governmental funds, but issuingdebt increased long-term liabilities in the Government-Wide Statement of Net Position. Also,governmental funds report the effect of issuance costs, premiums and discounts when debt is firstissued, whereas these amounts are deferred and amortized in the Statement of Activities:

Inception of capital lease (162,868)

Other long-term debt issued - California Energy Resources Conservation and Development Commission (172,837) (335,705)

Repayment of debt principal was an expenditure in governmental funds, but the repayment reducedlong-term liabilities in the Government-Wide Statement of Net Position:

Refunding certificates of participation 1,425,000 Certificates of participation 1,740,000 Lease revenue bonds 220,000 Lease revenue refunding bonds 54,660 Revenue bonds 430,000

Scotts Valley Writ of Mandate 725,073

McGaffigan Mill Road HOA 32,518 Capital leases 424,691 5,051,942

Some expenses reported in the Government-Wide Statement of Activities do not require the use ofcurrent financial resources. Therefore, they are not reported as expenditures in governmental funds:

Amortization of bond premium/discount 4,937 Amortization of bond issuance costs (115,545) Change in accrued interest payable 107,345 Change in compensated absences (224,400) (227,663)

OPEB obligation costs do not require current resources, so it is not reported on the governmentalfunds (7,203,737)

Internal service funds were used by management to charge the costs of certain activities to individualfunds. The net income of the internal service funds was reported with governmental activities. 1,348,749

Reverse of prior year transfer of internal service funds to business-type activities 295,803 Transfer of internal service funds to business-type activities (694,053)

(26,058,221)

Change in Extraordinary Item (Loss on capital assets transferred back to Santa Cruz CountyRedevelopment Successor Agency) (9,197,425)

Change in Net Position of Governmental Activities (35,255,646)$

See accompanying Notes to Basic Financial Statements.

Amounts reported for governmental activities in the Statement of Revenues, Expenditures and Changes inFund Balances were different because:

Change in Net Position of Governmental Activities before Extraordinary Item

34

Enterprise Funds - The Enterprise funds are used to account for County operations that are financedand operated in a manner similar to private business enterprises. The intent of the County in using thistype of fund is to determine that the costs (expenses, including depreciation) of providing these servicesto the general public on a continuing basis are financed or recovered primarily through user charges.

County Disposal Sites CSA 9C - The County Disposal Sites CSA 9C fund is used to account for the activities of the County's refuse utility, which provides refuse pick-up services, recycling services, and a sanitary landfill for residents of the County.

Internal Service Funds - The Internal Service Funds are used to account for the financing of goods or servicesprovided by one department or agency to other departments or agencies of the government and to othergovernment units, on a cost reimbursement basis.

PROPRIETARY FUNDFINANCIAL STATEMENTS

Proprietary Funds - Proprietary Funds consist of Enterprise Funds and Internal Service Funds.

35

36

County of Santa CruzStatement of Net PositionProprietary FundsJune 30, 2013

Governmental County Nonmajor ActivitiesDisposal Enterprise Internal

Sites CSA 9C Funds Total Service Funds

ASSETS

Current assets:Cash and investments 3,393,460$ 4,839,068$ 8,232,528$ 30,339,677$ Restricted cash 5,844,908 16,408 5,861,316 - Loans receivable - - - - Receivables 605,505 979 606,484 620,321 Due from other funds - - - 218,685 Deposits with others - - - 150,000 Inventory 128,852 - 128,852 567,073 Prepaid items - - - 51,725

Total current assets 9,972,725 4,856,455 14,829,180 31,947,481

Noncurrent assets:Loans receivable - 135,190 135,190 - Capital Assets:

Non-depreciable:Land 1,858,848 - 1,858,848 97,087 Construction in progress - 1,223,857 1,223,857 8,445

Depreciable:Buildings and structures 25,730,812 17,068,107 42,798,919 3,085,056 Equipment 10,133,653 186,605 10,320,258 26,167,698 Accumulated depreciation (23,240,133) (7,637,592) (30,877,725) (24,296,595)

Capital assets, net 14,483,180 10,840,977 25,324,157 5,061,691

Total noncurrent assets 14,483,180 10,976,167 25,459,347 5,061,691

Total assets 24,455,905 15,832,622 40,288,527 37,009,172

LIABILITIES

Current liabilities:Payables 427,747 50,992 478,739 1,670,794 Due to other funds - 160,551 160,551 58,134 Advances from other funds 997,761 - 997,761 - Current portion of long-term liabilities - 40,317 40,317 - Capital leases 1,086 - 1,086 10,012 Claims liability - - - 8,021,852 Compensated absences, due within one year - - - 2,880,521

Total current liabilities 1,426,594 251,860 1,678,454 12,641,313

Noncurrent liabilities:Long-term liabilities - 490,341 490,341 - Capital leases 1,865 - 1,865 5,530 Claims liability - - - 38,730,576 Closure and postclosure care costs liability 6,110,443 - 6,110,443 - Compensated absences, due in more than one year - - - 1,531,267

Total noncurrent liabilities 6,112,308 490,341 6,602,649 40,267,373

Total liabilities 7,538,902 742,201 8,281,103 52,908,686

NET POSITION

Net investment in capital assets 14,480,236 10,543,067 25,023,303 5,054,922 Restricted for:

Debt Service 919 43,427 44,346 - Unrestricted 2,435,848 4,503,927 6,939,775 (20,954,436)

Total net position 16,917,003$ 15,090,421$ 32,007,424 (15,899,514)$

Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 694,053 Net Position of Business-type Activities per Government-Wide Financial Statements 32,701,477$

See accompanying Notes to Basic Financial Statements.

Business-Type Activities - Enterprise Funds

37

County of Santa CruzStatement of Revenues, Expenses and Changes in Fund Net PositionProprietary FundsFor the year ended June 30, 2013

Governmental County Nonmajor ActivitiesDisposal Enterprise Internal

Sites CSA 9C Funds Total Service Funds

OPERATING REVENUES:

Charges for services 10,124,128$ 3,012,795$ 13,136,923$ 64,115,877$ Other revenues 608,671 - 608,671 880,799

Total operating revenues 10,732,799 3,012,795 13,745,594 64,996,676

OPERATING EXPENSES:

Salaries and employee benefits - - - 33,982,313 Services and supplies 9,900,889 2,217,015 12,117,904 13,425,050 Insurance and compensation claims - - - 15,807,995 Other - - - 49,829 Depreciation and amortization 1,357,690 453,347 1,811,037 1,273,794

Total operating expenses 11,258,579 2,670,362 13,928,941 64,538,981

Operating income (loss) (525,780) 342,433 (183,347) 457,695

NONOPERATING REVENUES (EXPENSES):

Intergovernmental 207,824 - 207,824 117,416 Interest and investment income (6,709) (17,531) (24,240) (10,125) Property taxes - 25,410 25,410 - Gain/(loss) on disposal of capital assets - - - 25,472

Total nonoperating revenues (expenses) 201,115 7,879 208,994 132,763

Income (loss) before contributions and transfers (324,665) 350,312 25,647 590,458

Capital Contributions - 60,071 60,071 - Transfers in - - - 758,291

Change in net position (324,665) 410,383 85,718 1,348,749

Net position - beginning 17,241,668 14,680,038 31,921,706 (17,248,263)

Net position - ending 16,917,003$ 15,090,421$ 32,007,424 (15,899,514)$

Change in Net Position of Business-type Activities 85,718 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 398,250 Change in Net Positon of Business-type Activities per Government-Wide Financial Statements 483,968$

See accompanying Notes to Basic Financial Statements.

Business-Type Activities - Enterprise Funds

38

39

County of Santa CruzStatement of Cash FlowsProprietary FundsFor the year ended June 30, 2013

Governmental County Nonmajor ActivitiesDisposal Enterprise Internal

Sites CSA 9C Funds Total Service Funds

CASH FLOWS FROM OPERATING ACTIVITIES:

Receipts from customers and users 10,757,162$ 3,216,587$ 13,973,749$ 31,817,987$ Receipts from interfund services provided - - - 32,802,454 Payments to suppliers for goods and services (3,951,634) (1,528,674) (5,480,308) (26,365,591) Payments to employees for services - - - (34,016,069) Payments to interfund services used (6,185,927) (833,988) (7,019,915) - Other receipts - - - 3,574 Other payments (2,343) - (2,343) (49,829)

Net cash provided by operating activities 617,258 853,925 1,471,183 4,192,526

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Transfers from other funds 115,611 9,094 124,705 1,158,924 Transfers to other funds (115,611) (333,536) (449,147) - Operating grants 207,824 - 207,824 117,416 Principal paid on other long-term liabilities - (11,614) (11,614) - Interest paid on other long-term liabilities - (6,353) (6,353) - Property taxes - 25,410 25,410 -

Net cash provided (used) by noncapital financing activities 207,824 (316,999) (109,175) 1,276,340

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:

Capital contributions - 60,071 60,071 - Purchase of capital assets (36,814) (1,345,103) (1,381,917) (1,613,847) Principal paid on long-term debt (980) (27,670) (28,650) (8,965) Interest paid on long-term debt (387) (8,870) (9,257) (1,630) Proceeds from sale of capital assets - - - 25,471 Loan proceeds - - - 58,133 Loan repayments - - - (77,196)

Net cash (used) by capital and related financing activities (38,181) (1,321,572) (1,359,753) (1,618,034)

CASH FLOWS FROM INVESTING ACTIVITIES:

Interest and dividends (6,315) (2,308) (8,623) (8,494)

Net cash (used) by investing activities (6,315) (2,308) (8,623) (8,494)

Net increase (decrease) in cash and cash equivalents 780,586 (786,954) (6,368) 3,842,338

CASH AND CASH EQUIVALENTS:

Beginning of year 8,457,782 5,642,430 14,100,212 26,497,339

End of year 9,238,368$ 4,855,476$ 14,093,844$ 30,339,677$

See accompanying Notes to Basic Financial Statements.

Business-Type Activities - Enterprise Funds

(Continued)

40

County of Santa CruzStatement of Cash Flows, ContinuedProprietary FundsFor the year ended June 30, 2013

Governmental County Nonmajor ActivitiesDisposal Enterprise Internal

Sites CSA 9C Funds Total Service Funds

RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY:

Operating activities:Operating income (loss) (525,780)$ 342,433$ (183,347)$ 457,695$ Adjustments to reconcile operating income (loss) to

net cash (used) by operating activities:Depreciation 1,357,690 453,347 1,811,037 1,273,794 Changes in assets and liabilities:

(Increase) decrease in:Receivables 24,363 203,792 228,155 (364,460) Inventory (36,436) - (36,436) 52,430 Prepaid items - - - (10,997)

Increase (decrease) in:Payables (217,349) (145,647) (362,996) 2,811,785 Due to other funds (251,685) - (251,685) - Closure and postclosure care liability 266,455 - 266,455 - Compensated absences - - - (27,721)

Net cash provided by operating activities 617,258$ 853,925$ 1,471,183$ 4,192,526$

See accompanying Notes to Basic Financial Statements.

Business-Type Activities - Enterprise Funds

41

42

Agency Funds - The Agency Funds are used to account for the receipt and disbursement of various taxes, deposits, deductions, and property collected by the County, acting in the capacity of an agent, for distribution to other governmental entities or other organizations.

Investment Trust Funds - The Investment Trust Funds are used to account for the investment pool that is managed by the County Treasurer for the purpose of increasing interest earnings through investment activities.

Private Purpose Trust Fund - The Private Purpose Trust Fund is used to report resources of other trust arrangements in which principal and income benefit individuals, private organizations, or other governments.

FIDUCIARY FUNDFINANCIAL STATEMENTS

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.

43

44

County of Santa CruzStatement of Net PositionFiduciary FundsJune 30, 2013

Investment Private Purpose

Agency Trust Trust

Funds Fund Fund Total

ASSETS

Cash and investments 36,547,947$ 358,813,874$ 20,539,610$ 415,901,431$

Restricted cash with fiscal agents - - 12,957,371 12,957,371

Receivables 15,184,677 - - 15,184,677

Capital assets, net - - 9,209,579 9,209,579

Total assets 51,732,624$ 358,813,874$ 42,706,560$ 453,253,058$

DEFERRED OUTFLOWS OF RESOURCES

Deferred bond issuance costs - - 3,610,855 3,610,855

Total deferred outflows of resources -$ -$ 3,610,855$ 3,610,855$

LIABILITIES

Accounts payable 6,688,087$ -$ 65,386$ 6,753,473$ Interest payable - - 4,636,371 4,636,371 Compensated absences - - 55,769 55,769

Due to other governmental units 24,163,897 - - 24,163,897

Agency funds held for others 20,880,640 - - 20,880,640

Long-term debt - - 241,230,018 241,230,018

Total liabilities 51,732,624$ - 245,987,544 297,720,168$

DEFERRED INFLOWS OF RESOURCESDeferred tax increment revenue - - 7,425,854 7,425,854

Total deferred inflows of resources -$ -$ 7,425,854$ 7,425,854$

NET POSITION

Net position held in trust -$ 358,813,874$ (207,095,983)$ 151,717,891$

See accompanying Notes to Basic Financial Statements.

45

46

County of Santa CruzStatement of Changes in Net PositionFiduciary FundsFor the Year Ended June 30, 2013

Investment Private Purpose

Trust Trust

Fund Fund Total

ADDITIONS

Contributions:

Contribution to investment pool 1,355,074,895$ -$ 1,355,074,895$

Contributions from other agencies - 315,373 315,373

Total contributions 1,355,074,895 315,373 1,355,390,268

Investment income 485,760 (40,026) 445,734 Tax increment received - 12,239,109 12,239,109 Other revenue - 256,003 256,003

Total Additions 1,355,560,655 12,770,459 1,368,331,114

DEDUCTIONS

Distributions from investment pool 1,245,140,583 - 1,245,140,583

Payments in accordance with trust agreements - 15,942,667 15,942,667

Contributions to other agencies - 1,159,675 1,159,675

Total Deductions 1,245,140,583 17,102,342 1,262,242,925

EXTRAORDINARY GAIN/(LOSS) - 16,376,150 16,376,150

Change in net position held in trust: 110,420,072 12,044,267 122,464,339

Net position - beginning of year 248,393,802 (216,894,656) 31,499,146

Prior period adjustment - (2,245,594) (2,245,594)

Net position - beginning of year, as restated 248,393,802 (219,140,250) 29,253,552

Net position held in trust - end of year 358,813,874$ (207,095,983)$ 151,717,891$

See accompanying Notes to Basic Financial Statements.

47

48

NOTES TO BASIC FINANCIAL STATEMENTS

49

–

County of Santa Cruz Index to the Notes to Basic Financial Statements For the year ended June 30, 2013

50

Page 1. Summary of Significant Accounting Policies .............................................................................................. 52 2. Cash and Investments .................................................................................................................................... 69 3. Restricted Cash and Investments .................................................................................................................. 74 4. Receivables ....................................................................................................................................................... 75 5. Interfund Transactions ................................................................................................................................... 75 6. Loans Receivable ............................................................................................................................................. 78 7. Capital Assets .................................................................................................................................................. 79 8. Short-Term Debt – Tax and Revenue Anticipation Notes ........................................................................ 81 9. Leases .............................................................................................................................................................. 82 10. Long-Term Debt .............................................................................................................................................. 85 11. Pledge of Future Revenues ............................................................................................................................ 93 12. Landfill Closure and Postclosure Costs ....................................................................................................... 94 13. Deficit Net Position and Fund Balance ........................................................................................................ 95 14. Defined Benefit Pension Plan ........................................................................................................................ 95 15. Post-Retirement Health Care Benefits .......................................................................................................... 98 16. Deferred Compensation Plan ...................................................................................................................... 100 17. Commitments and Contingencies .............................................................................................................. 101 18. Risk Management ......................................................................................................................................... 102 19. Pollution Remediation Obligations ............................................................................................................ 103 20. Prior Period Adjustments ............................................................................................................................ 104 21. Fund Balances ................................................................................................................................................ 105 22. Subsequent Events ........................................................................................................................................ 106 23. Extraordinary Item ....................................................................................................................................... 106

51

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

52

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Reporting Entity The County of Santa Cruz (County) was established by an act of the State Legislature of California in 1850 and is governed by a five-member elected Board of Supervisors (the Board). The Board is responsible for the legislative and executive control of the County. The County provides various services on a countywide basis including law and justice, education, detention, social, health, hospital, fire protection, road construction, road maintenance, transportation, park and recreation facilities, elections and records, communications, planning, zoning, and tax collection. As required by generally accepted accounting principles in the United States (GAAP), the accompanying basic financial statements present the County (the primary government) and its component units. Component units are legally separate entities for which the Board is considered to be financially accountable. Component units are entities that meet any one of the following tests:

1. The Board appoints the voting majority of the board and:

is able to impose its will on the component unit and/or

is in a relationship of financial benefit or burden with the component unit

2. The component unit is fiscally dependent upon the County.

3. The financial statements of the County would be misleading if data from the component unit were omitted.

The basic financial statements include both blended and discretely presented component units. The blended component units, although legally separate entities, are, in substance, part of the County’s operations and so data from these units are combined with data of the primary government. The discretely presented component unit is reported in a separate column in the Government-Wide Financial Statements since it does not have a shared governing body nor is it of exclusive or almost exclusive benefit to the primary government. Blended Component Units The following entities serve citizens of the County and provide for the construction and maintenance of County parks and recreation, police protection, mosquito abatement, fire protection, street lighting, roads, flood control, sewer, and refuse disposal districts. They are reported as if they were part of the primary government because they are governed by the Board. The Board establishes the work program and adopts the budget. Administrative services are provided by various departments of the County. Santa Cruz Flood Control and Water Conservation District – Zone 7

Santa Cruz Flood Control and Water Conservation District – Zone 7 (Zone 7) was established to provide funding for the local share of proposed Army Corps of Engineers flood control projects on the Pajaro River, Salsipuedes Creek, and Corralitos Creek. Zone 7 is governed by a seven-member board consisting of the Board and two additional members, one appointed by the City of Watsonville and another appointed by the Pajaro Valley Water Agency. Administrative services are provided by the County’s Department of Public Works. Completed financial statements may be obtained from the Department of Public Works at 701 Ocean Street, Room 410, Santa Cruz, CA 95060.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

53

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Reporting Entity, Continued

Blended Component Units, Continued

Santa Cruz County Public Financing Authority

The Santa Cruz County Public Financing Authority (Authority) facilitates financing for the County. The Authority is established and governed by the Board; it is not legally required to adopt a budget. Administrative services are provided by the County. Completed financial statements may be obtained from the County at 701 Ocean Street, Room 100, Santa Cruz, CA 95060. Discretely Presented Component Unit Santa Cruz County Sanitation District The Santa Cruz County Sanitation District (District) is included as a discretely presented component unit of the County because: 1) the Board appoints the District’s governing board, and 2) the District has an ongoing relationship with the County. The District is governed by a three-member board and managed by the County’s Department of Public Works under the direction of the District Board of Directors. The District, as a component unit, is presented separately from the primary government in the Government-Wide Financial Statements. Administrative services are provided by the County Department of Public Works and central support departments (i.e., personnel, purchasing, treasury, etc.). Complete financial statements may be obtained from the County, 701 Ocean Street, Room 410, Santa Cruz, CA 95060. The following funds are grouped by the Special Revenue Fund under which they are reported in the combining statements:

Library Fire Off Highway, Road and Transportation Public Financing Authority Fish and Game Park Dedication and State Park Bonds Health Services Santa Cruz County Flood Control and Water Conservation Zone 7

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

54

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

A. Reporting Entity, Continued

Districts Governed by the Board of Supervisors Public Protection

Aptos Seascape County Service Area (CSA) 3 County Fire Protection CSA 48 Police Protection CSA 38 Pajaro Storm Drain Maintenance District Pajaro Dunes Fire Protection CSA 4 Pajaro Dunes Station Maintenance Fund Pajaro Dunes Station Assessment District Reserve Santa Cruz County Flood Control and Water Conservation Zone 4 Santa Cruz County Flood Control and Water Conservation Zone 5 Santa Cruz County Flood Control and Water Conservation Zone 6 Santa Cruz County Flood Control and Water Conservation Zone 8 Santa Cruz County Flood Control and Water Conservation Zone – General

Health and Sanitation

Pasatiempo Rolling Woods Sewer District Recreation and Culture

Streetscape CSA 9E Parks and Recreation District CSA 11 CSA 11 Zone E CSA 11L Lompico Community

Public Ways and Facilities

County Highway Lighting CSA 9 Redwood Drive CSA 33 County Highway Residential Lighting CSA 9 Zone A Larsen Road CSA 34 School Crossing Guard CSA 9 Zone B County Estates CSA 35 County Road Maintenance CSA 9D Zone 1 Forest Glen CSA 36 County Road Maintenance CSA 9D Zone 2 Roberts Road CSA 37 CSA 9D Zone 3 Reed Street CSA 39 Hutchinson Road CSA 13 Ralston Way CSA 40 Oakflat Road CSA 13A Loma Prieta CSA 41 Huckleberry Woods Road CSA 15 Sunlit Lane CSA 42 Robak Drive CSA 16 Bonita-Encino Drive CSA 43 Empire Acres CSA 17 Sunbeam Woods CSA 44 Whitehouse Canyon CSA 18 Pinecrest CSA 46 Westdale Drive CSA 21 Braemoor CSA 47 Kelly Hill CSA 22 Vineyard CSA 50 Old Ranch Road CSA 23 Hopkins Gulch CSA 51 Pineridge CSA 24 Upper Pleasant Valley CSA 52 Viewpoint Road CSA 25 Mosquito Abatement CSA 53 Hidden Valley CSA 26 Riverdale Park Road CSA 55 Lomond Terrace CSA 28 Felton Grove CSA 56 Glenwood Acres CSA 30 View Circle CSA 32 Soquel Village Parking Improvement

Mansfield Street Assessment Dist. Ridge Drive CSA 58 McGaffigan Mill Road CSA 59

Underground Utilities #4-41st Ave.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

55

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

A. Reporting Entity, Continued

Geologic Hazard Abatement Districts (GHAD) Corralitos GHAD Mid-County GHAD Heartwood GHAD

The following Board of Supervisors Governed District funds are reported as Enterprise Funds (Sewer and Refuse Disposal Districts):

Boulder Creek CSA 7 Place De Mer CSA 2 Rolling Woods CSA 10 Sand Dollar Beach CSA 5 Septic Tank Maintenance CSA 12 Trestle Beach CSA 20 Freedom County Sanitation District Summit West CSA 54 Davenport County Sanitation District Graham Hill CSA 57 County Disposal Sites CSA 9C

B. Basis of Accounting and Measurement Focus

The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The more significant of the County’s accounting policies are described below. The accounting policies of the County conform to Generally Accepted Accounting Principles (GAAP) in the United States for local governmental units. The accounts of the County are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for by providing a separate set of self-balancing accounts that comprise its assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balance, revenues and expenditures or expenses, as appropriate. Governmental resources are allocated to and accounted for in individual funds based upon the purpose of which they are to be spent and means by which spending activities are controlled. New Accounting Pronouncements The following GASB Statements have been implemented in the current financial statements: Government Accounting Standards Board Statement No. 60 GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, addresses how to account for and report service concession arrangements (SCAs), a type of public-private or public-public partnership that state and local governments are increasingly entering into. Government Accounting Standards Board Statement No. 61 GASB Statement No. 61, The Financial Reporting Entity: Omnibus, an amendment of GASB Statement Nos. 14 and 34, modifies existing requirements for the assessment of potential component units in determining what should be included in the financial reporting entity and display and disclosure requirements.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued B. Basis of Accounting and Measurement Focus Government Accounting Standards Board Statement No. 62 GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, improves financial reporting by contributing to the GASB’s efforts to codify all sources of generally accepted accounting principles for state and local governments so that they derive from a single source. Government Accounting Standards Board Statement No. 63 GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position provides financial guidance for deferred outflows of resources and deferred inflows of resources. Government Accounting Standards Board Statement No. 65 GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, provides guidance to determine which balances, previously reported as assets and liabilities, should be reported as deferred outflows of resources or deferred inflows of resources. Application of the statement is effective for the County’s fiscal year ending June 30, 2014. The County implemented this statement early. Upcoming Accounting Pronouncements The following GASB Statements will become effective for fiscal years subsequent to June 30, 2013. The County is currently analyzing its accounting practices to determine the potential impact on the financial statements for the GASB Statements. Government Accounting Standards Board Statement No. 66 The objective of GASB Statement No. 66, Technical Corrections, is to resolve conflicting guidance between GASB Statement No. 54 and 10 and between GASB Statement Nos. 62, 13 and 48. Application of the statement is effective for the County’s fiscal year ending June 30, 2014. Government Accounting Standards Board Statement No. 67 The objective of GASB Statement No. 67, Financial Reporting for Pension Plans, is to improve financial reporting by state and local governmental pension plans. Application of the statement is effective for the County’s fiscal year ending June 30, 2014. Government Accounting Standards Board Statement No. 68 The primary objective of GASB Statement No. 68, Accounting and Financial Reporting for Pensions, is to improve accounting and financial reporting by state and local governments for pensions. Application of the statement is effective for the County’s fiscal year ending June 30, 2015.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

B. Basis of Accounting and Measurement Focus, Continued Government Accounting Standards Board Statement No. 69 GASB Statement No. 69, Government Combinations and Disposals of Government Operations is intended to improve accounting and financial reporting for U.S. state and local governments’ combinations and disposals of government operations. The requirements of this Statement are effective for the County’s fiscal year ending June 30, 2015. Government Accounting Standards Board Statement No. 70 The objective of GASB issued Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. is to improve accounting and financial reporting by state and local governments that extend and receive nonexchange financial guarantees. The requirements of this Statement are effective for the County’s fiscal year ending June 30, 2014. Government–Wide Financial Statements The County’s Government-Wide Financial Statements include a Statement of Net Position and a Statement of Activities and Changes in Net Position. These statements present summaries of governmental and business-type activities for the County accompanied by a total column, as well as its discretely presented component unit. Fiduciary activities of the County are not included in these statements. These basic financial statements are presented on an “economic resources” measurement focus and the accrual basis of accounting. Accordingly, all of the County’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 Position. The Statement of Activities 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. Certain types of transactions are reported as program revenues for the County in three categories:

Fees, fines, and charges for services Operating grants and contributions Capital grants and contributions

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

B. Basis of Accounting and Measurement Focus, Continued Certain eliminations have been made as prescribed by GASB Statement No. 34 in regards to interfund activities. All internal balances in the Statement of Net Position have been eliminated except those representing balances between the governmental activities and the business-type activities, which are presented as internal balances and eliminated in the total primary government column, if any. In the Statement of Activities, internal service fund transactions have been eliminated; however, those transactions between governmental and business-type activities have not been eliminated. The following interfund activities have been eliminated:

Due to and from other funds Advances to and from other funds Transfers in and out

The County prepares a County-wide cost allocation plan in accordance with Federal OMB Circular A-87. Using this directive, all indirect support costs are allocated to County funds and departments using a step-down method so that the true cost of operations can be included in determining the rates to be charged to users. The County apply, for governmental and business-type activities, all applicable GASB pronouncements as well as the Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins of the American Institute of Certified Public Accountants’ (AICPA) Committee on Accounting Procedures, issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Governmental Fund Financial Statements Governmental fund financial statements include a Balance Sheet and a Statement of Revenues, Expenditures and Changes in Fund Balances for all major governmental funds and non-major funds aggregated. The County has presented all major funds that met the applicable criteria.

The County reports the following major governmental funds:

General Fund – The County’s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in other specialized funds. Housing Fund – accounts for the County’s housing developments and loans. Capital Projects Funds – used to account for the construction or acquisition of capital assets, such as land, construction-in-progress, buildings and improvements, improvements other than buildings, and infrastructure.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

B. Basis of Accounting and Measurement Focus, Continued 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 and current liabilities are included on the balance sheets. The Statement of Revenues, Expenditures and Changes in Fund Balances present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in fund balance. 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. Revenues are recognized when “measurable” and “available”. Measurable means knowing or being able to reasonably estimate the amount. Available means having been earned and collectible within the current period or within 60 days after year end for property tax revenues, and 180 days after year end with limited exceptions extending the availability period for certain grant revenues. Expenditures (including capital outlay) are recorded when the related liability is incurred, except for debt service expenditures (principal and interest), as well as expenditures related to compensated absences, which are reported when due. Property taxes, sales taxes, franchise taxes, licenses, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Unearned revenue arises when potential revenues do not meet both the “measurable” and “available” criteria for recognition in the current period. Unearned revenues also arise when the government receives resources before it has a legal claim to them, as when grant monies are received prior to incurring qualifying expenditures. In subsequent periods when both revenue recognition criteria are met or when the government has a legal claim to the resources, the unearned revenue is removed from the balance sheet and revenue is recognized. Reconciliations of the Fund Financial Statements to the Government-Wide Financial Statements are provided to explain the differences created by the integrated approach of GASB Statement No. 34. Proprietary Fund Financial Statements Proprietary fund financial statements include a Statement of Net Position, a Statement of Revenues, Expenses and Changes in Net Position, and a Statement of Cash Flows for all proprietary funds. The County reports the following major proprietary funds:

County Disposal Sites Fund – Accounts for the operation and expansion of the County’s landfills and implementation of state mandated environmental health programs. User fees, service area charges and revenues from the waste recovery and recycling projects finance the fund.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

B. Basis of Accounting and Measurement Focus, Continued

Proprietary Fund Financial Statements, Continued

Internal Service Funds – Accounts for central duplicating, information services, public works, fleet management, and self-insurance services provided to other departments, or to other governments, on a cost reimbursement basis. Internal service balances and activities have been combined with the governmental activities in the Government-Wide Financial Statements. . The other proprietary funds provide sewer collection, treatment, and disposal services as well as septic tanks and water treatment within their area of service, along with unincorporated parts of the County.

Proprietary funds are accounted for using the “economic resources” measurement focus and the accrual basis of accounting. Accordingly, all assets, deferred outflows of resources, liabilities and deferred inflows of resources (whether current or noncurrent) are included on the Statement of Net Position. The Statement of Revenues, Expenses and Changes in Net Position presents increases (revenues) and decreases (expenses) in total 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.

Operating revenues in the proprietary funds are those revenues that are generated from the primary operations of the fund. All other revenues are reported as non-operating revenues. Operating expenses are those expenses that are essential to the primary operations of the fund. All other expenses are reported as non-operating expenses.

Fiduciary Fund Financial Statements

Fiduciary fund financial statements include a Statement of Fiduciary Net Position for all Agency Funds the Investment Trust Fund, and the Private Purpose Trust Fund and a Statement of Changes in Fiduciary Net Position for the Investment Trust Fund and the Private Purpose Trust Fund. The County reports the following fiduciary funds:

Agency Funds – Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Agency funds are accounted for using accrual basis accounting. These funds, including State and County revenue funds, tax collection funds, deposit funds, and clearing and revolving funds, account for assets held by the County in an agency capacity for individuals or other government units.

Investment Trust Fund – Accounts for the external portion of the County Treasurer’s investment pool, which commingles resources of legally separate local governments with the County in an investment portfolio for the benefit of all participants.

Private Purpose Trust Fund – Report resources of all other trust arrangements in which principal and income benefit individuals, private organizations, or other governments. Private purpose trust funds are reported using the economic resources measurement focus and the accrual basis of accounting. This fund is used to report the assets, deferred outflows of resources, liabilities, deferred inflows of resources and activities of the County of Santa Cruz Redevelopment Agency Successor Agency.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

C. Cash, Cash Equivalents and Investments

The County’s cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturity of three months or less from the date of acquisition. Cash and cash equivalents are combined with investments and displayed as Cash and Investments.

Highly liquid market investments with maturities of one year or less at time of purchase are stated at amortized cost. All other investments are stated at fair value. Market value is used as fair value for those securities for which market quotations are readily available. The County participates in an investment pool managed by the State of California titled Local Agency Investment Fund (LAIF) which has invested a portion of the pool funds in structured notes and asset-backed securities. LAIF’s investments are subject to credit risk with the full faith and credit of the State of California collateralizing these investments. In addition, these structured notes and asset-backed securities are subject to market risk as well as to changes in interest rates. In accordance with GASB Statement No. 40, Deposit and Investment Risk Disclosures (an amendment of GASB No. 3), certain disclosure requirements, if applicable, are provided for deposit and investment risk in the following areas:

Interest Rate Risk Credit Risk

Overall Custodial Credit Risk Concentration of Credit Risk

Foreign Currency Risk

All cash and investments of proprietary funds are held in the County’s investment pool. Therefore, all cash and investments in the proprietary funds are considered cash and cash equivalents for purposes of the statement of cash flows as these cash pools have the general characteristic of a demand deposit account.

D. Interfund Transactions

Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as “due to/from other funds” (i.e., current portion of interfund loans) or “advances from/to other funds” (i.e., noncurrent portion of interfund loans). Any residual balances outstanding between the governmental activities and business-type activities are reported in the Governmental-Wide Financial Statements as “internal balances.”

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued E. Inventories and Prepaid Items Inventories within the various fund types consist of materials and supplies which are valued at cost on a first-in, first-out basis. Cost is determined by the weighted average cost method. A reservation of fund balance has been reported in the governmental funds to show that inventories do not constitute “available spendable resources.” Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government-wide and fund financial statements. A reservation of fund balance has been reported in the governmental funds to show that prepaid amounts do not constitute “available spendable resources.”

F. Capital Assets

Government-Wide Financial Statements

Capital assets, which include land, construction-in-progress, buildings and improvements, improvements other than buildings, machinery and equipment, autos and trucks, equipment under capitalized leases, and infrastructure assets (e.g., roads, bridges, traffic signals, and similar items), are reported in the applicable governmental or business-type activities in the Government-Wide Financial Statements. County policy has set the capitalization threshold for reporting capital assets at $5,000 (for equipment and vehicles) and $25,000 (for infrastructure, buildings and structures). Capital assets are valued at historical cost or estimated historical cost if actual historical cost was not available. Donated assets are valued at their estimated fair market value on the date donated. Depreciation is recorded on a straight-line basis over estimated useful lives of the assets as follows: Infrastructure 4-65 years Buildings and structures 10-50 years Equipment and vehicles 3-15 years For infrastructure systems, the County elected to use the “Basic Approach” as defined by GASB Statement No. 34 for infrastructure reporting. The County defines infrastructure as the basic physical assets that allow the County to function. The assets include streets, bridges, sidewalks, drainage systems, lighting systems, etc. Each major infrastructure system can be divided into subsystems. For example, the street system can be subdivided into pavement, curb and gutters, sidewalks, medians, streetlights, landscaping and land. These subsystems were not delineated in the basic financial statements. The appropriate operating department maintains information regarding the subsystems. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest on construction-related debt incurred during the period of construction is capitalized as a cost of the constructed assets.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued F. Capital Assets, Continued Government-Wide Financial Statements, Continued Maintenance and repairs are charged to operations when incurred. Betterments and major improvements which significantly increase values, change capacities, or extend useful lives are capitalized. Upon sale or retirement of capital assets, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in the results of operations.

The Governmental Fund Financial Statements do not present General Government capital assets. Consequently, capital assets are shown as a reconciling item in the Reconciliation of the Governmental Funds Balance Sheet to the Government-Wide Statement of Net Position.

The capital assets of the enterprise funds in the Proprietary Funds Financial Statements are the same as those shown in the business-type activities of the Government-Wide Financial Statements. Internal Service Funds’ capital assets are combined with governmental activities.

G. Land Held for Resale

Land held for resale is carried at cost. An amount equal to the carrying value of land is reported in the non-spendable fund balance because such assets are not available to finance the County’s current operations.

H. Deferred Outflows and Inflows of Resources

The County recognizes deferred outflows of resources and deferred inflows of resources in accordance with GASB Statement No. 63 and GASB Statement No. 65. Deferred outflows and inflows were items previously reported as assets and liabilities and are defined as “a consumption of net assets by the government that is applicable to a future reporting period, and an acquisition of net assets by the government that is applicable to a future reporting period, respectively.”

I. Long-Term Debt

Government-Wide Financial Statements

Long-term debt and other financed obligations are reported as liabilities in Government-Wide Financial Statements and the proprietary fund financial statements.

Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable premium or discount. Issuance costs are reported as deferred outflows of resources.

Fund Financial Statements The Governmental Fund Financial Statements do not present long-term debt. As such, long-term debt is shown as a reconciling item in the Reconciliation of the Governmental Funds Balance Sheet to the Government-Wide Statement of Net Position.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued J. Compensated Absences

Government-Wide Financial Statements

For governmental and business-type activities, compensated absences are recorded as incurred and the related expenses and liabilities are reported.

Fund Financial Statements In governmental funds, compensated absences are recorded as expenditures in the year paid, as it is the County’s policy to liquidate any unpaid compensated absences at June 30 from future resources, rather than currently available financial resources. In proprietary funds, compensated absences are expensed to the various funds in the period they are earned, and such fund’s share of the unpaid liability is recorded as a long-term liability of the fund. Vested or accumulated compensated absences in proprietary funds are recorded as an expense and liability of those funds as the benefits accrue to employees. The compensated absences liability will generally be liquidated through individual funds.

K. Claims Payable

The County records a liability to reflect an actuarial estimate of ultimate uninsured losses for both general liability claims (including property damage claims) and workers’ compensation claims. The estimated liability for workers’ compensation claims and general liability claims includes “incurred but not reported” (IBNR) claims. There is no fixed payment schedule to pay these liabilities.

L. Unearned Revenue

Government-Wide Financial Statements - Unearned revenue is a liability reported when revenue has been received prior to revenue recognition. Unearned revenue includes monies received in advance from the fiscal agents on the amounts deposited in the reserve funds for various bonds and prepaid charges for services.

Fund Financial Statements - Deferred revenue represents money received during the current or previous years that has not been earned or is not considered available to finance expenditures of the current period.

M. Net Position and Fund Balances

Government-Wide Financial Statements - In the Government-Wide Financial Statements, net position is classified in the following:

Net Invested in Capital Assets – This amount consists of capital assets net of accumulated depreciation and reduced by outstanding debt that is attributed to the acquisition, construction, or improvement of the assets.

Restricted Net Position – This amount is restricted by external creditors, grantors, contributors, or laws or regulations of other governments.

Unrestricted Net Position – This amount is all net position that does not meet the definition of “net investment in capital assets” or “restricted net position.”

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

M. Net Position and Fund Balances, Continued Fund Financial Statements - In the fund financial statements, governmental funds report fund balance as nonspendable, restricted, committed, assigned or unassigned based primarily on the extent to which the County is bound to honor constraints on how specific amounts can be spent.

Nonspendable fund balance – amounts that cannot be spent because they are either (a) not spendable in form or (b) legally or contractually required to be maintained intact. Restricted fund balance – amounts with constraints placed on their use that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. Committed fund balance – amounts that can only be used for specific purposes determined by formal action of the County’s highest level of decision-making authority (the Board of Supervisors) and that remain binding unless removed in the same manner. The underlying action that imposed the limitation needs to occur no later than the close of the reporting period. The establishment of a committed fund balance requires the passage of a resolution by a simple majority vote before June 30 of the applicable fiscal year. Board action is required to change or remove the commitment. The Board resolution shall identify the title of the commitment, describe the specific purpose for the commitment, and the actual amount of the commitment or the process or formula necessary to calculate the actual amount. Funding for Committed fund balance shall be approved annually by the Board of Supervisors as part of the budget approval process. Assigned fund balance – amounts that are constrained by the County’s intent to be used for specific purposes. The intent can be established at either the highest level of decision-making, or by a body or an official designated for that purpose.

The Board of Supervisors has the authority to assign funds for a specific purpose with a simple majority vote. The same action is required to change or remove an assignment. The County Administrative Officer also has the authority to assign funds for specific purposes, and to change or remove the assignment. The establishment, change or removal of an assignment by the County Administrative Officer must be reported to the Board of Supervisors at the next Board meeting. The Board may change or remove an assignment established by the County Administrative Officer with a simple majority vote. An appropriation of existing fund balance to eliminate a projected budgetary deficit in the subsequent year’s budget may be classified as assigned fund balance.

Unassigned fund balance – the residual classification for the County’s General Fund that includes amounts not contained in the other classifications. In other funds, the unassigned classification is used only if expenditures incurred for specific purposes exceed the amounts restricted, committed, or assigned to those purposes.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

M. Net Position and Fund Balances, Continued

The County considers restricted fund balances to be spent first when both restricted and unrestricted resources are available for use. Similarly, when an expenditure is incurred for purposes for which amounts in any of the unrestricted classifications of fund balance could be used, the County considers Committed amounts to be reduced first, followed by Assigned amounts and then Unassigned amounts.

Fund Balance Policy - The County believes that sound financial management principles require that sufficient funds be retained by the County to provide a stable financial base at all times. To retain this stable financial base, the County needs to maintain unrestricted fund balance in its county funds sufficient to fund cash flows of the County and to provide financial reserves for unanticipated expenditures and/or revenue shortfalls of an emergency nature. Committed, assigned and unassigned fund balances are considered unrestricted. The purpose of the County’s fund balance policy is to maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls or unpredicted one-time expenditures. The County has adopted a policy to achieve and maintain committed and assigned fund balance categories of no less than 7% of the upcoming budget year’s estimated revenues. Additional detailed information, along with the complete Fund Balance Policy can be obtained from the County Auditor-Controller’s office located at 701 Ocean Street, Room 100, Santa Cruz, CA 95060. Reserve for Working Capital The County has established a separate committed fund balance account known as the Reserve for Working Capital. Funding for the Reserve for Working Capital is established by a resolution of the Board of Supervisors, and will be approved annually by the Board during the budget approval process. The purpose of the County’s Reserve for Working Capital is to assist the County in maintaining a minimal fund balance. Any use of funds requires a four-fifths vote of the Board of Supervisors appropriating the funds, and a resolution by the Board of Supervisors declaring a Fiscal Emergency. As of June 30, 2013, the County’s Reserve for Working Capital fund balance was $6,000,000 and is included in the general fund. Reserve for Economic Uncertainty The County has established a separate committed fund balance account known as the Reserve for Economic Uncertainty. Funding for the Reserve for Economic Uncertainty is established by a resolution of the Board of Supervisors, and will be approved annually by the Board during the budget approval process.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

M. Net Position and Fund Balances, Continued

The County’s Reserve for Economic Uncertainty is to be used only during recessions or periods of economic distress as measured by periods of time when the local unemployment rate exceeds 8% and or the rate of inflation exceeds the growth in property taxes. Any use of funds requires a four-fifths vote of the Board of Supervisors appropriating the funds.

As of June 30, 2013, the County’s Reserve for Economic Uncertainty fund balance was $4,857,787 and is included in the general fund.

Reserve for Natural Disasters

The County has established a separate committed fund balance account known as the Reserve for Natural Disasters. Funding for the Reserve for Natural Disasters is established by a resolution of the Board of Supervisors, and will be approved annually by the Board during the budget approval process.

The purpose of the County’s Reserve for Natural Disasters is to fund the extraordinary operating costs, legal costs, and cash flow problems associated with delays in State and Federal reimbursements for any natural disaster declared by the County’s Director of Emergency Services and subsequently ratified by the Board of Supervisors, and the State of California or the federal government. Any use of funds requires a four-fifths vote of the Board of Supervisors appropriating the funds.

As of June 30, 2013, the County’s Reserve for Natural Disasters fund balance was $1,251,089 and is included in the general fund.

N. Property Tax Levy, Collection and Maximum Rates

The State of California Constitution, Article XIIIA provides that the combined maximum property tax rate on any given property may not exceed 1% of its assessed value unless an additional amount for general obligation debt has been approved by the voters. Assessed value is calculated at 100% of market value as defined by Article XIIIA and may be increased by no more than 2% per year unless the property is sold or transferred. These general property tax rates do not apply to taxes levied to pay the interest and redemption charges on any indebtedness incurred prior to June 6, 1978, or subsequently approved by the voters. Supplemental property taxes are levied on a pro rata basis when changes in assessed valuation occur due to sales transactions or the completion of construction. The State Legislature has determined the method of distribution among the counties, cities, school districts, and other districts of receipts from the 1% property tax levy.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

N. Property Tax Levy, Collection and Maximum Rates, Continued

The County assesses properties, bills for, and collects taxes as follows:

Secured Unsecured

Levy Dates July 1 July 1

Lien Dates January 1 January 1

Due Dates November 1 and February 1 August 1

Delinquent After December 10 and April 10 August 31

Tax Rate per $100

Full Cash Value $1 $1

Late Penalty 10% 10%

Delinquent Interest 1-1.5% per month 1-1.5% per month

These taxes are secured by liens on the property being taxed. The Board annually sets the rates of the County and district taxes and levies County and district taxes as provided by law. The term “secured” refers to taxes on land and buildings, while “unsecured” refers to taxes on personal property other than land and buildings. During fiscal year 1993-1994, the Board adopted the Alternative Method of Tax Apportionment (the Teeter Plan). Under this method, the County allocates to all taxing jurisdictions under the County, 100% of the secured property taxes billed, even if it has not yet been collected. In return, the County retains the subsequent delinquent payments and associated penalties and interest. The penalties and interest are accumulated in an Agency Fund. The County may transfer to the General Fund any excess over the reserve required by the Board and the State.

Delinquent property taxes receivable are shown on the statement of fiduciary net position of the property tax trust funds reported in the Agency Funds. Under California law, real property is not subject to sale for reasons of delinquent taxes until the end of the fifth year of delinquency, and the taxpayer may arrange to repay the delinquent taxes over a five year period and any time within the five year period, although the property is subject to a cash redemption up to the time of the sale. Secured property taxes are recorded as revenue when apportioned in the fiscal year of the levy. The County apportions secured property tax revenue in accordance with the alternate method of distribution prescribed by Section 4705 of the State of California Revenue and Taxation Code. This alternate method provides for crediting each applicable fund with its total secured taxes upon completion of the secured tax roll. Under the alternate apportionment method, specified amounts of penalties and interest collected on delinquent secured taxes are held in trust in the secured tax losses reserve fund to fund specified tax redemption shortfalls.

O. Use of Estimates The preparation of the basic financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the disclosure of contingent assets and liabilities at the date of the basic financial statements and the related reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

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2. CASH AND INVESTMENTS

The County sponsors an investment pool that is managed by the County Treasurer for the purpose of increasing interest earnings through investment activities. Cash and investments for most County activities are included in the investment pool. Interest earned on the investment pool is distributed to the participating funds monthly using a formula based on the average daily cash balance of each fund. Interest earned through June 30, 2013, was distributed on the second business day during July 2013, and is shown as part of receivables on the financial statements.

The following is a summary of cash and investments at June 30, 2013:

Component Unit

Governmental Business-Type Santa Cruz County

Activities Activities Total Sanitation District

Cash and Investments 211,487,624$ 8,232,528$ 219,720,152$ 22,722,985$

Restricted Cash and Investments 6,582,547 5,861,316 12,443,863 1,622,865

Total Cash and Investments 218,070,171$ 14,093,844$ 232,164,015$ 24,345,850$

Agency Investment Private Purpose County

Funds Trust Fund Trust Fund Total

Cash and Investments 36,547,947$ 358,813,874$ 20,539,610$ 658,344,568$

Restricted Cash and Investments - - 12,957,371 27,024,099$

Total Cash and Investments 36,547,947$ 358,813,874$ 33,496,981$ 685,368,667$

Government-Wide Statement of Net Assets

Primary Governments

Fiduciary Funds

Cash and Restricted CashInvestments and Investments Total

Primary Government and Fiduciary Funds:Cash on hand or imprest cash 3,192,381$ -$ 3,192,381$ Cash deposits in treasury pool 7,995,810 - 7,995,810 Investments in treasury pool 624,433,392 - 624,433,392 Restricted investments in other pools - 19,539,918 19,539,918 Restricted cash deposits in treasury pool:

Davenport County Sanitation District - 16,408 16,408 County Disposal Sites CSA 9C - 5,844,908 5,844,908

Total 635,621,583 25,401,234 661,022,817

Component Unit:Investments in treasury pool 22,722,985 652,928 23,375,913 Restricted investments in other banks - 969,937 969,937

Total 22,722,985 1,622,865 24,345,850

Total cash and investments 658,344,568$ 27,024,099$ 685,368,667$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

70

2. CASH AND INVESTMENTS, Continued

At June 30, 2013, the County’s cash on hand, deposits, and investments consisted of:

Other Banks/Treasury Investment

Pool Pools Total

Primary Government and Fiduciary Funds:

Cash on hand or imprest cash 48,480$ 3,143,901$ 3,192,381$

Deposits 7,995,810 - 7,995,810

Investments 630,294,708 19,539,918 649,834,626

Total Primary Government 638,338,998 22,683,819 661,022,817

Component Unit:

Investments 23,375,913 969,937 24,345,850

Total Component Unit 23,375,913 969,937 24,345,850

Total reporting entity 661,714,911$ 23,653,756$ 685,368,667$

The carrying amounts of the County’s cash deposits were $7,995,810 at June 30, 2013. Bank balances at June 30, 2013, were $22,566,732 which were fully insured or collateralized with securities held by the pledging financial institutions in the County’s name as discussed below.

The California Government Code requires California banks and savings and loan associations to secure the County’s cash deposits by pledging securities as collateral. This Code states that collateral pledged in this manner shall have the effect of perfecting a security interest in such collateral superior to those of a general creditor. Thus, collateral for cash deposits is considered to be held in the County's name. The market value of pledged securities must equal at least 110% of the County’s cash deposits. California law also allows institutions to secure County deposits by pledging first trust deed mortgage notes having a value of 150% of the County’s total cash deposits. The County may waive collateral requirements for cash deposits, which are fully insured up to $250,000 by the Federal Deposit Insurance Corporation. The County, however, has not waived the collateralization requirements.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

71

2. CASH AND INVESTMENTS, Continued

A. Investments

The table below identifies the investment types that are authorized for the County by the California Government Code or the County’s investment policy, where more restrictive. The table also identifies certain provisions of the County’s investment policy that address interest rate risk, credit risk, and concentration risk.

Maximum Maximum

Maximum Percentage of Investment inAuthorized Investment Types Maturity Portfolio One Issuer

Local agency bonds 5 years 10% NoneU.S. Treasury obligations 5 years 100% NoneU.S. Government Agency obligations 5 years 100% 25%State of California obligations 5 years 10% NoneBanker's acceptances 180 days 40% 10%Commercial paper 270 days 25% 10%Negotiable certificates of deposit 5 years 30% NoneNon-negotiable certificates of deposit 180 days 10% 10%Repurchase agreements 1 year 100% 10%Medium-term notes 5 years 30% 10%Mutual funds/money market mutual funds N/A 20% 10%Local Agency Investment Fund (LAIF) N/A $50 million NoneJoint Powers Authority investment funds None 25% None

In accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, investments were stated at fair value. The fair value of investments generally changes with fluctuations of interest rates. When interest rates fall, the fair value of investments increases, and conversely when interest rates rise, the fair value of investments could fall below the original cost of the investments. A rise in interest rates in June 2013 resulted in a material decrease of $2,418,121 in the fair value of pool investments at June 30, 2013, which has been recorded in the financial statements of all funds with equity in pooled cash and investments in the County Treasury. Investments of debt proceeds held by the bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the County’s investment policy.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

72

2. CASH AND INVESTMENTS, Continued

B. Interest Rate Risk

The County manages its exposure to declines in fair values by limiting the weighted average maturity of its investment portfolio to five years or less in accordance with its investment policy.

At June 30, 2013, the County had the following investment maturities:

Investment TypeFair

Value Less than 1 1 to 2 2 to 3 3 to 4 More than 4

U.S. Treasury Securities 281,327,441$ 133,085,390$ 107,529,160$ 10,963,187$ 15,089,100$ 14,660,604$ Federal Agency Securities 214,619,259 41,118,440 7,995,120 94,857,409 41,365,290 29,283,000 Corporate Bonds and Notes 19,993,700 - 10,003,200 9,990,500 - - Medium-Term Notes - Other 16,000,000 16,000,000 - - - - Money Market Mutual Funds 25,582,547 25,582,547 - - - - Local Agency Investment Fund (LAIF) 50,024,364 50,024,364 - - - - Certificates of Deposit 50,017,158 50,017,158 - - - - Investment Agreements 969,937 - - - - 969,937

Total investments 658,534,406$ 315,827,899$ 125,527,480$ 115,811,096$ 56,454,390$ 44,913,541$

Investment Maturities (In Years)

C. Concentration of Credit Risk

At June 30, 2013, in accordance with State law and the County’s Investment Policy, the County did not have 5% or more of its net investment in commercial paper, corporate bonds or medium term notes of a single organization, nor did it have 10% or more of its net investment in any one money market mutual fund. Investments in obligations of the U.S. government, U.S. government agencies, or government-sponsored enterprises are exempt from these limitations.

The following schedule is a summary of the credit quality distribution and concentration of credit risk by investment type as a percentage of the County Investment Pool’s fair value at June 30, 2013.

Standard % ofInvestments Type & Poor's Moody's Portfolio

U.S. Treasury Securities AA+ Aaa 42.72%Federal Agency Securities AA+ Aaa 32.59%Corporate Bonds and Notes AA+ /AA- Aa3 3.04%Medium-Term Notes - Other Unrated Unrated 2.43%Money Market Mutual Funds Unrated Unrated 3.88%Local Agency Investment Fund (LAIF) Unrated Unrated 7.59%Certificates of Deposit A1+ Aa3 / Aa2 7.60%Investment Agreements AAA Aa3 0.15%

Total 100.00%

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

73

2. CASH AND INVESTMENTS, Continued

D. Custodial Credit Risk

For investments and deposits held with fiscal agents, custodial credit risk is the risk that, in the event of the failure of the counterparty, the County will not be able to recover the value of its investments or deposits that are in the possession of an outside party. At year end, the County’s investment pool and cash with fiscal agents had no securities exposed to custodial credit risk. E. Local Agency Investment Fund The County is a participant in LAIF which is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The County’s investments with LAIF at June 30, 2013, included a portion of the pool funds invested in Structured Notes and Asset-Backed Securities:

Structured Notes: debt securities (other than asset-backed securities) whose cash flow characteristics (coupon rate, redemption amount, or stated maturity) depend upon one or more indices and/or have embedded forwards or options. Asset-Backed Securities: generally mortgage-backed securities that entitle their purchasers to receive a share of the cash flows from a pool of assets such as principal and interest repayments from a pool of mortgages (for example, Collateralized Mortgage Obligations) or credit card receivables.

As of June 30, 2013, the County had $50,024,364 invested in LAIF, which had invested 0.33% of the pool investment funds in Structured Notes and Asset-Backed Securities as compared to 0.51% in the previous year. LAIF provided a fair value factor of 1.000273207 to calculate the fair value of the investments in LAIF. However, an adjustment was not made to reflect the fair market value of LAIF, as the fair market value adjustment was considered immaterial. LAIF is overseen by the Local Agency Investment Advisory Board, which consists of five members, in accordance with State statute.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

74

3. RESTRICTED CASH AND INVESTMENTS

Cash and investments at June 30, 2013, that are restricted by legal or contractual requirements are comprised of the following:

Governmental Activities

Non-major Governmental Funds:Used for debt service 6,582,547$

Business-Type Activities

County Disposal Site CSA 9C:Used for landfill deposits 5,844,908

Davenport County Sanitation District:Used for debt service and bond reserves 16,408

Subtotal 5,861,316

Component Unit

Santa Cruz County Sanitation District:Used for debt service 1,712,185

Fiduciary Funds

Redevelopment Agency Successor AgencyUsed for debt service 12,957,371

Total restricted cash and investments 27,113,419$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

75

4. RECEIVABLES

Receivables at year-end for the County’s major individual funds and non-major and internal service funds in the aggregate, including the applicable allowances for uncollectible accounts, are as follows:

Internal Total

General Housing Capital Projects Non-major Service Governmental

Fund Fund Fund Funds Funds Activities

Governmental Activities:

Accounts 26,685,833$ 185,208$ 15,000$ 2,032,915$ 620,321$ 29,539,277$

Taxes 1,314,358 - - - - 1,314,358

Gross receivables 28,000,191 185,208 15,000 2,032,915 620,321 30,853,635

Less: allowance for uncollectibles (1,828,234) - - - - (1,828,234)

Net receivables 26,171,957$ 185,208$ 15,000$ 2,032,915$ 620,321$ 29,025,401$

County Total

Disposal Non-major Business-Type

Sites CSA Funds Activities

Business-Type Activities:

Accounts receivable 605,505$ 979$ 606,484$

5. INTERFUND TRANSACTIONS

A. Government-Wide Financial Statements

Long-Term Internal Balances At June 30, 2013, the County had the following long-term internal balances:

Internal Balances Receivables

Governmental

Activities

Internal Balances Payable

Business-Type Activities 464,259$

The “Internal balances” on the Statement of Net Position (Government-wide) represents the net total amount of due to/from and advances to/from between Governmental funds and Enterprise funds and between Internal Service funds and Enterprise funds. These due to/from amounts include any that are the result of allocating operating profits and losses of the Internal Service funds to the Enterprise funds (Internal Service fund allocation). The due to/from amounts that are the results of operating profits/losses of the Internal Service funds are cumulative. Each current year amount is netted with the amounts from prior year.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

76

5. INTERFUND TRANSACTIONS, Continued

B. Fund Financial and Proprietary Fund Statements

Due to/from

The County had the following due to/from other funds as of June 30, 2013:

InternalGeneral Capital Projects Service

Fund Fund Funds Total

Capital Projects Fund -$ 15,000$ -$ 15,000$

Non major Governmental Funds 18,384 - - 18,384

Non major Enterprise Funds - - 160,551 160,551

- - 58,134 58,134

Total 18,384$ 15,000$ 218,685$ 252,069$

Du

e to

Oth

er F

un

ds

Internal Service Funds

Due from Other Funds

These balances resulted from short-term loans used to cover operating cash deficits at year-end. These amounts will be repaid in the following fiscal year. Long-Term Advances The County had the following long-term advances as of June 30, 2013:

Advances to Other Funds

Public Financing

Authority

Fund

County Disposal Site CSA 9C Fund 997,761$ Ad

van

ces

from

Oth

er

Fun

ds

This balance consists of a long-term advance between the Public Financing Authority Fund and the County Disposal Site CSA 9C Fund of $997,761.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

77

5. INTERFUND TRANSACTIONS, Continued B. Fund Financial Statements, Continued Transfers in/out The County had the following transfers for the year ending June 30, 2013:

Transfers In

Non-MajorGeneral Housing Capital Projects Governmental Internal Service

Fund Fund Fund Funds Funds Total

General Fund -$ 232,624$ 124,286$ 6,233,614$ 186,731$ 6,777,255$

Housing Fund - 65,312 - - - 65,312

Capital Projects Fund 2 5,532,802 404 - - 5,533,208

2,073,087 - 3,170,797 187,646 571,560 6,003,090

Total 2,073,089$ 5,830,738$ 3,295,487$ 6,421,260$ 758,291$ 18,378,865$

Non-Major Governmental Funds

Tra

nsf

ers

Ou

t

Transfers are contributions to other funds to finance various programs in accordance with budgetary authorizations.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

78

6. LOANS RECEIVABLE A. Governmental Wide Financial Statements The County had the following loans receivable as of June 30, 2013:

The St Stephens Predevelopment loan is an unsecured loan, which will be converted to loan secured by the deed of trust to the property upon commencement of development. The SERAF Loan is secured by a promissory note. All remaining loans are housing loans secured by deeds of trust on the properties. B. Business-Type Financial Statements The County had the following loans receivable as of June 30, 2013:

Nonmajor business-type fund:

Septic tank maintenance CSA 12 135,190$

Total business-type loans receivable 135,190$

Housing Fund

Aptos Cottages (Miller) 8,682,802$ First Time Homebuyer Program 5,999,639 Golden Torch 1,296,240 Hand loans 2,405,967 Housing for Independent People 40,940 Marmo's 1,642,323 Mercy - McIntosh (Coach Loan) 348,665 Mercy - Rehab 95,237 McIntosh Coach Purchases 97,367 McIntosh Coach Purchase #12 98,000 McGregor 891,748 Mid-Peninsula the Farm, Inc 1,786,465 Minto 10,191,743 Mobile Home Change Out Program 5,344,980 Mobile Home Rehab Program 338,146 Mobile Home Rehab Program (Bonds) 23,069 Pacific Family-SCH 2,733,234 Pacific Family Coach Acquisitions 143,990 Pleasant Acres Permanent Financing 3,512,452 Pleasant Acres Coach Acquisitions 124,875 Property Tax Postponement Loans 27,022 San Andreas 700,000 SERAF Loan 2,245,594 Sorrento Oaks 10,000 South County Housing Corp 5,721,263 St Stephens Predevelopment 421,832 Vista Verde Family Housing 1,165,000

Total Housing Fund 56,088,593$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

79

7. CAPITAL ASSETS

A. Government-Wide Financial Statements

The following is a summary of capital assets for governmental activities: Balance Balance

July 1, 2012 Additions Retirements Reclassifications June 30, 2013

Governmental activities:

Capital assets, not being depreciated:Land 59,319,954$ -$ (9,197,476)$ -$ 50,122,478$ Construction-in-progress 36,060,149 11,285,128 - (2,437,486) 44,907,791

Total capital assets, not being depreciated 95,380,103 11,285,128 (9,197,476) (2,437,486) 95,030,269

Capital assets, being depreciated:Infrastructure 567,500,776 15,388,524 (8,000,000) - 574,889,300 Buildings 127,648,142 2,153,755 (238,794) 632,590 130,195,693 Machinery and equipment 42,349,698 2,203,353 (761,739) 1,804,896 45,596,208

Total capital assets, being depreciated 737,498,616 19,745,632 (9,000,533) 2,437,486 750,681,201

Less accumulated depreciation for:Infrastructure (222,723,500) (14,014,004) - - (236,737,504) Buildings (68,205,641) (4,274,736) - - (72,480,377) Machinery and equipment (38,516,157) (2,395,032) 759,914 - (40,151,275)

Total accumulated depreciation (329,445,298) (20,683,772) 759,914 - (349,369,156)

Total capital assets, being depreciated, net 408,053,318 (938,140) (8,240,619) 2,437,486 401,312,045

Governmental activities

capital assets, net 503,433,421$ 10,346,988$ (17,438,095)$ -$ 496,342,314$

For an explanation of retirements of Land, see note 24, Extraordinary Item.

Depreciation expense was charged to governmental functions as follows:

Total

Governmental Activities:

General government 1,375,364$

Public protection 2,201,249

Public ways and facilities 13,577,455

Health and sanitation 818,958

Public assistance 479,849

Education 218,098

Recreation and culture 704,450

Subtotal 19,375,423

Capital assets held by the County's internal

services funds are charged to the various

functions based on their usage of the assets 1,308,349

Total 20,683,772$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

80

7. CAPITAL ASSETS, Continued

A. Government-Wide Financial Statements, Continued The following is a summary of capital assets for business-type activities:

Balance Balance

July 1, 2012 Additions Retirements Reclassifications June 30, 2013

Business-Type activities:

Capital assets, not being depreciated:

Land 1,858,849$ -$ -$ -$ 1,858,849$

Construction-in-progress 136,993 1,086,863 - - 1,223,856

Total capital assets,

not being depreciated 1,995,842 1,086,863 - - 3,082,705

Capital assets, being depreciated:

Buildings 42,586,352 212,567 - - 42,798,919

Machinery and equipment 10,252,677 68,274 - - 10,320,951

Total capital assets,

being depreciated 52,839,029 280,841 - - 53,119,870

Less accumulated depreciation for:

Buildings (19,564,069) (1,526,971) - - (21,091,040)

Machinery and equipment (9,503,312) (284,066) - - (9,787,378)

Total accumulated depreciation (29,067,381) (1,811,037) - - (30,878,418)

Total capital assets,

being depreciated, net 23,771,648 (1,530,196) - - 22,241,452

Business-Type activitiescapital assets, net 25,767,490$ (443,333)$ -$ -$ 25,324,157$

Depreciation expense was charged to business-type functions as follows:

Total

Business-Type Activities:

County Disposal Sites CSA 9C 1,357,690$

Boulder Creek CSA 7 73,385

Rolling Woods CSA 10 8,644

Septic Tank Maintenance CSA 12 903

Freedom County Sanitation District 163,209

Davenport Sanitation District 165,390

Place de Mer CSA 2 5,541

Sand Dollar Beach CSA 5 34,918

Trestle Beach CSA 20 1,357

Total 1,811,037$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

81

7. CAPITAL ASSETS, Continued

B. Component Unit – Santa Cruz County Sanitation District (SCCSD)

Balance Balance

July 1, 2012 Additions Deletions Reclassification June 30, 2013

Nondepreciable assets:

Construction in progress 26,868,373$ 5,617,457$ -$ (21,706,163)$ 10,779,667$

Total nondepreciable assets 26,868,373 5,617,457 - (21,706,163) 10,779,667

Depreciable assets:

Pumping stations 39,484,678 1,646,451 - - 41,131,129

Transmission systems 73,015,189 789,263 - 21,706,163 95,510,615

Sewage treatment capacity rights 35,038,480 110,029 - - 35,148,509

Mobile equipment 3,690,964 (103,668) - 3,587,296

Other equipment 2,520,682 112,414 - 2,633,096

Total depreciable assets 153,749,993 2,658,157 (103,668) 21,706,163 178,010,645

Accumulated depreciation:

Pumping stations (19,235,515) (878,352) - (20,113,867)

Transmission systems (31,202,337) (1,643,849) - (32,846,186)

Sewage treatment capacity rights (11,263,847) (875,126) - (12,138,973)

Mobile equipment (2,533,314) (214,413) 103,668 - (2,644,059)

Other equipment (1,683,571) (153,395) - (1,836,966)

Total accumulated depreciation (65,918,584) (3,765,135) 103,668 - (69,580,051)

Depreciable assets, net 87,831,409 (1,106,978) - 21,706,163 108,430,594

Total capital assets, net 114,699,782$ 4,510,479$ -$ -$ 119,210,261$

Depreciation expense for the District at June 30, 2013, is $3,661,467.

8. SHORT-TERM DEBT – TAX AND REVENUE ANTICIPATION NOTES

The County issues tax and revenue anticipation notes annually to meet current expenses, capital expenditures, and other obligations or indebtedness until sufficient taxes or revenues are collected to fund the County’s operations.

Tax and revenue anticipation notes payable debt activity for the year ended June 30, 2013, was as follows:

Fiscal Interest Beginning Accrued Ending

Year Rate Balance Additions Deletions Interest Balance

2012 2.0% -$ 48,854,000$ (15,195,833)$ -$ 33,658,167$

2013 2.0% 33,658,167$ 50,000,000$ (33,658,167)$ 997,222$ 50,997,222$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

82

9. LEASES

A. Operating Leases

The County has entered into certain operating leases as lessee. Total expenditures for these operating leases for the fiscal year ended June 30, 2013, were $2,343,550. As of June 30, 2013, the County has future minimum operating lease payments with a remaining term in excess of one year as follows:

Governmental

Year Ending June 30, Activities

2014 1,586,242$ 2015 1,618,3142016 1,526,3522017 1,306,9292018 1,298,911

2019-2023 4,428,1042024-2028 254,0662029-2033 287,4532034-2038 325,2262039-2043 367,9642044-2048 416,3172049-2053 471,0252054-2058 532,9212059-2060 232,287

14,652,111$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

83

9. LEASES, Continued

B. Capital Leases

The County has entered into certain capital lease agreements under which the related equipment, computers, vehicles, and furniture become the property of the County. The leased assets are presented as components of capital assets and the lease liabilities are presented as components of long-term debt.

Present Value ofStated Remaining

Interest Payments as ofRate June 30, 2013

Government-Wide Activities

Governmental Activities:Energy efficient infrastructure 3.62% 4,901,059$ Human Services Department-server 4.45% 8,159 Treasurer's check remittance-processor 4.24% 51,469 Copy machines 12.54% 114,359

Subtotal Governmental Activities: 5,075,046

Internal Service Fund Activities:Central duplicating-copy machine 6.70% 9,109 Public Works copy machines 6,433

Subtotal Internal Service Fund Activities: 15,542

Total government-wide capital lease obligations 5,090,588$

Business-type Activities

Enterprise Fund ActivitiesCounty Disposal Sites CSA 9C Copy Machines 12.54% 2,951

Total business-type capital lease obligations 2,951$

Governmental Business-TypeActivities Activities

Equipment, computers, furniture, and vehicles 500,843$ 1,551,878$ Structures and improvements 6,041,400 -

Total assets under capital lease 6,542,243 1,551,878

Less: accumulated depreciation (1,438,329) (1,438,438)

Net 5,103,914$ 113,440$

Equipment, computers, vehicles, furniture, and accumulated amortization under capitallease are as follows:

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

84

9. LEASES, Continued

B. Capital Leases, Continued

As of June 30, 2013, capital lease annual amortization is as follows:

Governmental Business-TypeYear Ending June 30, Activities Activities

2014 542,662 1,364$ 2015 524,509 1,364 2016 490,577 682 2017 452,336 - 2018 449,250

2019-2023 2,246,251 - 2024-2027 1,797,001 -

Total Requirements 6,502,586 3,410

Less: Interest (1,411,998) (459)

Present Value of Remaining P 5,090,588$ 2,951$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

85

10. LONG-TERM DEBT

The following is a summary of long-term liabilities transactions for the year ended June 30, 2013:

Balance Debt Debt Retired o r Balance Due in Due in Mo re

J uly 1, 2012 Is s ued Trans ferred Out J une 30, 2013 One Year Than One Year

Go v e rnm e nta l A c t iv ity D e bt:

P FA-1996 Refunding Certifica tes o f P artic ipa tio n 17,130,000$ -$ (765,000)$ 16,365,000$ 815,000$ 15,550,000$

P FA-2002 Refunding Certifica tes o f P artic ipa tio n 2,080,000 - (60,000) 2,020,000 60,000 1,960,000

2002 Unamo rtized bo nd premium 86,255 - (4,208) 82,047 4,208 77,839

S ubto ta l 2,166,255 - (64,208) 2,102,047 64,208 2,037,839

P FA-2005 Refunding Certifica tes o f P artic ipa tio n 6,700,000 - (600,000) 6,100,000 635,000 5,465,000

2005 Unamo rtized bo nd dis co unt (36,877) - 4,339 (32,538) (4,339) (28,199)

S ubto ta l 6,663,123 - (595,661) 6,067,462 630,661 5,436,801

P FA-2001B Leas e Revenue Bo nds 6,670,000 - (220,000) 6,450,000 230,000 6,220,000

P FA-1995B Revenue Bo nds 405,000 - (405,000) - - -

P FA-1999 Lo ca l Agency Revenue Bo nds 250,000 - (25,000) 225,000 30,000 195,000

P FA-2004 Certifica tes o f P artic ipa tio n 16,265,000 - (1,060,000) 15,205,000 1,110,000 14,095,000

2004 Unamo rtized bo nd premium 16,426 - (1,369) 15,057 1,369 13,688

S ubto ta l 16,281,426 - (1,061,369) 15,220,057 1,111,369 14,108,688

2006 Certifica tes o f P artic ipa tio n 7,410,000 - (355,000) 7,055,000 370,000 6,685,000

2006 Unamo rtized bo nd dis co unt (51,203) - 2,090 (49,113) (2,090) (47,023)

S ubto ta l 7,358,797 - (352,910) 7,005,887 367,910 6,637,977

P FA-2008 Certifica tes o f P artic ipa tio n 3,705,000 - (325,000) 3,380,000 340,000 3,040,000

2008 Unamo rtized bo nd premium 78,388 - (6,816) 71,572 6,816 64,756

S ubto ta l 3,783,388 - (331,816) 3,451,572 346,816 3,104,756

P FA-2011 Certifica tes o f P artic ipa tio n 5,605,000 - - 5,605,000 145,000 5,460,000

2011 Unamo rtized bo nd dis co unt (4,504) - 188 (4,316) (188) (4,128)

S ubto ta l 5,600,496 - 188 5,600,684 144,812 5,455,872

P FA-2012 Leas e Revenue Refunding Bo nd, Series A 1,884,565 - (54,660) 1,829,905 61,789 1,768,116

2012 Unamo rtized bo nd dis co unt (18,465) - 839 (17,626) (839) (16,787)

S ubto ta l 1,866,100 - (53,821) 1,812,279 60,950 1,751,329

Ca lifo rnia Energy Res o urces Co ns erva tio n

and Develo pment Co mmis s io n 172,837 172,837 15,416 157,421

McGaffigan Mill Ro ad HOA 33,175 - (32,518) 657 657 -

City o f Sco tts Valley Writ o f Mandate 2,175,220 - (725,073) 1,450,147 725,073 725,074

S ubto ta l bo nds a nd lo a ns pa ya ble 70,382,980 172,837 (4,632,188) 65,923,629 4,542,872 61,380,757

OP EB Liability 88,212,910 7,203,737 - 95,416,647 - 95,416,647

Co mpens a ted abs ences 21,437,389 15,462,385 (15,237,984) 21,661,790 15,397,491 6,264,299

Capita l leas es 5,336,869 5,173,194 (5,435,017) 5,075,046 343,795 4,731,251

To ta l g o v e rnm e nta l a c t iv ity 185,370,148$ 28,012,153$ (25,305,189)$ 188,077,112$ 20,284,158$ 167,792,954$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

86

10. LONG-TERM DEBT, Continued

Balance Debt Debt Balance Due in Due in Mo re

J uly 1, 2012 Is s ued Retired J une 30, 2013 One Year Than One Year

Go v e rnm e nta l A c t iv ity D e bt , C o nt inue d:

Inte rna l S e rv ic e F unds

Co mpens a ted abs ences 4,441,851$ 2,878,440$ (2,908,504)$ 4,411,787$ 2,880,521$ 1,531,266$

Es timated c la ims 44,287,352 15,843,711 (13,378,635) 46,752,428 8,021,852 38,730,576

Capita l leas es 28,729 - (13,187) 15,542 10,012 5,530

To ta l Inte rna l S e rv ic e F unds 48,757,932$ 18,722,151$ (16,300,326)$ 51,179,757$ 10,912,385$ 40,267,372$

To ta l Go v e rnm e nt-Wide A c t iv it ie s

Co mpens a ted abs ences 25,879,240$ 18,340,825$ (18,146,488)$ 26,073,577$ 18,278,012$ 7,795,565$

Es timated c la ims 44,287,352 15,843,711 (13,378,635) 46,752,428 8,021,852 38,730,576

Other lo ng-te rm liabilitie s :

Bo nds and lo ans payable 70,382,980 172,837 (4,632,188) 65,923,629 4,542,872 61,380,757

Capita l leas es 5,365,598 5,173,194 (5,448,204) 5,090,588 353,807 4,736,781

S ubto ta l o the r lo ng -te rm lia bilit ie s 75,748,578 5,346,031 (10,080,392) 71,014,217 4,896,679 66,117,538

OP EB liability 88,212,910 7,203,737 - 95,416,647 - 95,416,647

To ta l Go v e rnm e nt-Wide A c t iv it ie s 234,128,080$ 46,734,304$ (41,605,515)$ 239,256,869$ 31,196,543$ 208,060,326$

B us ine s s -Type A c t iv it ie s

Enterpris e Funds

Lo ans payable

Septic Tank Maintenance CSA 12 244,362$ -$ (11,614)$ 232,748$ 11,916$ 220,832$

Davenpo rt Sanita tio n 325,580 - (27,670) 297,910 28,401 269,509

To ta l Lo a ns P a ya ble 569,942 - (39,284) 530,658 40,317 490,341

P o s tc lo s ure Liability

Ente rpris e Fund - Co unty Dis po s al S ites CSA 9 5,843,987 266,456 - 6,110,443 - 6,110,443

Capital Leas es - 3,927 (976) 2,951 1,086 1,865

To ta l B us ine s s -Type A c t iv it ie s 6,413,929$ 270,383$ (40,260)$ 6,644,052$ 41,403$ 6,602,649$

C o m po ne nt Unit - S a nta C ruz C o unty

S a nita t io n D is tric t

2005 Was tewate r Revenue Refunding Bo nds 5,475,000$ -$ (765,000)$ 4,710,000$ 800,000$ 3,910,000$

2005 Unamo rtized bo nd premium 25,605 - (2,235) 23,370 2,235 21,135

2004 Limited Obliga tio n STET

Impro vement Bo nds 540,000 - (65,000) 475,000 70,000 405,000

2009 S ta te Wate r Res o urce Co ntro l Bo ard Lo an 7,631,772 203,503 (307,617) 7,527,658 314,359 7,213,299

Lo ans payable 10,070,213 - (1,322,206) 8,748,007 1,359,228 7,388,779

To ta l C o m po ne nt Unit 23,742,590$ 203,503$ (2,462,058)$ 21,484,035$ 2,545,822$ 18,938,213$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

87

10. LONG-TERM DEBT, Continued

Descriptions of the long-term liabilities at June 30, 2013, are as follows:

Annual Principal Original Issue Outstanding at

Type of Indebtedness (Purpose) Maturity Interest Rates Installments Amount June 30, 2013

Governmental Activities:

Public Financing Authority

Refunding Certificates of Participation

1996 Issue (financed construction of the County Emeline Avenue Health Services

building and an infirmary in the County Medium Security Detenion Facility)

Collateral: HSA Building/Jail Infirmary

Serial certificates 9/1/97-9/1/26 4.00-5.65% $190,000-$1,065,000 20,955,000$ 12,465,000$

Term bonds 3/1/21-9/1/23 5.60% $1,230,000-$1,370,000 3,900,000 3,900,000

Total 1996 Issue 16,365,000

2002 Issue (refinanced road improvements, a detention facility, a library, equipment,

purchase of parkland and construction of a transfer station and financed an animal

services authority facility)

Collateral: Polo Grounds Park/Ben Lomond Transfer Station

Serial certificates 8/1/03-8/1/22 4.00-5.15% $50,000-$730,000 4,380,000$ 760,000

Term bonds 8/1/23-8/1/32 5.25% $100,000-$155,000 1,260,000 1,260,000

Unamortized bond premium 126,230 82,047

Total 2002 Issue 2,102,047

2005 Issue (defeased 1995A Lease Revenue Refunding Bonds and financed construction of

and improvements to the Santa Cruz County Water Street and Roundtree Lane detention facility)

Collateral: Water Street Detention Facility/Rountree Lanr Detention Facility

Serial certificates 8/1/05-8/1/20 2.75-4.25% $500,000-$910,000 10,580,000$ 6,100,000

Unamortized bond discount (67,249) (32,538)

Total 2005 Issue 6,067,462

Total Refunding Certificates of Participation 24,485,000

Net Premiums/(Discounts) 49,509 Total including Premiums (Discounts) 24,534,509$

Lease Revenue Bonds

2001 Series B Lease Revenue Bonds (financed equipment for the Santa Cruz County

Department of Public Works, County Counsel, Agricultural Commissioner,

and improvements to the Health Services building)

Collateral: Water Street Detention Facility/Rountree Lane Detention Facility

Serial bonds 8/1/02-8/1/26 2.10-4.625% $200,000-$760,000 9,675,000$ 4,225,000$

Term bonds 2/1/27-8/1/31 4.75% $405,000-$485,000 2,225,000 2,225,000

Total 2001 Issue 6,450,000$

2012 Series A (refinanced construction and equipment costs for the Santa Cruz County

Consolidated Emergency Communication Center)

Collateral: Santa Cruz County Regional 911 Center

Serial bonds 6/15/13-6/15/30 2.00-4.75% $115,000-$225,000 1,402,135$ 1,347,475$

Term bonds 6/15/31-6/15/34 5.00% 482,430 482,430

Unamortized bond discount 18,465 (17,626) Total 2012 Issue 1,812,279

Total Lease Revenue Refunding Bonds 8,279,905

Net Premiums/(Discounts) (17,626) Total including Premiums (Discounts) 8,262,279$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

88

10. LONG-TERM DEBT, Continued Annual Principal Original Issue Outstanding at

Type of Indebtedness (Purpose) Maturity Interest Rates Installments Amount June 30, 2013Governmental Activities, Continued:Public Financing Authority, Continued

Revenue Bonds

1995 Series B Issue (financed improvements to existing drainage facilities of the Santa Cruz County Flood Control Zone No. 7)

Serial bonds 8/1/97-8/1/10 4.20-6.35% $175,000-$360,000 3,565,000$ -$ Term bonds 2/1/11-8/1/12 6.50% $380,000-$405,000 785,000 -

Total 1995 Issue -$ Local Agency Revenue Bonds

1999 Issue (defeased 1992 Place de Mer and 1993 Sand Dollar Beach Districtsand financed construction of the Sunset Beach Water Main Extension Project)

Local obligation bonds 9/2/00-9/2/19 4.00-5.50% $20,000-$85,000 895,000$ 225,000$

Certificates of Participation2004 Series Issue (financed payments due for settlement of lawsuits arising from

damage to property caused by flooding of the Pajaro River)Collateral: County Administrative Offices/County Court Building

Serial certificates 6/1/05-6/1/24 2.25-5.00% $525,000-$1,720,000 23,000,000$ 15,205,000$ Unamortized bond premium 27,378 15,057

Total 2004 Issue 15,220,057 2006 Series Issue (financed improvements to Watsonville Courthouse

and Buena Vista Landfill)Collateral: Water Street Detention Facility/Rountree Lane Detention Facility

Serial certificates 8/1/07-8/1/28 3.50-4.50% $180,000-$410,000 6,225,000$ 4,280,000 Term certificates 8/1/29-8/1/32 4.50% 1,265,000 1,265,000 Term certificates 8/1/33-8/1/36 4.625% 1,510,000 1,510,000 Unamortized bond discount (62,698) (49,113)

Total 2006 Issue 7,005,887 2008 Series Issue (finance purchase of computer software systems

for various County departments)

Collateral: Water Street Detention Facility/Rountree Lane Detention FacilitySerial certificates 8/1/09-8/1/23 3.00-4.30% $215,000-$405,000 4,625,000$ 3,380,000 Unamortized bond premium 102,244 71,572

Total 2008 Issue 3,451,572 2011 Series Issue (financed improvements to Veteran's Building and Main Jail roof)Collateral: HSD Application Center

Serial certificates 8/1/12-8/1/21 2.00-4.00% $145,000-$340,000 1,495,000$ 1,495,000 Term certificates 8/1/22-8/1/26 4.25% 1,080,000 1,080,000 Term certificates 8/1/27-8/1/31 4.625% 1,340,000 1,340,000 Term certificates 8/1/32-8/1/36 5.000% 1,690,000 1,690,000 Unamortized bond discount (4,692) (4,316)

Total 2011 Issue 5,600,684 Total Certificates of Participation 31,245,000

Net Premiums/(Discounts) 33,200

Total including Premiums (Discounts) 31,278,200$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

89

10. LONG-TERM DEBT, Continued

Annual Principal Original Issue Outstanding atType of Indebtedness (Purpose) Maturity Interest Rates Installments Amount June 30, 2013

Governmental Activities, Continued:

Capital leases

Energy efficient infrastructure 2008-2027 3.62% $135,989-$220,635 5,989,594$ 4,901,059$

Human Services Department - server 2008-2013 4.45% $8,159-$23,765 110,563 8,159

Treasurer's - check remittance processor 2011-2016 4.24% $4,033-$18,806 89,348 51,469

Copy Machines 2011-2016 12.54% $2,953-$48,812 183,614 120,792

Central duplicating - copy machine 2011-2015 6.70% $1,464-$7,645 28,058 9,109

Total leases 5,090,588

Total Governmental Activities 69,390,576$

Business-Type Activities:

Enterprise Fund - Davenport Sanitation District

California State Department of Water Resources (upgrade existing water facilities)

1/1/88-1/1/22 2.5% $4,550-$10,575 250,000$ 86,117$

California Technology, Trade & Commerce Agency (fund sanitation system improvements)

2/28/95-7/1/25 2.75% $3,550-$4,817 310,691 150,608

California State Water Resources Control Board - revolving loan (fund sewer reconstruction project)

5/31/01-5/31/20 2.60% $5,940-$9,429 151,547 61,185

Enterprise Fund - Septic Tank Maintenance CSA 12

California State Water Resources Control Board

4/23/2010-4/23/2029 2.60% $10,753-$17,512 277,467 232,748

Total Loans 530,658

Landfill post closure 6,110,443

Capital Leases 2012-2016 12.50% $682-$1364 4,377 2,951

Total Business-Type Activities 6,644,052$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

90

10. LONG-TERM DEBT, Continued

Annual Outstanding at

Type of Indebtedness (Purpose) Maturity Interest Rates Principal Payments Original Issue June 30, 2013

Component Unit - Santa Cruz County Sanitation District (SCCSD)

2005 Wastewater Revenue Refunding Bonds (financed the SCCSD's share of the

improvements to the City of Santa Cruz sewer treatment facility)

Serial bonds 9/1/05-9/1/19 2.80-5.0% $140,000-$940,000 9,335,000$ 4,710,000$

Unamortized bond premium 41,252 23,370

4,733,370

2004 Issue Limited Obligation Refunding Improvement Bonds - Freedom Boulevard Sewer

Assessment District (financed construction of sewer facility)

Serial bonds 9/2/05-9/2/18 1.85-5.25% $55,000-$90,000 950,000$ 475,000

Loans payable - City of Santa Cruz 2000-2019 2.80% $928,354-$1,564,248 24,330,576 8,748,007

(construct treatment plant expansion)

2009 State Water Resources Control Board 2013-2032 2.50% $630,445-$959,296 8,116,120 7,527,658

Loan

Total Component Unit 21,484,035$

A. Governmental Activities

At June 30, 2013, annual debt service requirements of governmental activities to maturity are as follows:

Public Financing Authority

Year Ending June 30, Principal Interest Principal Interest Principal Interest

2014 1,510,000 1,222,225 291,789 365,484 1,965,000 1,373,060

2015 1,585,000 1,150,665 301,789 354,613 2,035,000 1,295,858

2016 1,670,000 1,073,843 314,165 343,131 2,110,000 1,214,018

2017 1,760,000 991,944 326,542 330,687 2,185,000 1,125,073

2018 1,860,000 904,705 336,542 317,325 2,040,000 1,036,678

2019-2023 8,900,000 3,086,707 1,903,356 1,352,379 10,735,000 3,812,133

2024-2028 6,490,000 954,100 2,294,160 886,750 4,330,000 1,735,044

2029-2033 710,000 96,600 2,380,855 296,151 2,950,000 1,048,920

2033-2037 - - 130,707 6,535 2,895,000 286,231

Total 24,485,000$ 9,480,789$ 8,279,905$ 4,253,055$ 31,245,000$ 12,927,015$

Certificates of Participation

Lease Revenue

Refunding Bonds

Refunding

Certificates of Participation

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

91

10. LONG-TERM DEBT, Continued

A. Governmental Activities, Continued Public Financing Authority, Continued

Year Ending June 30, Principal Interest Principal Interest Principal Interest

2014 230,000 290,966 61,789 74,518 30,000 11,520

2015 240,000 281,331 61,789 73,282 30,000 9,893

2016 250,000 271,161 64,165 71,970 30,000 8,250

2017 260,000 260,321 66,542 70,366 30,000 6,600

2018 270,000 248,791 66,542 68,534 35,000 4,813

2019-2023 1,535,000 1,043,258 368,356 309,120 70,000 3,850

2024-2028 1,845,000 655,950 449,160 230,800 - -

2029-2033 1,820,000 177,650 560,855 118,501 - -

2034 - - 130,707 6,535 - -

Total 6,450,000$ 3,229,428$ 1,829,905$ 1,023,626$ 225,000$ 44,926$

Revenue BondsLease Revenue Bonds Lease Revenue Refunding Bonds

Local Agency

The Refunding Certificates of Participation, Lease Revenue Refunding Bonds, Certificates of Participation, and Lease Revenue Bonds retirements and related interest payments are paid from revenues from the General Fund. The Local Agency Revenue Bonds retirements and related interest payments are paid from revenues generated from property owners’ assessments.

McGaffigan Mill Road Association

Year Ending June 30, Principal Interest

2014 656 4

Total 656$ 4$

In September 2005, the County entered into a loan agreement with McGaffigan Mill Road Association in the amount of $232,101. The loan bears an annual interest rate of 7.48% due in monthly installments and matures in July 1, 2014. For the current year, principal and interest paid on the loan was $33,900. The outstanding balance of the loan is $660. During the year the County entered into a loan agreement with the Energy Resources Conservation and Development Commission in the amount of $172,837.44. The loan bears annual interest rate of 3% due semi-annually and matures on December 22, 2017. For the current year, principal and interest paid on the loan was $0.00. The outstanding balance of the loan is $172,837.44.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

92

10. LONG-TERM DEBT, Continued

B. Business-Type Activities At June 30, 2013, annual debt service requirements for loans payable of business-type activities to maturity are as follows:

Year Ending June 30, Principal Interest

2014 40,316 11,530

2015 41,376 10,590

2016 42,463 9,625

2017 43,579 8,634

2018 44,724 7,618

2019-2023 201,278 22,646

2024-2028 99,411 5,800

2029-2033 17,512 280

Total 530,659$ 76,723$

Loans Payable

Loans payable principal and interest are paid from various enterprise fund revenues.

C. Component Unit At June 30, 2013, annual debt service requirements of the District to maturity are as follows:

Year EndingJune 30, Principal Interest Principal Interest Principal Interest

2014 800,000$ 196,800$ 70,000$ 21,990$ 1,673,587$ 433,135$ 2015 840,000 160,000 75,000 18,599 1,719,505 387,219

2016 890,000 125,400 75,000 14,980 1,766,684 340,039

2017 940,000 84,100 80,000 11,123 1,815,161 291,562

2018 535,000 47,225 85,000 6,914 1,864,969 241,754

2019-2022 705,000 22,525 90,000 2,363 3,429,992 686,935

2024-2028 - - - - 2,115,183 397,572

2029-2033 - - - - 1,890,584 119,620

Total 4,710,000$ 636,050$ 475,000$ 75,969$ 16,275,665$ 2,897,836$

Loans PayableRevenue Bonds STET Improvement Bonds2005 Wastewater 2004 Limited Obligation

During 2005, the District issued $9,335,000 of 2005 Wastewater Revenue Refunding Bonds which refunded the 1977 Sewer Revenue Bonds, Series A, and the 1994 Certificates of Participation issued for the wastewater treatment plant. The bonds are obligations of the District, and are payable from and secured by a pledge of net revenues. During 2004, the District issued Limited Obligation Refunding Improvement Bonds to refinance the 1994 Freedom Boulevard Sewer Special Assessment bonds, pay costs related to the issuance of the bonds and to make a deposit to a Reserve Fund.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

93

10. LONG-TERM DEBT, Continued

C. Component Unit, Continued The Loans Payable – County of Santa Cruz principal and related interest payments are payable from the District’s net revenues after provision has been made for payment on the District’s 1977 Revenue Bonds. During 2009, the District entered into a Project Finance Agreement (Agreement) with the State Water Resources Control Board (SWRCB) to finance the Aptos Transmission Main Relocation Project. Under this Agreement, the SWRCB has agreed to loan the District a total of $16,725,699. As of June 30, 2013, SWRCB has loaned the District a total of $7,835,275 pursuant to this Agreement. Pursuant to the Agreement, the interest rate is 2.5% and the District will begin to make payments to repay the loan in the 2012-2013 fiscal year.

D. Legal Debt Limit

The County’s legal annual debt service limit as of June 30, 2013, is $420,314,615. The County’s legal debt service limit is 1.25% of the total full cash valuation of all real and personal property within the County.

E. Arbitrage The Tax Reform Act of 1986 instituted certain arbitrage restrictions with respect to the issuance of tax-exempt bonds after August 31, 1986. Arbitrage regulations deal with the investment of all tax-exempt bond proceeds at an interest yield greater than the interest yield paid to bondholders. Generally, all interest paid to bondholders can be retroactively rendered taxable if applicable rebates are not reported and paid to the Internal Revenue Service at least every five years. The County has hired a consultant to perform calculations of excess investment earnings on various bonds and financings, and it is anticipated that the County will be determined to be in compliance with arbitrage regulations.

11. PLEDGE OF FUTURE REVENUES PFA 2012A Lease Revenue Refunding Bonds

The revenues of the Santa Cruz Regional 911 (Regional 911) were pledged to repay $3,965,000 in lease revenue refunding bonds issued in May 2012. The Regional 911 was formed in a Joint Powers Authority Agreement with the cities of Santa Cruz, Watsonville, and Capitola and the County of Santa Cruz. Proceeds from the bonds provided funds to refinance an existing lease and to fund equipment purchases. The bonds were payable from use payments paid to the Regional 911 by the different governmental agencies. Annual principal and interest payments on the bonds continue through 2034 and are expected to require less than 12 percent of revenues. The total principal and interest remaining to be paid on the bonds is $6,003,644. Pursuant to the Joint Powers Authority Agreement, the County of Santa Cruz is responsible for 47.53% of the total liability, or $2,853,532. Total principal and interest paid for the current year and total customer revenues were $287,338 and $4,764,164 respectively. The County of Santa Cruz paid $136,572 of the current year principal and interest. The Bonds were refunded on May 15, 2012.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

94

12. LANDFILL CLOSURE AND POSTCLOSURE COSTS

The County operates the Buena Vista Landfill for the disposal of municipal waste and a transfer station at the site of the closed Ben Lomond Landfill. State and federal laws and regulations, including the California Integrated Waste Management Board Title 14, California State Water Resources Control Board Title 23, and the Environmental Protection Agency Subtitle D of the Codified Federal Regulations 40, require the County to place a final cover on its landfill sites when it stops accepting waste and to perform certain maintenance and monitoring functions at the site for 30 years after closure. Although closure and postclosure care costs will be paid only near or after the date that landfills stop accepting waste, the County reports a portion of these closure and postclosure care costs as an operating expense in each period based on the County landfill’s capacity used as of June 30 of each year. As of June 30, 2013, a liability for closure and postclosure maintenance in the amount of $6,110,443 is reflected in the County Disposal Sites Enterprise Fund based upon landfill capacity used to date. As of June 30, 2013, Ben Lomond Landfill was filled to 100% capacity, and the County estimates that the Buena Vista Landfill is filled to 61.3% of capacity with an estimated remaining useful life of 10 years. The Ben Lomond Landfill was closed during 1989 and the closure and postclosure care costs have been fully paid. The County will recognize the remaining estimated cost of closure and postclosure maintenance of $4,572,298 as the remaining estimated capacity is filled. These amounts are based on what it would cost to perform all closure and postclosure care in 2013. Actual cost may be higher due to inflation, changes in technology, or changes in regulations. The estimates will also be adjusted annually for inflation or deflation, in accordance with State guidelines. The County is required by State and Federal laws and regulations to make annual contributions to a fund to finance closure and postclosure maintenance. The County is in compliance with these requirements, and at June 30, 2013, cash of $5,844,908 is held for this purpose, reported as restricted assets on the Statement of Net Position. The County expects that future inflation costs will be paid from interest earnings on these annual contributions. However, if interest earnings are inadequate or additional postclosure care requirements are determined (due to changes in technology or applicable laws and regulations, for example), these costs may need to be covered by charges to future landfill users. Postclosure maintenance for both the Buena Vista and closed Ben Lomond Landfills are provided for through a “Pledge of Revenue.” The Board adopted resolutions pledging future County Disposal Sites CSA 9C’s revenues annually through the prescribed postclosure maintenance period. An initial postclosure cost was estimated at the time of adoption of the Pledge of Revenue resolutions and is adjusted for inflation on an annual basis.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

95

13. DEFICIT NET POSITION AND FUND BALANCES

Individual nonmajor special revenue fund and proprietary fund deficit net position at June 30, 2013, were as follows:

Nonmajor Special Revenue Funds: Library $ 17,150 Internal Service Funds: Self Insurance – Liability and Property 3,401,337 Self-Insurance – Workers’ Compensation 23,874,819

The Library Fund had deficit net position of $17,150, a reduction of $5,327 from a $22,477 net deficit at June 30, 2012. The deficit originated in the fiscal year ended June 30, 2011, as a result of unrealized property tax revenues. Each fiscal year, the annual payment from the Library Fund to the Library Financing Authority is calculated based upon estimated property tax revenues. During the 2010-2011 fiscal year, property tax revenues were slightly lower than anticipated, but the annual payment to the Library Financing Authority still was required to be made. A procedure was implemented to ensure that the payment to the Library Financing Authority is capped if there are insufficient funds to make the entire payment. The Liability and Property Fund and Workers’ Compensation Fund had deficit net position of $3,401,337 and $23,874,819 related to the losses payable for claims and the inclusion of estimates for incurred but not reported (IBNR) claims. Management anticipates that the County will have sufficient funds to pay annual requirements. These funds will normally show up as deficits since the County is set up on a pay-as-you go program.

14. DEFINED BENEFIT PENSION PLAN

A. Plan Description

The County contributes to the California Public Employees Retirement System (CalPERS), an agent multiple-employer public employee defined benefit pension plan. CalPERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. CalPERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by State statute and County ordinance. Copies of CalPERS’ annual financial report may be obtained from their Executive Office located at 400 P Street, Sacramento, California 95814.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

96

14. DEFINED BENEFIT PENSION PLAN, Continued

B. Funding Policy

Active plan members are required by State statute to contribute 7% and 9% of annual covered salary for miscellaneous and safety employees respectively. The County makes the contributions required of County employees on their behalf and for their account for Service Employees International Union employees only, other employees pay their own contributions. The County was required to contribute for fiscal year 2012-2013 at an actuarially determined rate of 14.253% for miscellaneous employees, 17.381% for safety employees, and 29.153% for safety sheriff employees. Separately funded plans have been established for each employee group. Benefit provisions and all other requirements are established by State statute and County contracts with employee bargaining groups. The contribution requirements of plan members and the County are established by CalPERS. C. Annual Pension Costs

The County’s annual pension cost for the current year and two previous years was $34,365,995, $33,261,121, and $31,074,807, respectively. These were equal to the County’s required and actual contributions. The 2012-2013 required contribution was determined as part of the June 30, 2010, actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included; (a) 7.75% investment rate of return (net of administrative expenses), (b) projected salary increases of 3.55% to 14.45% for miscellaneous employees, 3.55% to 13.15% for safety and sheriff safety depending on age, service, and type of employment, and (c) 3.25% per year cost-of-living adjustments. Both (a) and (b) included an inflation component of 3.00%. The actuarial value of CalPERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period. CalPERS unfunded actuarial accrued liabilities (or surplus) is being amortized as a level percentage of projected payroll on a closed basis. All gains and losses are tracked and amortized over a rolling 30 year period for both miscellaneous and safety plans with the exception of special gains and losses in fiscal years 2008-2009, 2009-2010, and 2010-2011. Each of these years’ gains and losses will be isolated and amortized over fixed and declining 30 year periods (as opposed to the current rolling 30 year amortization).

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

97

14. DEFINED BENEFIT PENSION PLAN, Continued

C. Annual Pension Costs, Continued

THREE-YEAR TREND INFORMATION FOR CalPERS

Annual Percentage Annual Percentage

Pension Cost of APC Net Pension Pension Cost of APC Net Pension

Fiscal Year (APC) Contributed Obligation (APC) Contributed Obligation

6/30/2011 23,622,349 100% -$ 3,349,540 100% -$

6/30/2012 24,723,167 100% - 3,863,194 100% -

6/30/2013 25,235,435 100% - 4,222,688 100% -

Annual Percentage Annual Percentage

Pension Cost of APC Net Pension Pension Cost of APC Net Pension

Fiscal Year (APC) Contributed Obligation (APC) Contributed Obligation

6/30/2011 4,102,918 100% -$ 31,074,807 100% -$

6/30/2012 4,674,760 100% - 33,261,121 100% -

6/30/2013 4,907,872 100% - 34,365,995 100% -

Miscellaneous Safety

Safety Sheriff County Totals

D. Funded Status and Funding Progress The following is the funded status information for each plan as of June 30, 2011, the most recent actuarial valuation date:

Unfunded

Unfunded (Overfunded)

Entry Age (Overfunded) Liability as

Actuarial Actuarial Actuarial a Percentage

Value of Accrued Accrued Funded Covered of Covered

Assets Liability Liability Ratio Payroll Payroll

Miscellaneous 721,534,770$ 875,808,856$ 154,274,086$ 82.4% 139,029,180$ 111.0%

Safety 114,873,164 133,199,435 18,326,271 86.2% 14,825,926 123.6%

Safety Sheriff 81,994,903 108,356,979 26,362,076 75.7% 12,207,567 215.9%

The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

98

15. POST-RETIREMENT HEALTH CARE BENEFITS

Plan Description. Employees of the County who retire through CalPERS, their spouse, and eligible dependents may receive health plan coverage through the Public Employees’ Medical & Hospital Care Program Plan (Plan). The Plan is a defined benefit plan which provides the retirees a monthly medical contribution that is not to exceed the cost of the plan selected. The cost of the Plan to the County for each bargaining group will be determined through CalPERS’ regulations and requirements. For the Physicians Bargaining Unit, the County contributes fixed dollar amounts that vary by coverage [($327.21 (single), $388.41 (2-party) and $454.49 (family) for 2013]. For other bargaining units, the County contributions are based on longevity schedules with fixed dollar scaling that varies by bargaining unit. The Plan does not issue a financial report. Eligibility. All of the County’s employees became participants in accordance with the Memorandum of Understanding (MOU) as negotiated by each group or bargaining unit. In order to receive benefits, eligible employees must meet the minimum requirements defined in their MOU. The Plan is eligible to plan members who retire directly from the County through CalPERS at age 50 with at least 5 years of service. The numbers of participants in the Plan are as follows:

Participants

as of January 1, 2012* Total

Active employees 2,111

Retirees 1,072 Total 3,183

* Most recent information available.

Funding Policy. The contribution requirements for the County are established by a Memorandum of Understanding as negotiated by each group or bargaining unit. The required contribution is based on projected pay-as-you-go financing requirements. For fiscal year 2013, the County contributed $4,591,534 to the Plan.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

99

15. POST-RETIREMENT HEALTH CARE BENEFITS, Continued

Annual OPEB Cost and Net OPEB Obligation. The County’s Annual Other Post-Employment Benefits (OPEB) cost (expense) is calculated based on the Annual Required Contribution of the Employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excesses) over a period not to exceed thirty years. The following table shows the components of the County’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the County’s net OPEB obligation to the Plan:

Total

Annual required contribution 12,106,000$

Interest on net OPEB obligation 3,866,271

Amortiazation of net OPEB obligation (4,177,000)

Annual OPEB cost (expense) 11,795,271

Contributions made (4,591,534)

Increase in net OPEB obligation 7,203,737

Net OPEB obligation - beginning of year 88,212,910

Net OPEB obligation - end of year 95,416,647$

The County’s annual OPEB costs, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation for 2013 is as follows:

Fiscal Annual % of Annual Net

Year OPEB Annual OPEB Cost OPEB

Ended Cost Contribution Contributed Obligation

6/30/2011 25,556,004 4,818,714 18.9% 81,781,824

6/30/2012 11,254,000 4,822,914 42.9% 88,212,910

6/30/2013 11,795,166 4,591,534 38.9% 95,416,647

Funded Status and Funding Progress. As of January 1, 2012, the most recent actuarial valuation date, the Plan was zero percent funded. The Actuarial Accrued Liability for benefits was $127,836,000 and the actuarial value of assets was $0, resulting in an Unfunded Actuarial Accrued Liability (UAAL) of $127,836,000. The covered payroll (annual payroll of active employees covered by the plan) was $154,788,000 and the ratio of UAAL to the covered payroll was 82.6%. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend rate. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents trend information about whether the actuarial value of Plan assets is increasing or decreasing over time relative to the Actuarial Accrued Liabilities for benefits.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

100

15. POST-RETIREMENT HEALTH CARE BENEFITS, Continued

Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. Actuarial assumptions involve estimates and assumptions that extend far into the future. These assumptions are subject to future revisions as new facts become known. In the January 1, 2012, actuarial valuation, the entry age actuarial cost method was used. The actuarial assumptions include a 4.5% investment rate of return which is based on the expected return on funds invested in County investments, and an annual healthcare cost trend of actual premiums initially and reduced to an ultimate rate of 5% thereafter. The actuarial assumption for inflation was 3%, and the aggregate payroll increases were 3.25%. The Unfunded Actuarial Accrued Liability (UAAL) is being amortized as a level percentage of projected payroll on a closed basis. The remaining amortization as of June 30, 2013, was 27 years.

OTHER POSTEMPLOYMENT OBLIGATIONS

SCHEDULE OF FUNDING PROGRESS

The table below shows the analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of June 30, 2013. The schedule of funding progress presented as RSI following the notes to the financial statements presents multiyear trend information about whether the actuarial value of Plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

Unfunded

Unfunded (Overfunded)

Entry Age (Overfunded) Liability as

Actuarial Actuarial Actuarial Actuarial a Percentage

Valuation Value of Accrued Accrued Funded Covered of Covered

Date Assets Liability Liability Ratio Payroll Payroll

01/01/12 - 127,836,000 127,836,000 0.0% 154,788,000 82.6%

16. DEFERRED COMPENSATION PLAN

The County offers all of its full-time employees a deferred compensation plan (Plan) created in accordance with Section 457 of the Internal Revenue Code. The Plan permits employees to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or emergency. Employees direct the investment of Plan assets into certificates of deposits and various mutual funds. The County has insignificant administrative duties.

As of June 30, 2013, the Plan’s assets of $120,644,891 are not recorded in the County’s financial statements as they are deposited with a third party administrator independent of the County.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

101

17. COMMITMENTS AND CONTINGENCIES

As of June 30, 2013, the County has construction contract commitments in the Department of Public Works (all funds types) and in Special Revenue and Capital Project Funds in the amount of $5,335,948 and $17,727,638, respectively.

A. Litigation

There are several lawsuits and unresolved disputes involving the County or its employees in which the County is represented by the County Counsel. However, in the opinion of the County Counsel these actions will not, in the aggregate, have a material adverse effect upon the operations or financial position of the County.

B. Federal and State Grants The County participates in a number of Federal and State grant programs subject to financial and compliance audits by the grantors or their representatives. The amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time. However, management does not believe that audit disallowances, if any, would have a significant effect on the financial position of the County. C. Medicare and Medi-Cal Reimbursements The County’s Medicare and Medi-Cal cost reports for certain prior years are in various stages of review by the third-party intermediaries and have not been settled as a result of certain unresolved reimbursement issues. The County believes that it has adequately provided for any potential liabilities which may arise from the intermediaries’ review. D. Encumbrances Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of monies are recorded in order to reserve that portion of the applicable appropriation, is employed by the County as an extension of formal budgetary accounting in the General Fund, Housing Fund, Capital Projects Fund, and Nonmajor Governmental Funds. Encumbrances still open at year end are not accounted for as expenditures and liabilities but as part of committed fund balance. At June 30, 2013, encumbrances totaled $4,059,718, $121,236, $35,844,535 and $9,945,943 for the General Fund, Housing Fund, Capital Projects Fund, and Nonmajor Governmental Funds, respectively.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

102

18. RISK MANAGEMENT

The County is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets, errors and omissions, injuries to employees, natural disasters, medical malpractice, unemployment coverage, and dental benefits to employees. The County is self-insured for its general and auto liability, workers’ compensation, property, and employees’ dental coverage. The County has chosen to establish risk-financing internal service funds, where assets are set aside for claim settlements associated with the above risk of loss up to certain limits. Excess coverage is provided by the California State Association of Counties (CSAC) Excess Insurance Authority (Insurance Authority), a joint powers authority whose purpose is to develop and fund programs of excess insurance for its member counties. The Insurance Authority is governed by a Board of Directors consisting of representatives of the member counties. Self-insurance limits per occurrence and Insurance Authority limits per year are as presented in the Statistical Section of this report. Amounts in excess of these limits are self-insured. None of the insurance settlements over the past three years has exceeded the amount of insurance coverage. As of June 30, 2013, the workers’ compensation liability limit per occurrence was $500,000. The unpaid claims liability included in each of the Self-Insurance Internal Service Funds are based on the results of actuarial studies and include amounts for claims incurred but not reported. Claim liabilities are calculated considering the effects of inflation, recent claim settlement trends, including frequency and amount of payouts, and other economic and social factors. It is the County’s practice to obtain full actuarial studies bi-annually. Annual premiums are charged by each Self-Insurance fund using various allocation methods which include actual costs, claims experience, and number of participants. The change in the balance of claims liabilities during the fiscal years ended June 30, 2013, and two prior years for all Self-Insurance Internal Service Funds combined is as follows:

2013 2012 2011

Unpaid claims and claim adjustment expenses,

beginning of the fiscal year 44,287,352$ 36,861,428$ 35,296,149$

Incurred claims and claim adjustment expenses 15,843,711 23,928,174 13,092,624

Claim payments (13,378,635) (16,502,250) (11,527,345)

Unpaid claims and claim adjustment expenses,

end of the fiscal year 46,752,428$ 44,287,352$ 36,861,428$

At June 30, 2013, the Self-Insurance Funds held a total of $23,221,348 in cash for the payment of these claims.

A. Workers’ Compensation The Workers’ Compensation self-insurance program is funded on a cash flow plus contingency reserve basis. The County is liable for the first $500,000 and carries catastrophic insurance coverage. At June 30, 2013, the estimated future liabilities were $34,494,000. As permitted by State and Federal guidelines, the Workers’ Compensation program is funded on a pay-as-you-go basis. The funding is closely monitored to ensure that claims are paid when due or required by law.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

103

18. RISK MANAGEMENT, Continued B. Dental and Medical On September 30, 1994, the County discontinued its medical self-insurance program. On January 5, 1991, the County established a self-insurance program to provide dental benefits. At June 30, 2013, the County had an estimated future liability of $96,053 for dental. The County is fully insured for its alternative capitation dental program and for medical coverage for employees represented by Operating Engineers Union Local 3. C. Liability and Property The County has a self-insured retention of $1 million with excess insurance coverage for the general liability program. At June 30, 2013, the County had estimated future liabilities totaling $12,070,909 which included estimates for known claims and losses incurred but not reported (IBNR). D. Unemployment Insurance The Unemployment Insurance self-insurance program is considered a “reimbursable” program by Employment Development Department (EDD), since EDD provides benefits and bills the County quarterly after the fact. As billings are always one quarter in arrears, the estimated future liabilities are based on 25% of the amount budgeted for the new fiscal year. At June 30, 2013, estimated future liabilities were $91,466.

19. POLLUTION REMEDIATION OBLIGATIONS

In accordance with GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, the County is required to estimate the components of expected pollution remediation outlays and determine whether outlays for those components should be accrued as liabilities or, if appropriate, capitalized when goods and services are acquired if one of the following five specified obligating events occurs:

The County is compelled to take pollution remediation action because of an imminent

endangerment; The County violates a pollution prevention-related permit or license; The County is named, or evidence indicates that it will be named, by a regulator as a responsible

party or potentially responsible party for remediation, or as a government responsible for sharing costs;

The County is named, or evidence indicates that it will be named, in a lawsuit to compel participation in pollution remediation;

The County commences or legally obligates itself to commence pollution remediation.

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

104

19. POLLUTION REMEDIATION OBLIGATIONS, Continued

At June 30, 2013, the County identified the following site, within the Santa Cruz County Sanitation District (District), which met one of the above obligating events: Rio Del Mar Pump Station The site was the former location of the District’s Rio Del Mar Pump Station underground storage tank (UST) for diesel fuel. The UST was removed in 1996. However, levels of hydrocarbons have been detected at the site above acceptable levels. The District has contracted with a consultant for a corrective action plan, which has been approved. The estimated clean-up remaining as of June 30, 2013, was calculated by the consultant by extrapolating the total volume of diesel fuel present based on (1) the volume of diesel absorbed into the soil, (2) the volume of separate-phase, “free product” floating on the groundwater, and (3) the volume of dissolved diesel in the groundwater. The estimated volume of diesel fuel present was then used to calculate the amount of reactive oxidant needed to break down the remaining contamination. The estimated clean-up cost for the underground contamination and monitoring as of June 30, 2013, is approximately $4,848. At June 30, 2013, the District has recorded a pollution remediation obligation in the amount of $4,848 on the Government-Wide Statement of Net Position and allocated the total amount to General Government on the Government-Wide Statement of Activities and Changes in Net Position.

20. PRIOR PERIOD ADJUSTMENTS In the Private Purpose Trust Fund, the $2,245,594 SERAF loan owed by the Redevelopment Successor Agency to the County was not included in Long-term debt at June 30, 2012. The beginning net position held in trust of $(216,894,656), as originally reported, was restated to $(219,140,250) to include the SERAF loan of $2,245,594 at June 30, 2012.

Net Position, as previously

reportedNet Position, as

restatedPrior Period Adjustment

Net position held in trust (216,894,656) (219,140,250) (2,245,594)

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

105

21. FUND BALANCES

Fund balances are presented in the following categories: nonspendable, restricted, committed, assigned and unassigned (see Note 1 for a description of these categories). A detailed schedule of fund balances at June 30, 2013, is as follows:

General Fund Housing Fund

Capital Projects

Fund

Nonmajor

Governmental

Funds

Total

Governmental

Funds

Nonspendable:

Inventory, prepaids and imprest cash 1,419,261$ -$ -$ -$ 1,419,261$

Advances and loans 435,278 56,076,675 - - 56,511,953

Assets held for resale 1,689,135 - - - 1,689,135

Total nonspendable fund balance 3,543,674 56,076,675 - - 59,620,349

Restricted for:

Purpose of fund - 2,745,075 - 16,655,442 19,400,517

Debt service 2,000 - 2,737,533 2,739,533

Capital asset acquisition - - 40,053,013 4,839,541 44,892,554

Total restricted fund balance 2,000 2,745,075 40,053,013 24,232,516 67,032,604

Committed to:

Natural Disasters 1,251,089 - - - 1,251,089

Working Capital 6,000,000 - - - 6,000,000

Economic Uncertainty 4,857,787 - - - 4,857,787

General Government 1,133,234 - - - 1,133,234

Public Protection 2,391,987 - - - 2,391,987

Public Ways and Facilities 2,564 - - - 2,564

Health and Sanitation 639 - - - 639

Public Assistance 492,042 - - - 492,042

Recreation and Cultural Services 37,253 - - - 37,253

Total committed fund balance 16,166,595 - - - 16,166,595

Assigned to:

Federally qualified health program 14,229,750 - - - 14,229,750

Eliminate projected budgetary deficit

in subsequent year's budget 5,174,625 - - - 5,174,625

Liabilities 1,052,278 - - - 1,052,278

Human services 400,000 - - - 400,000

Total assigned fund balance 20,856,653 - - - 20,856,653

Unassigned Fund Balance - - - (17,150) (17,150)

Total fund balances 40,568,922$ 58,821,750$ 40,053,013$ 24,215,366$ 163,659,051$

County of Santa Cruz Notes to Basic Financial Statements, Continued For the year ended June 30, 2013

106

22. SUBSEQUENT EVENTS

On July 3, 2013, the County issued a Tax and Revenue Anticipation Note at 2.00% in the amount of $50,000,000. Tax and Revenue Anticipation Notes are issued annually as part of a cash management policy to maintain the County’s working capital until sufficient taxes or revenues are collected to fund the County’s operations. The note is due in one payment of $50,000,000 on July 2, 2014, and is payable from taxes, income, revenues, cash receipts and other moneys which are received by the County for the general fund attributable to Fiscal Year 2013-2014 and which are lawfully available for the payment of current expenses and other obligations of the County (the Unrestricted Revenues). The County of Santa Cruz is projecting completion of the County owned Behavioral Health Unit (BHU) located at 2250 Soquel Avenue. The BHU will operate two primary programs a crisis stabilization unit for short-term crisis services and a 16-bed short-stay psychiatric health facility providing evaluation and stabilization for acute psychiatric crises, nursing care, medication monitoring, psychiatric consultation, and referrals. This acute care psychiatric facility would replace the existing County facility that has been operating on the Dominican Hospital campus since 1985. The construction is scheduled to be completed with operations beginning January 1, 2014. The project cost of approximately $14.5 Million to complete was financed primarily with $6 Million of Redevelopment funds and $8.5 Million in Mental Health reserves backed by a $5 Million reimbursement guarantee from Dominican Hospital.

23. EXTRAORDINARY ITEM

As of February 1, 2012 all redevelopment agencies in the State of California were dissolved and successor agencies were formed in accordance with Assembly Bill 1X26 (Bill). All assets and liabilities were transferred from the governmental funds of the former redevelopment agency to the private-purpose trust fund of the successor agency. As a result of the dissolution an extraordinary gain of $174,032,791 was recognized by the County in the June 30, 2012 financial statements. A corresponding loss was recognized by the Redevelopment Successor Agency (RSA) as of January 31, 2012. In March 2011, prior to the dissolution, the Board had approved and the County Redevelopment Agency had transferred all non-housing properties that were not encumbered by third-party enforceable obligations to the County. Pursuant to a state-wide order by the State Controller of the State of California dated April 20, 2012, regarding transfers of assets between redevelopment agencies and other public bodies that occurred after January 1, 2011, the County transferred the non-housing properties back to the public body designated as the successor agency by the Bill. Amounts related to the dissolution of the former Redevelopment Agency that transferred from the County to the Agency as of June 30, 2013 are presented in the table below.

Cash and investments (Loss on governmental funds financial statements) 7,178,725$ Land 9,197,425

Total (Loss on government-wide financial statements and to RSA) 16,376,150$

Asset transferred from the County to the Redevelopment Successor Agencyrelation to the dissolution of the former Redevelopment Agency

107

REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

108

County of Santa CruzRequired Supplementary Information (Unaudited)For the year ended June 30, 2013

BUDGETARY PRINCIPLES

General Budget Policies

1.

2.

3. On or before October 2, the budget is legally enacted through passage of a resolution.

4.

5.

6.

7.

•

•

8.

In accordance with Chapter 1, Division 3, Title 3, of the Government Code of the State of California, known as the "Budget Act," the County prepares and adopts a budget for each fiscal year. The budget is a compilation of operating budgets from: individual functional units within the General Fund, Special Revenue Funds, Capital Project Funds, and Proprietary Funds (operating plans). Budgets are adopted for all funds except for Debt Service Funds and certain special revenue funds, namely, Public Financing Authority, Health Services, and Geological Hazard Abatement Districts.

The County follows these procedures in establishing the budgetary data reflected in the financial statements:

Budgetary control is maintained at the character level, except for capital assets and other charges which are controlled by line item. Character levels are appropriation totals for salaries and employee benefits, and services and supplies. The Board approves all transfers of budgeted appropriation amounts between budget units within any fund or between expenditures outside of budgetary control limits. Unencumbered appropriations a year-end lapse into fund balance. See the following paragraph for encumbered appropriations at year-end.

The County uses formal budgetary integration as a management control device during the year for the primary government and all blended component units, except the Public Financing Authority and certain special revenue funds, which do not annually adopt a budget.

Budgets are adopted on a basis consistent with GAAP except for the following different classifications:

Interfund transfers are reported as revenues or expenditures for budgetary purposes; however, for GAAP purposes they are reported as other financing sources, or uses.

Proceeds from the sale of assets and the issuance of new debt are reported as revenues for budgetary purposes; however, for GAAP purposes they are reported as other financing sources

Prior to July 1, the County Administrative Officer submits to the Board of Supervisors a proposed program budget for the fiscal year commencing the following July 1. The budget includes proposed expenditures and the means of financing them. In addition, the Auditor-Controller submits a proposed budget containing the line items of revenue and appropriations based up on the County Administrative Officer's budget proposal.

On or before August 20, public hearings are conducted to obtain public comments. Such hearings shall be concluded within 10 calendar days.

On or before November 1, the Auditor-Controller publishes a final budget as recommended by the County Administrative Officer and adopted by the Board of Supervisors.

Budget units are expenditure classifications which identify accounting or cost centers necessary or desirable for control of the County financial operation.

109

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

BUDGETARY PRINCIPLES, Continued

General Budget Policies, Continued

Encumbrances

Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of monies are recorded in order to reserve that portion of the applicable appropriations, is employed as an extension of formal budgetary accounting in the General and Special Revenue Funds. Encumbrances outstanding at year-end are reported as commitments of fund balance since they do not constitute expenditures or liabilities. Encumbrances at year-end are rebudgeted in the new year.

The Board made several supplementary budgetary appropriations throughout the year, primarily to the Special Revenue and Capital Project Funds. Other supplemental budgetary appropriations in other funds were not considered material.

110

111

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

FUND BALANCE, BEGINNING 42,168,827$ 42,168,827 42,168,827$ -$

RESOURCE(INFLOWS)

Taxes 87,291,909 87,291,909 88,390,337 1,098,428

Licenses 10,264,567 10,264,567 9,819,321 (445,246)

Fines, forfeitures and penalties 4,292,372 4,565,517 4,418,159 (147,358)

Revenue from use of money and property 1,715,859 1,715,859 1,079,143 (636,716)

Aid from other governmental agencies 197,228,219 206,092,439 208,953,957 2,861,518

Charges for current services 51,376,481 51,992,902 43,279,759 (8,713,143)

Other revenues 3,243,467 4,049,294 3,554,348 (494,946)

Inception of capital leases - - 35,766 35,766

Contributed capital - - 232,624 232,624 Transfers in 28,128,795 29,736,614 2,073,089 (27,663,525)

Amount Available for Appropriation 383,541,669 395,709,101 361,836,503 (33,872,598)

CHARGES TO APPROPRIATIONS (OUTFLOWS)

General Government:

Board of Supervisors

Salaries and employee benefits 2,257,977 2,283,977 2,279,334 4,643

Services and supplies 99,395 103,063 97,647 5,416

Other charges 3,230 3,230 3,229 1

Capital assets 10,385 10,385 10,385 -

Total 2,370,987 2,400,655 2,390,595 10,060

Administrative Office

Salaries and employee benefits 2,576,257 2,576,257 2,166,162 410,095

Services and supplies 1,741,591 1,652,139 373,159 1,278,980

Other charges 210,342 210,342 210,342 -

Intrafund transfers (1,059,779) (1,059,779) (1,057,654) (2,125)

Total 3,468,411 3,378,959 1,692,009 1,686,950

Auditor-Controller

Salaries and employee benefits 2,664,330 2,674,173 2,662,567 11,606

Services and supplies 1,971,684 1,883,601 1,794,611 88,990

Other charges 849,549 1,786,732 847,735 938,997

Intrafund transfers (1,592,313) (1,592,313) (1,756,436) 164,123

Appropriations for contingencies - 13,915 - 13,915

Total 3,893,250 4,766,108 3,548,477 1,217,631

(Continued)

Budget

Budgetary Comparison Schedule, General Fund

112

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

General Government, Continued:

Treasurer - Tax Collector

Salaries and employee benefits 1,295,085$ 1,295,085 1,207,188$ 87,897$

Services and supplies 694,518 573,771 481,520 92,251

Intrafund transfers (13,959) (13,959) (13,959) -

Total 1,975,644 1,854,897 1,674,749 180,148

Assessor

Salaries and employee benefits 2,563,189 2,563,189 2,485,629 77,560

Services and supplies 744,301 662,008 636,164 25,844

Other charges 260,172 260,172 260,170 2

Intrafund transfers (444,260) (444,260) (443,925) (335)

Total 3,123,402 3,041,109 2,938,038 103,071

Purchasing

Salaries and employee benefits 302,989 302,989 300,330 2,659

Services and supplies 115,969 109,693 109,403 290

Intrafund transfers (85,792) (85,792) (85,792) -

Total 333,166 326,890 323,941 2,949

County Counsel

Salaries and employee benefits 2,682,087 2,723,840 2,723,838 2

Services and supplies 339,823 253,093 198,319 54,774

Intrafund transfers (963,249) (963,249) (988,199) 24,950

Appropriations for contingencies - 42,319 - 42,319

Total 2,058,661 2,056,003 1,933,958 122,045

Personnel

Salaries and employee benefits 2,400,604 2,400,604 2,199,725 200,879

Services and supplies 2,997,839 2,863,878 2,814,013 49,865

Intrafund transfers (578,925) (578,925) (578,925) -

Total 4,819,518 4,685,557 4,434,813 250,744

County Clerk/Elections

Salaries and employee benefits 1,574,254 1,709,692 1,668,948 40,744

Services and supplies 1,552,027 1,648,790 1,110,746 538,044

Other charges 3,125 3,907 3,906 1

Capital assets 61,484 66,864 66,864 -

Total 3,190,890 3,429,253 2,850,464 578,789

(Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

113

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

General Government, Continued:

Communications

Salaries and employee benefits 624,879$ 644,879 635,576$ 9,303$

Services and supplies 1,816,187 2,499,349 1,917,955 581,394

Other charges 130,838 117,084 117,084 -

Capital Assets 2,028 2,028 - 2,028

Intrafund transfers (568,852) (568,852) (517,482) (51,370)

Total 2,005,080 2,694,488 2,153,133 541,355

General Services

Salaries and employee benefits 3,934,740 4,018,106 4,018,106 -

Services and supplies 3,358,184 3,247,832 3,242,636 5,196

Other charges 471,695 471,695 460,472 11,223

Capital assets - 6,000 5,542 458

Interfund transfers (4,415,663) (4,415,663) (4,277,456) (138,207)

Appropriations for contingencies - 13,702 - 13,702

Total 3,348,956 3,341,672 3,449,300 (107,628)

Real Property Management

Services and supplies 59,762 107,494 107,493 1

Total 59,762 107,494 107,493 1

Surveyor

Services and supplies 445,707 413,873 370,255 43,618

Interfund transfers - - (2,429) 2,429

Total 445,707 413,873 367,826 46,047

DPW Engineering

Services and supplies 149,756 149,756 81,257 68,499

Total 149,756 149,756 81,257 68,499

Central Stores

Salaries and employee benefits 159,154 166,254 165,061 1,193

Services and supplies 43,692 38,848 37,384 1,464

Intrafund transfers (244,413) (244,413) (228,911) (15,502)

Total (41,567) (39,311) (26,466) (12,845)

Total General Government 31,201,623 32,607,403 27,919,587 4,687,816 (Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

114

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

Public Protection:

Courts

Services and supplies 26,000$ 26,000 19,738$ 6,262$

Other charges 2,163,153 2,313,408 2,283,010 30,398

Total 2,189,153 2,339,408 2,302,748 36,660

Grand Jury

Services and supplies 138,750 138,982 136,224 2,758

Total 138,750 138,982 136,224 2,758

Child Support

Salaries and employee benefits 6,142,146 6,067,151 5,678,591 388,560

Services and supplies 699,165 749,165 670,191 78,974

Other charges 219,787 219,787 219,787 -

Total 7,061,098 7,036,103 6,568,569 467,534

District Attorney

Salaries and employee benefits 10,754,718 10,891,746 10,856,237 35,509

Services and supplies 1,100,513 1,260,133 1,154,364 105,769

Other charges 170,127 231,232 228,232 3,000

Intrafund transfers (153,373) (153,373) (180,709) 27,336

Total 11,871,985 12,229,738 12,058,124 171,614

Public Defender

Services and supplies 9,089,895 9,089,895 8,810,211 279,684

Total 9,089,895 9,089,895 8,810,211 279,684

Sheriff-Coroner

Salaries and employee benefits 20,755,424 21,155,424 21,096,022 59,402

Services and supplies 5,121,642 5,241,151 4,522,887 718,264

Other charges 55,166 55,856 50,753 5,103

Capital assets 70,810 310,647 203,623 107,024

Intrafund transfers - - - -

Total 26,003,042 26,763,078 25,873,285 889,793

Jail and Rehabilitation Center

Salaries and employee benefits 21,799,868 19,839,039 19,717,132 121,907

Services and supplies 4,694,709 6,634,099 6,457,104 176,995

Other charges 66,758 36,913 6,757 30,156

Appropriations for contingencies - 22,721 - 22,721

Total 26,561,335 26,532,772 26,180,993 351,779

(Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

115

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

Public Protection, Continued:

Probation Department

Salaries and employee benefits 12,573,776$ 12,680,143 12,080,267$ 599,876$

Services and supplies 5,220,364 5,053,886 4,524,872 529,014

Other charges 30,332 65,192 54,979 10,213

Capital assets 26,082 62,382 42,868 19,514

Appropriations for contingencies - 80,073 - 80,073

Total 17,850,554 17,941,676 16,702,986 1,238,690

State Correctional Schools

Services and supplies 5,740 20,070 - 20,070

Other charges 15,000 15,000 15,000 -

Total 20,740 35,070 15,000 20,070

Agricultural Commissioner/

Weights and Measures

Salaries and employee benefits 1,633,571 1,615,717 1,579,649 36,068

Services and supplies 312,232 338,280 334,934 3,346

Other charges 2,859 3,574 3,572 2

Intrafund transfers (115,430) (115,430) (115,430) -

Total 1,833,232 1,842,141 1,802,725 39,416

Public Works - Other Construction Inspection

Services and supplies 38,250 88,250 62,553 25,697

Total 38,250 88,250 62,553 25,697

Recorder

Salaries and employee benefits 881,830 881,830 850,296 31,534

Services and supplies 798,313 784,512 691,193 93,319

Other charges - 117,413 117,413 -

Capital assets 18,000 18,000 18,000 -

Intrafund transfers 73,879 73,879 73,879 -

Total 1,772,022 1,875,634 1,750,781 124,853

(Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

116

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

Public Protection, Continued:

County Emergency Office

Salaries and employee benefits 150,008$ 150,008 147,346$ 2,662$

Services and supplies 317,887 326,660 296,691 29,969

Total 467,895 476,668 444,037 32,631

Local Agency Formation Commission

Other charges 104,267 104,267 104,267 -

Total 104,267 104,267 104,267 -

Planning Department

Salaries and employee benefits 7,167,628 7,236,628 7,224,044 12,584

Services and supplies 2,111,833 1,833,863 1,489,585 344,278

Other charges 1,434,880 3,035,998 1,237,020 1,798,978

Intrafund transfers (2,250) (2,250) (1,571) (679)

Appropriations for contingencies - 4,311 - 4,311

Total 10,712,091 12,108,550 9,949,078 2,159,472

Animal Services

Other charges 1,170,768 1,170,768 1,170,768 -

Total 1,170,768 1,170,768 1,170,768 -

Association of Monterey Bay Area Govts.

Other charges 33,512 33,512 33,512 -

Total 33,512 33,512 33,512 -

Total Public Protection 116,918,589 119,806,512 113,965,861 5,840,651

Public Ways and Facilities:

Public Ways - DPW

Services and supplies 205,459 222,411 219,847 2,564

Total 205,459 222,411 219,847 2,564

Total Public Ways and Facilities 205,459 222,411 219,847 2,564

(Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

117

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

Health and Sanitation:

Health Services Agency

Salaries and employee benefits 56,393,256$ 56,009,098 53,507,287$ 2,501,811$

Services and supplies 50,653,481 52,047,963 43,155,278 8,892,685

Other charges 24,070,982 24,847,353 22,047,691 2,799,662

Capital assets 65,372 80,185 (136,188) 216,373

Intrafund transfers (13,680,777) (14,164,826) (12,150,948) (2,013,878)

Appropriations for contingencies - 77,473 - 77,473

Total 117,502,314 118,897,246 106,423,120 12,474,126

Mosquito Abatement

Salaries and employee benefits 765,057 765,057 749,232 15,825

Services and supplies 563,730 563,730 342,719 221,011

Other charges 4,450 4,450 4,450 -

Capital assets 12,000 12,000 - 12,000

Total 1,345,237 1,345,237 1,096,401 248,836

Air Pollution

Other charges 31,711 31,711 30,082 1,629

Total 31,711 31,711 30,082 1,629

Total Health and Sanitation 118,879,262 120,274,194 107,549,603 12,724,591

Public Assistance:

Human Services Department

Salaries and employee benefits 41,194,288 41,730,572 41,704,211 26,361

Services and supplies 13,283,279 15,052,222 13,724,229 1,327,993

Other charges 10,213,813 11,156,885 9,972,801 1,184,084

Capital assets 404,108 1,523,077 909,233 613,844

Intrafund transfers (548,881) (548,881) (260,483) (288,398)

Appropriations for contingencies - 128,911 - 128,911

Total 64,546,607 69,042,786 66,049,991 2,992,795

Community Programs

Other charges 3,075,281 3,075,281 3,075,162 119

Total 3,075,281 3,075,281 3,075,162 119

(Continued)

Budget

Budgetary Comparison Schedule, General Fund, Continued

118

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

Public Assistance, Continued:

Categorical Aids

Other charges 31,105,162$ 30,716,782 30,231,497$ 485,285$

Total 31,105,162 30,716,782 30,231,497 485,285

General Assistance

Services and supplies 1,351 3,351 2,946 405

Other charges 448,505 446,505 366,278 80,227

Total 449,856 449,856 369,224 80,632

Burial of Indegents

Services and supplies 49,129 49,129 32,206 16,923

Total 49,129 49,129 32,206 16,923

Family Relations

Services and supplies 921,843 990,067 582,111 407,956

Other charges 563,984 549,320 366,484 182,836

Appropriations for contingencies - 22,918 - 22,918

Total 1,485,827 1,562,305 948,595 613,710

Wards of Court

Services and supplies 10,000 22,709 8,126 14,583

Other charges 201,500 201,500 63,793 137,707

Appropriations for contingencies - 291 - 291

Total 211,500 224,500 71,919 152,581

Veterans Service Officer

Salaries and employee benefits 298,269 298,269 241,668 56,601

Services and supplies 23,145 23,145 22,075 1,070

Total 321,414 321,414 263,743 57,671

Total Public Assistance 101,244,776 105,442,053 101,042,337 4,399,716

(Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

119

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

CHARGES TO APPROPRIATIONS (OUTFLOWS), Continued

Education:

Agricultural Extension Services

Salaries and employee benefits 87,064$ 87,064 86,903$ 161$

Services and supplies 36,354 36,354 28,495 7,859

Total 123,418 123,418 115,398 8,020

Total Education 123,418 123,418 115,398 8,020

Recreation and Culture:

Recreation and Cultural Services

Salaries and employee benefits 3,856,721 3,806,721 3,706,821 99,900

Services and supplies 1,813,470 1,854,133 1,823,055 31,078

Other charges 315,822 315,822 261,847 53,975

Capital assets - 56,888 - 56,888

Intrafund transfers (126,831) (126,831) (128,181) 1,350

Total 5,859,182 5,906,733 5,663,542 243,191

Total Recreation and Culture 5,859,182 5,906,733 5,663,542 243,191

Debt Service:

Debt Service

Services and supplies 145,850 145,850 97,125 48,725

Other charges 330,382 386,349 371,883 14,466

Intrafund transfers (284,697) (284,697) (286,030) 1,333

Total 191,535 247,502 182,978 64,524

Total Debt Service 191,535 247,502 182,978 64,524

Total Charges to Appropriations (Outflows) 374,623,844 384,630,226 356,659,153 27,971,073

(Continued)

Budgetary Comparison Schedule, General Fund, Continued

Budget

120

County of Santa CruzRequired Supplementary Information (Unaudited), ContinuedFor the year ended June 30, 2013

Variance with

Final Budget

Positive

Original Final Actual (Negative)

Transfers Out:

Auditor-Controller -$ 232,624 232,624$ -$

Communications - 40,000 40,000 -

Child Support Services - 24,995 24,593 402

Sheriff-Coroner 45,000 124,855 109,987 14,868

Probation Department 95,000 75,700 67,198 8,502

Mosquito Abatement 40,000 40,000 24,808 15,192

Health Services Agency 12,426,202 15,059,202 - 15,059,202

Human Services Department 44,431 44,431 44,431 -

Debt Service to Public Financing Authority 6,439,996 6,495,963 6,233,614 262,349

Total transfers out 19,090,629 22,137,770 6,777,255 15,360,515

Total Charges to Appropriations (Outflows) 393,714,473 406,767,996 363,436,408 43,331,588

Net change in fund balances (10,172,804) (11,058,895) (1,599,905) 9,458,990

FUND BALANCE, ENDING 31,996,023$ 31,109,932 40,568,922$ 9,458,990$

(Concluded)

Budgetary Comparison Schedule, General Fund, Continued

Budget

121

County of Santa CruzRequired Supplementary Information (Unaudited), Continued

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

Actual amounts (budgetary basis) "available for appropriation" from the budgetarycomparison schedule 361,836,503$

Differences - budget to GAAP:

Inception of capital leases are not revenues for financial reporting purposes (35,766)

Sales of capital assets are not revenues for financial reporting purposes -

Contributed capital are not revenue for financial reporting purposes (232,624)

Transfers from other funds are inflows of budgetary resources but are not revenues forfinancial reporting purposes (2,073,089)

Total revenues as reported on the Statement of Revenues, Expenditures and Changes in FundBalances - Governmental Funds 359,495,024$

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparisonschedule 363,436,408$

Differences - budget to GAAP:

Transfers to other funds are outflows of budgetary resources but are not expenditures forfinancial reporting purposes (6,777,255)

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes inFund Balances - Governmental Funds 356,659,153$

Sources/Inflows of Resources:

For the year ended June 30, 2013

Uses/Outflows of Resources:

122

County of Santa CruzBudgetary Comparison ScheduleHousing Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 51,038,792$ 51,038,792$ 51,038,792$ -$

RESOURCES(INFLOWS)

Use of money and property 12,450 60,710 97,891 37,181 Aid from other governments 1,856,099 2,856,099 1,525,127 (1,330,972) Charges for current services 385,836 385,836 277,033 (108,803) Other revenue 2,500 2,500 512,684 510,184 Transfers in 65,312 65,312 5,830,738 5,765,426

Amounts available for appropriation 2,322,197 3,370,457 8,243,473 4,873,016

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 503,083 550,368 287,297 263,071 Other charges 2,050,465 3,051,440 107,906 2,943,534 Transfers out 65,312 65,312 65,312 -

Total charges to appropriations 2,618,860 3,667,120 460,515 3,206,605

FUND BALANCE, ENDING 50,742,129$ 50,742,129$ 58,821,750$ 8,079,621$

-

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

8,243,473$

Differences - budget to GAAP:

(5,830,738)

2,412,735$

460,515$

Differences - budget to GAAP:

(65,312)

395,203$

For the year ended June 30, 2013

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Total revenues as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

Budget

Sources/Inflows of Resources:

Actual amounts (budgetary basis) "available for appropriation" from the budgetary comparison schedule

Transfers from other funds are inflows of budgetary resources but are not revenues for financial reporting purposes

123

124

PUBLIC EMPLOYEES RETIREMENT SYSTEM (PERS)

SCHEDULE OF FUNDING PROGRESS

The table below shows a three-year analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of June 30 of each year indicated:

Miscellaneous Employees

(A) (B) (C) (D) (E) (F)

Unfunded

Unfunded (Overfunded)

(Overfunded) Liability as

Entry Age Actuarial a Percentage

Actuarial Actuarial Actuarial Accrued Funded of Covered

Valuation Value of Accrued Liability Ratio Covered Payroll

Date* Assets Liability [(B)-(A)] [(A)/(B)] Payroll [(C)/(E)]

2009 646,907,355$ 772,139,864$ 125,232,509$ 83.8% 143,916,625$ 87.0%

2010 682,810,383 823,338,155 140,527,772 82.9% 143,904,032 97.7%

2011 721,534,770 875,808,856 154,274,086 82.4% 139,029,180 111.0%

Safety Employees

(A) (B) (C) (D) (E) (F)

Unfunded

Unfunded (Overfunded)

(Overfunded) Liability as

Entry Age Actuarial a Percentage

Actuarial Actuarial Actuarial Accrued Funded of Covered

Valuation Value of Accrued Liability Ratio Covered Payroll

Date* Assets Liability [(B)-(A)] [(A)/(B)] Payroll [(C)/(E)]

2009 104,636,268$ 117,605,110$ 12,968,842$ 89.0% 15,469,830$ 83.8%

2010 109,419,543 124,165,627 14,746,084 88.1% 15,479,038 95.3%

2011 114,873,164 133,199,435 18,326,271 86.2% 14,825,926 123.6%

125

PUBLIC EMPLOYEES RETIREMENT SYSTEM (PERS), Continued

SCHEDULE OF FUNDING PROGRESS, Continued

Sheriff Safety Employees

(A) (B) (C) (D) (E) (F)

Unfunded

Unfunded (Overfunded)

(Overfunded) Liability as

Entry Age Actuarial a Percentage

Actuarial Actuarial Actuarial Accrued Funded of Covered

Valuation Value of Accrued Liability Ratio Covered Payroll

Date* Assets Liability [(B)-(A)] [(A)/(B)] Payroll [(C)/(E)]

2009 71,394,537$ 95,041,935$ 23,647,398$ 75.1% 12,591,776$ 187.8%

2010 76,572,047 100,814,044 24,241,997 76.0% 12,490,589 194.1%

2011 81,994,903 108,356,979 26,362,076 75.7% 12,207,567 215.9%

*Most recent information available

OTHER POSTEMPLOYMENT OBLIGATIONS

SCHEDULE OF FUNDING PROGRESS

The table below shows a three-year analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of January 1 of each year indicated. Unfunded liability as a percentage of covered payroll decreased significantly with the January 1, 2012, actuarial valuation as the County made changes to the other post employment benefits offered to employees. County contributions are now based on Longevity Schedules with Fixed Dollar Scaling that varies by bargaining unit (excluding the physicians bargaining unit, which receives a fixed dollar amount).

Unfunded

Unfunded (Overfunded)

Entry Age (Overfunded) Liability as

Actuarial Actuarial Actuarial Actuarial a Percentage

Valuation Value of Accrued Accrued Funded Covered of Covered

Date* Assets Liability Liability Ratio Payroll Payroll

01/01/07 -$ 216,766,000$ 216,766,000$ 0.0% 153,807,000$ 140.9%

01/01/09 - 181,575,000 181,575,000 0.0% 161,577,000 112.4%

01/01/12 - 127,836,000 127,836,000 0.0% 154,788,000 82.6%

* Most recent information available.

SUPPLEMENTARY INFORMATION

126

127

COMBINING AND INDIVIDUAL FUND STATEMENTS AND SCHEDULES

128

129

SUMMARY OF NONMAJOR GOVERNMENTAL FUND

FINANCIAL STATEMENTS

Special Revenue Funds - The Special Revenue Funds are used to account for the proceeds of specific revenuesources which are legally restricted to expenditures for specific purposes.

Debt Service Funds - The Debt Service Funds are used to account for the accumulation of resources for, andthe payment of interest and principal on, revenue bonds issued by the Santa Cruz County Public FinancingAuthority. The bonds were issued for the purpose of financing certain development activities within theCounty, and for refunding outstanding bonds.

130

131

County of Santa CruzBalance SheetNonmajor Governmental Funds June 30, 2013

Special

Revenue

Funds

ASSETS

Cash and investments 20,877,905$

Restricted cash and investments 6,582,547

Receivables 2,032,915

Advances to other funds 997,761

Total assets 30,491,128$

LIABILITIES

Accounts payable 2,179,344$

Due to other funds 18,384

Unearned revenue 4,078,034

Total liabilities 6,275,762

FUND BALANCES

Restricted 24,232,516

Unassigned (17,150)

Total fund balances 24,215,366

Total liabilities and fund balances 30,491,128$

132

County of Santa CruzStatement of Revenues, Expenditures and Changes in Fund BalancesNonmajor Governmental Funds

Special

Revenue

Funds

REVENUES:

Taxes 13,606,055$ Fines, forfeits and penalties 6,602 Use of money and property (3,215) Aid from other governments 19,422,593 Charges for services 11,434,478 Other 1,252,938

Total revenues 45,719,451

EXPENDITURES:

Current:General government 391,460 Public protection 15,595,908 Public ways and facilities 23,211,072 Health & Sanitation 1,138,808 Education 4,665,192 Recreation and culture 1,236,471

Debt service:Principal 3,815,000 Interest and fiscal charges 3,135,125

Total expenditures 53,189,036

REVENUES OVER (UNDER) EXPENDITURES (7,469,585) OTHER FINANCING SOURCES (USES):

Transfers in 6,421,260 Transfers out (6,003,090)

Total other financing sources (uses) 418,170

Net change in fund balances (7,051,415)

FUND BALANCES:

Beginning of year 31,266,781

End of year 24,215,366$

For the year ended June 30, 2013

133

County of Santa CruzBudgetary Comparison ScheduleCapital Project Funds

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 65,378,757$ 65,378,757$ 65,378,757$ -$

RESOURCES(INFLOWS)

Fines, forfeits and penalties - 56,972 49,557 (7,415) Use of money and property 175,825 182,568 90,010 (92,558) Aid from other governmental agencies - 54,382 117,192 62,810 Charges for services - 1,435,707 1,634,907 199,200 Other revenue - 194,239 58 (194,181) Transfers in - 3,017,051 3,295,487 278,436

Amounts available for appropriation 175,825 4,940,919 5,187,211 246,292

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 297,416 201,435 68,316 133,119 Capital assets 55,867,094 21,258,041 7,509,701 13,748,340 Other charges - 34,686,739 10,223,005 24,463,734 Transfers out 407,328 5,639,106 5,533,208 105,898

Total charges to appropriations 56,571,838 61,785,321 23,334,230 38,451,091

FUND BALANCE, ENDING 8,982,744$ 8,534,355$ 47,231,738$ 38,697,383$

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

5,187,211$

Differences - budget to GAAP:

(3,295,487)

1,891,724$

23,334,230$

Differences - budget to GAAP:

(5,533,208)

17,801,022$

For the year ended June 30, 2013

Total expenditures as reported on the Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Governmental Funds

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

Budget

Sources/Inflows of Resources:

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "available for appropriation" from the budgetary comparison schedule

Actual amounts (budgetary basis) "available for appropriation" from the budgetary comparison schedule

Transfers from other funds are inflows of budgetary resources but are not revenues for financial reporting purposes

Total revenues as reported on the Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Governmental Funds

134

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135

Library Fund - The Library Fund finances library services in the unincorporated area of the County through contractswith the cities of Santa Cruz and Watsonville. Revenue is collected from property taxes in the unincorporated area ofthe County and from the cities of Scotts Valley and Capitola and is dedicated to the S.C. County Library Joint PowersAuthority for library operations.

Fire Fund - The Fire Fund provides support for coordinating fire protection and prevention activities with local fireprotection agencies, County departments, and advisory bodies. Revenues consist of taxes and charges for services.

Off Highway, Road and Transportation Fund - The Off Highway, Road and Transportation Fund provides for theconstruction and maintenance of County roads, along with transportation planning activities. Revenues consistprimarily of state and federal grants, state taxes, and a state subvention from vehicle license fees.

Public Financing Authority - The Public Financing Authority is a legal entity separate from the County, although it isreported as a component unit of the County. The Authority facilitates financing for the County and RedevelopmentAgency.

Fish and Game Fund - The Fish and Game Fund provides for expenditures, which are used for the protection andpropagation of fish and game. Revenues are from the County's share of fines collected for violations of fish and gamelaws.

Park Dedication and State Park Bonds Fund - The Park Dedication and State Park Bonds Fund finances park landacquisition and park development. Revenues come from development impact fees charged on new residentialdevelopment and major residential remodeling.

Health Services Fund - The Health Services Fund provides for future purchases of health facilities.

Santa Cruz Flood Control and Water Conservation Zone 7 - The Santa Cruz Flood Control and Water ConservationZone 7 fund supports a special purpose district fund administered by the Department of Public Works. It is governedby an independent Board of Directors. Revenues consist largely of service charges.

Districts Governed by the Board of Supervisors: Public Protection, Health and Sanitation, Recreation and Culture,Public Ways and Facilities Funds - The Public Protection, Health and Sanitation, Recreation and Culture, PublicWays and Facilities Funds support a number of special purpose district funds administered by the Department ofPublic Works. Revenues consist of tax levies and service charges.

Districts Governed by the Board of Supervisors: Geologic Hazard Abatement Districts Fund - The Geologic HazardAbatement Districts Fund provides for financing and maintaining improvements necessary or incidental to theprevention, mitigation, abatement, or control of geologic hazards.

Special Revenue Funds:

NONMAJORSPECIAL REVENUE FUNDS

136

County of Santa CruzCombining Balance SheetNonmajor Special Revenue Funds June 30, 2013

835/842 836 838 839

Off Highway Public

Road and Financing

Library Fire Transportation Authority

ASSETS

Cash and investments -$ 2,677,555$ 4,341,901$ -$

Restricted cash and investments - - - 6,582,547

Receivables - 62,099 1,142,568 -

Advances to other funds - - - 997,761

Prepaid items - - - -

Land held for Resale - - - -

Total assets -$ 2,739,654$ 5,484,469$ 7,580,308$

LIABILITIES

Accounts payable -$ 41,451$ 1,028,866$ -$

Due to other funds 17,150 - - 1,234

Unearned revenue - - 4,078,034 -

Total liabilities 17,150 41,451 5,106,900 1,234

FUND BALANCES

Restricted - 2,698,203 377,569 7,579,074

Unassigned (17,150) - - -

Total fund balance (17,150) 2,698,203 377,569 7,579,074

Total liabilities and fund balances -$ 2,739,654$ 5,484,469$ 7,580,308$

137

754 Park 452 Santa Cruz 710

Dedication and Flood Control

Fish and State Park Health and Water Public Health and

Game Bonds Services Conservation Zone 7 Protection Sanitation

15,409$ 1,414,731$ 862,519$ 597,521$ 2,077,027$ 11,964$

- - - - - -

- - - 609,190 208,566 -

- - - - - -

- - - - -

- - - - - -

15,409$ 1,414,731$ 862,519$ 1,206,711$ 2,285,593$ 11,964$

-$ 17,018$ -$ 806,663$ 168,216$ -$

- - - - - -

- - - - - -

- 17,018 - 806,663 168,216 -

15,409 1,397,713 862,519 400,048 2,117,377 11,964

- - - - - -

15,409 1,397,713 862,519 400,048 2,117,377 11,964

15,409$ 1,414,731$ 862,519$ 1,206,711$ 2,285,593$ 11,964$

(Continued)

Districts Governed by the Board of Supervisors

138

County of Santa CruzCombining Balance SheetNonmajor Special Revenue Funds, ContinuedJune 30, 2013

758 713 Total

Public Ways Geologic Hazard Nonmajor

Recreation and and Abatement Special Revenue

Culture Facilities Districts Funds

ASSETS

Cash and investments 1,762,196$ 6,931,898$ 185,184$ 20,877,905$

Restricted cash and investments - - - 6,582,547

Receivables - 10,492 - 2,032,915

Advances to other funds - - - 997,761

Prepaid items - - - -

- - - -

Total assets 1,762,196$ 6,942,390$ 185,184$ 30,491,128$

LIABILITIES

Accounts payable 2,274$ 114,856$ -$ 2,179,344$

Due to other funds - - - 18,384

Unearned revenue - - - 4,078,034

Total liabilities 2,274 114,856 - 6,275,762

FUND BALANCES

Restricted 1,759,922 6,827,534 185,184 24,232,516

Unassigned - - - (17,150)

Total fund balance 1,759,922 6,827,534 185,184 24,215,366

Total liabilities and fund balances 1,762,196$ 6,942,390$ 185,184$ 30,491,128$

Districts Governed by theBoard of Supervisors

139

140

County of Santa CruzCombining Statement of Revenues, Expenditures and Changes in Fund BalancesNonmajor Special Revenue Funds

835/842 836 838 839

Off Highway Public

Road and Financing

Library Fire Transportation Authority

REVENUES:

Taxes 4,631,513$ 1,656,926$ -$ -$ Fines, forfeits and penalties - - - - Use of money and property - 332 4,169 995 Aid from other governments 44,561 206,663 13,856,868 37,999 Charges for services - 991,816 1,802,537 - Other - 7,200 1,208,351 -

Total revenues 4,676,074 2,862,937 16,871,925 38,994

EXPENDITURES:

Current:General government - - - 5,940 Public protection - 2,026,446 - - Public ways and facilities - - 19,066,371 - Health & Sanitation - - - - Education 4,665,192 - - - Recreation and culture - - - -

Debt service:Principal - - - 3,815,000 Interest - - - 3,135,125

Total expenditures 4,665,192 2,026,446 19,066,371 6,956,065

REVENUES OVER (UNDER) EXPENDITURES 10,882 836,491 (2,194,446) (6,917,071)

OTHER FINANCING SOURCES (USES):

Transfers in - - - 6,233,614 Transfers out (5,555) - (183,033) (3,569,982)

Total other financing sources (uses) (5,555) - (183,033) 2,663,632

Net change in fund balances 5,327 836,491 (2,377,479) (4,253,439)

Fund balances - beginning (22,477) 1,861,712 2,755,048 11,832,513

Fund balances (deficit) - ending (17,150)$ 2,698,203$ 377,569$ 7,579,074$

For the year ended June 30, 2013

141

754 Park 452 Santa Cruz 710 758

Dedication and Flood Control

Fish and State Park Health and Water Public Health and Recreation and

Game Bonds Services Conservation Zone 7 Protection Sanitation Culture

-$ -$ -$ -$ 5,725,942$ -$ 969,073$ 6,602 - - - - - -

4 264 (322) (2,471) 1,361 33 (2,111) - - - 4,226,872 605,080 - 2,884 - 131,643 - 1,668,962 1,176,253 - 338,805 - - - 75 5,131 - 3,004

6,606 131,907 (322) 5,893,438 7,513,767 33 1,311,655

- 385,520 - - - - - 7,500 - - 6,235,295 7,284,358 42,309 -

- - - - - - - - - - - - - - - - - - - - - - 40,875 - - - - 1,195,596

- - - - - - - - - - - - - -

7,500 426,395 - 6,235,295 7,284,358 42,309 1,195,596

(894) (294,488) (322) (341,857) 229,409 (42,276) 116,059

- 160,146 - - 27,500 - - - (160,146) - - (827,500) - (135,665)

- - - - (800,000) - (135,665)

(894) (294,488) (322) (341,857) (570,591) (42,276) (19,606)

16,303 1,692,201 862,841 741,905 2,687,968 54,240 1,779,528

15,409$ 1,397,713$ 862,519$ 400,048$ 2,117,377$ 11,964$ 1,759,922$

Board of Supervisors Governed

142

County of Santa CruzCombining Statement of Revenues, Expenditures and Changes in Fund BalancesNonmajor Special Revenue Funds, ContinuedFor the year ended June 30, 2013

713 Total

Public Ways Geologic Hazard Nonmajor

and Abatement Special Revenue

Facilities Districts Funds

REVENUES:

Taxes 622,601$ -$ 13,606,055$ Fines, forfeits and penalties - - 6,602 Use of money and property (5,401) (68) (3,215) Aid from other governments 441,666 - 19,422,593 Charges for services 5,324,462 - 11,434,478 Other 29,177 - 1,252,938

Total revenues 6,412,505 (68) 45,719,451

EXPENDITURES:

Current:General government - - 391,460 Public protection - - 15,595,908 Public ways and facilities 4,144,701 - 23,211,072 Health & Sanitation 1,138,808 - 1,138,808 Education - - 4,665,192 Recreation and culture - - 1,236,471

Debt service:Principal - - 3,815,000 Interest and fiscal charges - - 3,135,125

Total expenditures 5,283,509 - 53,189,036

REVENUES OVER (UNDER) EXPENDITURES 1,128,996 (68) (7,469,585)

OTHER FINANCING SOURCES (USES):

Transfers in - - 6,421,260 Transfers out (1,121,209) - (6,003,090)

Total other financing sources (uses) (1,121,209) - 418,170

Net change in fund balances 7,787 (68) (7,051,415)

Beginning of year 6,819,747 185,252 31,266,781

End of year 6,827,534$ 185,184$ 24,215,366$

Board of Supervisors Governed

143

144

County of Santa CruzBudgetary Comparison ScheduleLibrary Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING (22,477)$ (22,477)$ (22,477)$ -$

RESOURCES(INFLOWS)

Taxes 4,627,819 4,627,819 4,631,513 3,694 Aid from other governmental agencies 97,616 97,616 44,561 (53,055)

Amounts available for appropriation 4,725,435 4,725,435 4,676,074 (49,361)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 4,675,951 4,675,951 4,643,741 32,210 Other Charges 21,451 21,451 21,451 -

Transfers out 5,555 5,555 5,555 -

Total charges to appropriations 4,702,957 4,702,957 4,670,747 32,210

FUND BALANCE, ENDING 1$ 1$ (17,150)$ (17,151)$

-

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

4,670,747$

Differences - budget to GAAP:

(5,555)

4,665,192$

For the year ended June 30, 2013

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Budget

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

145

County of Santa CruzBudgetary Comparison ScheduleFire Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 1,861,712$ 1,861,712$ 1,861,712$ -$

RESOURCES(INFLOWS)

Taxes 1,659,025 1,659,025 1,656,926 (2,099) Use of money and property 13,000 13,000 332 (12,668) Aid from other governmental agencies 154,987 235,711 206,663 (29,048) Charges for current services 1,011,773 1,011,773 991,816 (19,957) Other revenue 7,200 7,200 7,200 -

Amounts available for appropriation 2,845,985 2,926,709 2,862,937 (63,772)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Salaries and employee benefits 160,145 160,145 111,153 48,992 Services and supplies 3,010,661 3,032,422 1,779,519 1,252,903 Other charges 96,445 96,445 85,986 10,459 Capital assets 40,000 98,963 49,788 49,175 Appropriations for contingencies 200,000 200,000 - 200,000

Total charges to appropriations 3,507,251 3,587,975 2,026,446 1,561,529

FUND BALANCE, ENDING 1,200,446$ 1,200,446$ 2,698,203$ 1,497,757$

Budget

For the year ended June 30, 2013

146

County of Santa CruzBudgetary Comparison ScheduleOff Highways Road and Transportation Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 2,755,048$ 2,755,048$ 2,755,048$ -$

RESOURCES(INFLOWS)

Use of money and property 5,950 5,950 4,169 (1,781) Aid from other governmental agencies 29,932,917 31,594,543 13,856,868 (17,737,675) Charges for current services 4,748,104 4,203,928 1,802,537 (2,401,391) Other revenue - - 1,208,351 1,208,351

Amounts available for appropriation 34,686,971 35,804,421 16,871,925 (18,932,496)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 37,376,995 38,232,925 19,006,924 19,226,001 Other Charges - 59,448 59,447 1 Transfers out - 183,033 183,033 - Appropriations for contingencies - 19,039 - 19,039

Total charges to appropriations 37,376,995 38,494,445 19,249,404 19,245,041

FUND BALANCE, ENDING 65,024$ 65,024$ 377,569$ 312,545$

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule 19,249,404$

Differences - budget to GAAP:

Transfers to other funds are outflows of budgetary resources but are not expenditures for

financial reporting purposes (183,033)

19,066,371$ Fund Balances - Nonmajor Special Revenue Funds

Budget

For the year ended June 30, 2013

147

County of Santa CruzBudgetary Comparison ScheduleFish and Game Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 16,303$ 16,303$ 16,303$ -$

RESOURCES(INFLOWS)

Fines, forfeitures and penalties 3,000 3,000 6,602 3,602 Use of money and property 100 100 4 (96)

Amounts available for appropriation 3,100 3,100 6,606 3,506

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Other charges 7,500 7,500 7,500 - Appropriations for contingencies 500 500 - 500

Total charges to appropriations 8,000 8,000 7,500 500

FUND BALANCE, ENDING 11,403$ 11,403$ 15,409$ 4,006$

-

Budget

For the year ended June 30, 2013

148

County of Santa CruzBudgetary Comparison SchedulePark Dedication and State Park Bonds Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 1,692,201$ 1,692,201$ 1,692,201$ -$

RESOURCES(INFLOWS)

Use of money and property 5,931 5,931 264 (5,667) Aid from other governmental agencies 132,119 132,119 - (132,119) Charges for current services 178,361 178,361 131,643 (46,718) Other revenue 80,000 80,000 - (80,000) Transfers In 160,146 160,146 160,146 -

Amounts available for appropriation 556,557 556,557 292,053 (264,504)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 14,676 14,676 13,613 1,063 Other charges 228,547 228,547 20,153 208,394 Capital assets 1,834,687 1,834,687 392,629 1,442,058 Transfers out 160,146 160,146 160,146 -

Total charges to appropriations 2,238,056 2,238,056 586,541 1,651,515

FUND BALANCE, ENDING 10,702$ 10,702$ 1,397,713$ 1,387,011$

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

292,053$

Differences - budget to GAAP:

(160,146)

131,907$

586,541$

Differences - budget to GAAP:

(160,146)

426,395$

For the year ended June 30, 2013

Budget

Sources/Inflows of Resources:

Actual amounts (budgetary basis) "available for appropriation" from the budgetary comparison schedule

Transfers from other funds are inflows of budgetary resources but are not revenues for financial reporting purposes

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Total revenues as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

149

County of Santa CruzBudgetary Comparison ScheduleSanta Cruz Flood Control and Water Conservation - Zone 7 Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 741,905$ 741,905$ 741,905$ -$

RESOURCES(INFLOWS)

Use of money and property 2,300 2,300 (2,471) (4,771) Aid from other governmental agencies 8,656,000 12,588,854 4,226,872 (8,361,982) Charges for current services 1,627,122 1,627,122 1,668,962 41,840 Other revenue - - 75 75 Transfers In 1,045,493 1,045,493 - (1,045,493)

Amounts available for appropriation 11,330,915 15,263,769 5,893,438 (9,370,331)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 1,059,685 1,051,603 920,633 130,970 Other charges - 952,494 942,788 9,706 Capital assets 10,941,270 13,902,000 4,371,874 9,530,126 Transfers out 10,000 10,000 - 10,000 Appropriations for contingencies 61,867 89,579 - 89,579

Total charges to appropriations 12,072,822 16,005,676 6,235,295 9,770,381

FUND BALANCE, ENDING (2)$ (2)$ 400,048$ 400,050$

-

For the year ended June 30, 2013

Budget

150

County of Santa CruzBudgetary Comparison ScheduleDistricts Governed by the Board of Supervisors - Public Protection Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 2,687,968$ 2,687,968$ 2,687,968$ -$

RESOURCES(INFLOWS)

Taxes 5,732,164 5,732,164 5,725,942 (6,222) Use of money and property 13,059 13,059 1,361 (11,698) Aid from other governmental agencies 716,425 716,425 605,080 (111,345) Charges for current services 933,245 947,745 1,176,253 228,508 Other revenue - - 5,131 5,131 Transfers in - 27,500 27,500 -

Amounts available for appropriation 7,394,893 7,436,893 7,541,267 104,374

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Salaries and employee benefits 54,190 54,190 43,047 11,143 Services and supplies 6,434,716 6,635,176 5,937,309 697,867 Other charges 883,988 884,030 879,829 4,201 Capital assets 925,099 910,723 424,173 486,550 Transfers out 800,000 800,000 827,500 (27,500) Appropriations for contingencies 174,899 154,899 - 154,899

Total charges to appropriations 9,272,892 9,439,018 8,111,858 1,327,160

FUND BALANCE, ENDING 809,969$ 685,843$ 2,117,377$ 1,431,534$

-

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

7,541,267$

Differences - budget to GAAP:

(27,500)

7,513,767$

8,111,858$

Differences - budget to GAAP:

(827,500)

7,284,358$

For the year ended June 30, 2013

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Transfers from other funds are inflows of budgetary resources but are not revenues for financial reporting purposes

Total revenues as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Budget

Sources/Inflows of Resources:

Actual amounts (budgetary basis) "available for appropriation" from the budgetary comparison schedule

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

151

County of Santa CruzBudgetary Comparison ScheduleDistricts Governed by the Board of Supervisors - Health and Sanitation Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 54,240$ 54,240$ 54,240$ -$

RESOURCES(INFLOWS)

Use of money and property 50 50 33 (17)

Amounts available for appropriation 50 50 33 (17)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 54,290 54,069 42,088 11,981 Other charges - 221 221 -

Total charges to appropriations 54,290 54,290 42,309 11,981

FUND BALANCE, ENDING -$ -$ 11,964$ 11,964$

-

Budget

For the year ended June 30, 2013

152

County of Santa CruzBudgetary Comparison ScheduleDistricts Governed by the Board of Supervisors - Recreation and Culture Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 1,779,528$ 1,779,528$ 1,779,528$ -$

RESOURCES(INFLOWS)

Taxes 924,728 924,728 969,073 44,345 Use of money and property 8,754 8,754 (2,111) (10,865) Aid from other governmental agencies 3,802 3,802 2,884 (918) Charges for current services 321,889 321,889 338,805 16,916 Other revenue 1,200 1,200 3,004 1,804

Amounts available for appropriation 1,260,373 1,260,373 1,311,655 51,282

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 1,013,783 1,013,320 945,154 68,166 Other charges 396,437 396,437 250,442 145,995 Transfers out 135,202 135,665 135,665 -

Total charges to appropriations 1,545,422 1,545,422 1,331,261 214,161

FUND BALANCE, ENDING 1,494,479$ 1,494,479$ 1,759,922$ 265,443$

-

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

1,331,261$

Differences - budget to GAAP:

(135,665)

1,195,596$

For the year ended June 30, 2013

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Budget

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

153

County of Santa CruzBudgetary Comparison ScheduleDistricts Governed by the Board of Supervisors-Public Ways and Facilities Special Revenue Fund

Variance withFinal Budget

PositiveOriginal Final Actual (Negative)

FUND BALANCE, BEGINNING 6,819,747$ 6,819,747$ 6,819,747$ -$

RESOURCES(INFLOWS)

Taxes 607,706 607,706 622,601 14,895 Use of money and property 45,179 45,179 (5,401) (50,580) Aid from other governmental agencies 1,265,974 1,265,974 441,666 (824,308) Charges for current services 5,325,027 5,325,027 5,324,462 (565) Other revenues - 21,550 29,177 7,627

Amounts available for appropriation 7,243,886 7,265,436 6,412,505 (852,931)

CHARGES TO APPROPRIATIONS(OUTFLOWS)

Services and supplies 7,901,156 7,739,429 4,529,017 3,210,412 Other charges 61,023 85,192 73,317 11,875 Capital assets 1,241,793 1,411,793 681,175 730,618 Transfers out 1,385,237 1,385,237 1,121,209 264,028 Appropriations for contingencies 91,000 91,000 - 91,000

Total charges to appropriations 10,680,209 10,712,651 6,404,718 4,307,933

FUND BALANCE, ENDING 3,383,424$ 3,372,532$ 6,827,534$ 3,455,002$

-

Explanation of Differences between Budgetary Inflows and Outflows and GAAP Revenues and Expenditures

6,404,718$

Differences - budget to GAAP:

(1,121,209)

5,283,509$

For the year ended June 30, 2013

Budget

Total expenditures as reported on the Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds

Uses/Outflows of Resources:

Actual amounts (budgetary basis) "charges to appropriation" from the budgetary comparison schedule

Transfers to other funds are outflows of budgetary resources but are not expenditures for financial reporting purposes

154

155

Davenport Sanitation District - This district provides sewage collection, treatment, and disposal services aswell as the supplying and treatment of water to Davenport, Newtown, and San Vicente. User fees andcontributions from the principal commercial customer are the principal sources of revenue.

NONMAJOR ENTERPRISE FUNDS

Boulder Creek CSA 7, Rolling Woods CSA 10, Place de Mer CSA 2, Sand Dollar Beach CSA 5, Trestle BeachCSA 20, Summit West CSA 54, and Graham Hill CSA 57 - These County Service Areas provide sewagecollection, treatment, and disposal services to residents within each district's area. User fees are the principalsources of revenue.

Septic Tank Maintenance CSA 12 - This County Service Area provides maintenance for septic tanks inunincorporated areas of the County. User fees are the principal source of revenue.

Freedom County Sanitation District - This district provides sewage collection, treatment, and disposalservices for the residents of the Freedom area. User fees are the principal source of revenue.

156

County of Santa CruzCombining Statement of Net PositionNonmajor Enterprise FundsJune 30, 2013

Sand

Boulder Rolling Place Dollar Trestle

Creek Woods de Mer Beach Beach

CSA 7 CSA 10 CSA 2 CSA 5 CSA 20

ASSETS

Current assets:

Cash and investments 486,158$ 1,515$ 336,595$ 148,010$ 70,945$

Restricted cash - - - - -

Receivables - - - - -

Total current assets 486,158 1,515 336,595 148,010 70,945

Noncurrent assets:

Loans Receivable - - - - -

Capital assets:

Construction in progress - - - - -

Buildings and structures 1,903,676 375,398 188,209 917,969 -

Equipment 83,079 - - - 13,569

Accumulated depreciation (1,368,144) (217,394) (97,658) (265,679) (11,534)

Capital assets, net 618,611 158,004 90,551 652,290 2,035

Total Noncurrent assets 618,611 158,004 90,551 652,290 2,035

Total assets 1,104,769 159,519 427,146 800,300 72,980

LIABILITIES

Current Liabilities:

Payables 95 - - 19,046 54

Due to other funds - - - - -

Current portion of long-term liabilities - - - - -

Total current liabilities 95 - - 19,046 54

Noncurrent Liabilities:

Long-term liabilities - - - - -

Total noncurrent liabilities - - - - -

Total liabilities 95 - - 19,046 54

NET POSITION

Net investment in capital assets 618,611 158,004 90,551 652,290 2,035 Restricted for:

Debt service - - - - -

Unrestricted 486,063 1,515 336,595 128,964 70,891

Total net position 1,104,674$ 159,519$ 427,146$ 781,254$ 72,926$

157

Freedom

Summit Graham Septic Tank County Davenport

West Hill Maintenance Sanitation Sanitation

CSA 54 CSA 57 CSA 12 District District Total

2,733$ 586,716$ 1,152,123$ 2,040,115$ 14,158$ 4,839,068$

- - - - 16,408 16,408

- - 979 - - 979

2,733 586,716 1,153,102 2,040,115 30,566 4,856,455

- - 135,190 - - 135,190

- - - 1,223,857 - 1,223,857

- - - 7,076,821 6,606,034 17,068,107

- - 72,612 - 17,345 186,605

- - (46,421) (3,741,749) (1,889,013) (7,637,592)

- - 26,191 4,558,929 4,734,366 10,840,977

- - 161,381 4,558,929 4,734,366 10,976,167

2,733 586,716 1,314,483 6,599,044 4,764,932 15,832,622

- - 31,227 139 431 50,992

- - - - 160,551 160,551

- - 11,916 - 28,401 40,317

- - 43,143 139 189,383 251,860

- - 220,832 - 269,509 490,341

- - 220,832 - 269,509 490,341

- - 263,975 139 458,892 742,201

- - 26,191 4,558,929 4,436,456 10,543,067

- - - - 43,427 43,427

2,733 586,716 1,024,317 2,039,976 (173,843) 4,503,927

2,733$ 586,716$ 1,050,508$ 6,598,905$ 4,306,040$ 15,090,421$

158

County of Santa CruzCombining Statement of Revenues, Expenses and Changes in Net PositionNonmajor Enterprise Funds

Sand

Boulder Rolling Place Dollar Trestle

Creek Woods de Mer Beach Beach

CSA 7 CSA 10 CSA 2 CSA 5 CSA 20

OPERATING REVENUES:

Charges for services 427,195$ 11,569$ 82,964$ 249,991$ 54,252$

Total operating revenues 427,195 11,569 82,964 249,991 54,252

OPERATING EXPENSES:

Services and supplies 280,837 6,013 16,462 233,493 35,590

Depreciation and amortization 73,385 8,644 5,541 34,918 1,357

Total operating expenses 354,222 14,657 22,003 268,411 36,947

Operating income (loss) 72,973 (3,088) 60,961 (18,420) 17,305

NONOPERATING REVENUES (EXPENSES):

Interest and investment income (582) 76 (276) (194) (84)

Property taxes - - - - -

Total nonoperating revenues (expenses) (582) 76 (276) (194) (84)

Income (loss) before contributions and transfers 72,391 (3,012) 60,685 (18,614) 17,221

Capital contributions - - - - -

Change in net position 72,391 (3,012) 60,685 (18,614) 17,221

Beginning of the year 1,032,283 162,531 366,461 799,868 55,705

End of the year 1,104,674$ 159,519$ 427,146$ 781,254$ 72,926$

For the year ended June 30, 2013

159

Freedom

Summit Graham Septic Tank County Davenport

West Hill Maintenance Sanitation Sanitation

CSA 54 CSA 57 CSA 12 District District Total

-$ 90,724$ 967,929$ 701,770$ 426,401$ 3,012,795$

- 90,724 967,929 701,770 426,401 3,012,795

136 36,753 1,015,746 288,087 303,898 2,217,015

- - 903 163,209 165,390 453,347

136 36,753 1,016,649 451,296 469,288 2,670,362

(136) 53,971 (48,720) 250,474 (42,887) 342,433

(1) (326) (7,841) 1,142 (9,445) (17,531)

- - - - 25,410 25,410

(1) (326) (7,841) 1,142 15,965 7,879

(137) 53,645 (56,561) 251,616 (26,922) 350,312

- - - - 60,071 60,071

(137) 53,645 (56,561) 251,616 33,149 410,383

2,870 533,071 1,107,069 6,347,289 4,272,891 14,680,038

2,733$ 586,716$ 1,050,508$ 6,598,905$ 4,306,040$ 15,090,421$

160

County of Santa CruzCombining Statement of Cash FlowsNonmajor Enterprise Funds

Sand

Boulder Rolling Place Dollar TrestleCreek Woods de Mer Beach BeachCSA 7 CSA 10 CSA 2 CSA 5 CSA 20

CASH FLOWS FROM OPERATING ACTIVITIES:

Receipts from customers and users 427,195$ 11,569$ 82,964$ 249,991$ 54,252$

Payments to suppliers for goods and services (93,921) (4,816) (9,310) (71,039) (9,045)

Payments for interfund services used (187,237) (1,197) (7,152) (143,724) (27,638)

Net cash provided (used) by operating activities 146,037 5,556 66,502 35,228 17,569

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Transfers from other funds - - - - -

Transfers to other funds - - - - -

Principal paid on other long-term debt - - - - -

Interest paid on other long-term debt - - - - -

Property taxes - - - - -

Net cash provided (used) by noncapitalfinancing activities - - - - -

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:

Capital contributions - - - - -

Purchase of capital assets - (54,017) - - -

Principal paid on long-term liabilities - - - - -

Interest paid on long-term liabilities - - - - -

Net cash provided (used) by capital andrelated financing activities - (54,017) - - -

CASH FLOWS FROM INVESTING ACTIVITIES:

Interest and dividends (582) 76 (276) (194) (84)

Net cash provided (used) by investing activities (582) 76 (276) (194) (84)

Net increase (decrease) in cashcash and cash equivalents 145,455 (48,385) 66,226 35,034 17,485

Cash and cash equivalents at beginning of year 340,703 49,900 270,369 112,976 53,460

Cash and cash equivalents at end of year 486,158$ 1,515$ 336,595$ 148,010$ 70,945$

For the year ended June 30, 2013

161

Freedom

Summit Graham Septic Tank County DavenportWest Hill Maintenance Sanitation Sanitation

CSA 54 CSA 57 CSA 12 District District Total

-$ 90,724$ 1,025,878$ 701,770$ 572,244$ 3,216,587$

(125) (4,122) (1,065,696) (191,537) (79,063) (1,528,674)

(11) (32,631) - (202,329) (232,069) (833,988)

(136) 53,971 (39,818) 307,904 261,112 853,925

- - - (2,056) 11,150 9,094

- - - - (333,536) (333,536)

- - (11,614) - - (11,614)

- - (6,353) - - (6,353)

- - - - 25,410 25,410

- - (17,967) (2,056) (296,976) (316,999)

- - - - 60,071 60,071 - - (27,094) (1,263,992) - (1,345,103) - - - - (27,670) (27,670) - - - - (8,870) (8,870)

- - (27,094) (1,263,992) 23,531 (1,321,572)

(1) (326) (1,488) 1,142 (575) (2,308)

(1) (326) (1,488) 1,142 (575) (2,308)

(137) 53,645 (86,367) (957,002) (12,908) (786,954)

2,870 533,071 1,238,490 2,997,117 43,474 5,642,430

2,733$ 586,716$ 1,152,123$ 2,040,115$ 30,566$ 4,855,476$

(Continued)

163

County of Santa CruzCombining Statement of Cash Flows, ContinuedNonmajor Enterprise FundsFor the year ended June 30, 2013

Sand

Boulder Rolling Place Dollar TrestleCreek Woods de Mer Beach BeachCSA 7 CSA 10 CSA 2 CSA 5 CSA 20

RECONCILIATION OF OPERATING

INCOME (LOSS) TO NET CASH PROVIDED

(USED) BY OPERATING ACTIVITIES:

Operating income (loss) 72,973$ (3,088)$ 60,961$ (18,420)$ 17,305$

Adjustments to reconcile operating income (loss) to net

cash provided (used) by operating activities:

Depreciation 73,385 8,644 5,541 34,918 1,357

Changes in assets and liabilities:

(Increase) decrease in:

Receivables - - - - -

Increase (decrease) in:

Payables (321) - - 18,730 (1,093)

Total adjustments 73,064 8,644 5,541 53,648 264

Net cash provided (used) by

operating activities 146,037$ 5,556$ 66,502$ 35,228$ 17,569$

162

Freedom

Summit Graham Septic Tank County DavenportWest Hill Maintenance Sanitation Sanitation

CSA 54 CSA 57 CSA 12 District District Total

(136)$ 53,971$ (48,720)$ 250,474$ (42,887)$ 342,433$

- - 903 163,209 165,390 453,347

- - 57,949 - 145,843 203,792

- - (49,950) (105,779) (7,234) (145,647)

- - 8,902 57,430 303,999 511,492

(136)$ 53,971$ (39,818)$ 307,904$ 261,112$ 853,925$

(Concluded)

164

165

Self-Insurance Funds - The Self-Insurance Funds account for the County's self-insured risk management,dental and health, liability and property, workers' compensation, employee benefit staffing, and statecompensation insurance program.

Public Works Fund - The Public Works Fund accounts for such County functions as construction andmaintenance of the County road system and management of certain special districts and other relatedactivities.

Service Center Fund - The Service Center Fund accounts for the maintenance of the County fleet of vehiclesand for related services to other County departments.

INTERNAL SERVICE FUNDS

Internal Service Funds are used to account for the financing of goods or services provided by one department oragency to other departments or agencies of the government and to other government units, on a cost reimbursementbasis.

Information Services Fund - The Information Services Fund accounts for data processing andtelecommunications services provided to County departments.

Central Duplicating Fund - The Central Duplicating Fund accounts for the County print shop, copycenter, and mail room.

166

County of Santa CruzCombining Statement of Net PositionInternal Service FundsJune 30, 2013

Central Information Public Service

Duplicating Services Works Center

ASSETS

Current assets:Cash and investments -$ 3,330,472$ 2,455,171$ 1,332,686$ Receivables - - 579,459 30 Due from other funds - 58,134 160,551 - Deposits with others - - - - Inventory - - 550,336 16,737 Prepaid items 51,725 - - -

Total current assets 51,725 3,388,606 3,745,517 1,349,453

Capital assets:Land - - 62,914 34,173 Construction in progress - - 8,445 - Buildings and structures - - 2,611,613 473,443 Equipment 389,772 9,854,697 7,992,163 7,875,829 Accumulated depreciation (353,925) (7,189,882) (9,598,548) (7,099,003)

Capital assets, net 35,847 2,664,815 1,076,587 1,284,442

Total assets 87,572 6,053,421 4,822,104 2,633,895

LIABILITIES

Current Liabilities:Payables 6,990 168,349 837,765 98,120 Due to other funds 58,134 - - - Claims liability - - - - Capital leases 7,645 - 2,367 - Compensated absences,

due within one year 9,773 504,352 2,235,389 36,768

Total current liabilities 82,542 672,701 3,075,521 134,888

Noncurrent Liabilities:Claims liability - - - - Capital leases 1,464 - 4,066 - Compensated absences,

due in more than one year 1,972 392,350 1,036,259 21,755

Total noncurrent liabilities 3,436 392,350 1,040,325 21,755

Total liabilities 85,978 1,065,051 4,115,846 156,643

NET POSITION

Net investment in capital assets 26,735 2,664,815 1,078,930 1,284,442 Unrestricted (25,141) 2,323,555 (372,672) 1,192,810

Total net position 1,594$ 4,988,370$ 706,258$ 2,477,252$

167

Risk Dental and Liability and Workers' Employee State

Management and Health Property Compensation Benefit Unemployment

Self-Insurance Insurance Insurance Insurance Staffing Insurance Total

487,315$ 1,365,872$ 8,909,387$ 10,682,231$ 584,904$ 1,191,639$ 30,339,677$ - 40,832 - - - - 620,321 - - - - - - 218,685 - - - 150,000 - - 150,000 - - - - - - 567,073 - - - - - - 51,725

487,315 1,406,704 8,909,387 10,832,231 584,904 1,191,639 31,947,481

- - - - - - 97,087 - - - - - - 8,445 - - - - - - 3,085,056

55,237 - - - - - 26,167,698 (55,237) - - - - - (24,296,595)

- - - - - - 5,061,691

487,315 1,406,704 8,909,387 10,832,231 584,904 1,191,639 37,009,172

26,803 44,796 239,815 213,050 35,106 - 1,670,794 - - - - - - 58,134 - 96,053 3,328,736 4,505,597 - 91,466 8,021,852 - - - - - - 10,012

64,837 - - - 29,402 - 2,880,521

91,640 140,849 3,568,551 4,718,647 64,508 91,466 12,641,313

- - 8,742,173 29,988,403 - - 38,730,576 - - - - - - 5,530

68,375 - - - 10,556 - 1,531,267

68,375 - 8,742,173 29,988,403 10,556 - 40,267,373

160,015 140,849 12,310,724 34,707,050 75,064 91,466 52,908,686

- - - - - - 5,054,922 327,300 1,265,855 (3,401,337) (23,874,819) 509,840 1,100,173 (20,954,436)

327,300$ 1,265,855$ (3,401,337)$ (23,874,819)$ 509,840$ 1,100,173$ (15,899,514)$

Self-Insurance

168

County of Santa CruzCombining Statement of Revenues, Expenses and Changes in Net PositionInternal Service Funds

Central Information Public Service

Duplicating Services Works Center

OPERATING REVENUES:

Charges for services 577,095$ 9,973,195$ 33,926,101$ 2,150,202$

Other revenues - 82,114 754,629 11,306

Total operating revenues 577,095 10,055,309 34,680,730 2,161,508

OPERATING EXPENSES:

Salaries and employee benefits 149,205 6,258,150 25,980,279 442,782

Services and supplies 293,514 3,063,669 5,167,065 1,077,411

Insurance and compensation claims - 79,044 2,323,723 26,593

Other 49,829 - - -

Depreciation and amortization 7,872 442,031 371,803 452,088

Total operating expenses 500,420 9,842,894 33,842,870 1,998,874

Operating income (loss) 76,675 212,415 837,860 162,634

NONOPERATING REVENUES (EXPENSES):

Intergovernmental - - - 117,416

Interest and investment income (881) - (750) -

Gain/(loss) on disposal of capital assets - - 8,895 16,577

Total nonoperating revenues (expenses) (881) - 8,145 133,993

Income (loss) before contributions and transfers 75,794 212,415 846,005 296,627

Transfers in - 571,560 - 186,731

Change in net position 75,794 783,975 846,005 483,358

Beginning of the year (74,200) 4,204,395 (139,747) 1,993,894

End of the year 1,594$ 4,988,370$ 706,258$ 2,477,252$

For the year ended June 30, 2013

169

Risk Dental and Liability and Workers' Employee State

Management and Health Property Compensation Benefit Unemployment

Self-Insurance Insurance Insurance Insurance Staffing Insurance Total

1,400,000$ 1,973,115$ 5,900,000$ 6,500,000$ 1,016,169$ 700,000$ 64,115,877$

- - 708 32,042 - - 880,799

1,400,000 1,973,115 5,900,708 6,532,042 1,016,169 700,000 64,996,676

853,159 - - - 298,738 - 33,982,313

559,644 31,712 1,668,901 1,067,014 491,277 4,843 13,425,050

22,302 2,040,918 3,197,944 7,766,723 - 350,748 15,807,995

- - - - - - 49,829

- - - - - - 1,273,794

1,435,105 2,072,630 4,866,845 8,833,737 790,015 355,591 64,538,981

(35,105) (99,515) 1,033,863 (2,301,695) 226,154 344,409 457,695

- - - - - - 117,416

543 (102) (5,409) (2,575) (217) (734) (10,125)

- - - - - - 25,472

543 (102) (5,409) (2,575) (217) (734) 132,763

(34,562) (99,617) 1,028,454 (2,304,270) 225,937 343,675 590,458

- - - - - - 758,291

(34,562) (99,617) 1,028,454 (2,304,270) 225,937 343,675 1,348,749

361,862 1,365,472 (4,429,791) (21,570,549) 283,903 756,498 (17,248,263)

327,300$ 1,265,855$ (3,401,337)$ (23,874,819)$ 509,840$ 1,100,173$ (15,899,514)$

Self-Insurance

170

County of Santa CruzCombining Statement of Cash FlowsInternal Service Funds

Central Information Public ServiceDuplicating Services Works Center

CASH FLOWS FROM OPERATING ACTIVITIES:

Receipts from customers and users 577,095$ 10,080,281$ 1,438,422$ 2,192,012$

Receipts from interfund services provided - - 32,802,454 -

Payments to suppliers for goods and services (334,246) (3,169,607) (7,128,319) (1,195,104)

Payments to employees for services (146,595) (6,189,687) (26,078,577) (437,374)

Other receipts - - - -

Other payments (49,829) - - -

Net cash provided (used) by operating activities 46,425 720,987 1,033,980 559,534

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Transfers from other funds - 571,560 400,633 186,731 Intergovernmental - - - 117,416

Net cash provided (used) by noncapitalfinancing activities - 571,560 400,633 304,147

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:

Purchase of capital assets (19,333) (878,239) (419,185) (297,090)

Principal paid on long-term debt (7,149) - (1,816) -

Interest paid on long-term debt (880) - (750) -

Proceeds from sale of capital assets - - 8,895 16,576

Loan proceeds 58,133 - - -

Loan repayment (77,196) - - -

Net cash provided (used) by capital andrelated financing activities (46,425) (878,239) (412,856) (280,514)

CASH FLOWS FROM INVESTING ACTIVITIES:

Interest and dividends - - - -

Net cash provided (used) by investing activities - - - -

Net increase (decrease) in cashcash and cash equivalents - 414,308 1,021,757 583,167

Cash and cash equivalents at beginning of year - 2,916,164 1,433,414 749,519

Cash and cash equivalents at end of year -$ 3,330,472$ 2,455,171$ 1,332,686$

For the year ended June 30, 2013

171

Risk Dental and Liability and Workers' Employee StateManagement and Health Property Compensation Benefit Unemployment

Self-Insurance Insurance Insurance Insurance Staffing Insurance Total

1,400,000$ 1,984,833$ 5,900,000$ 6,529,175$ 1,016,169$ 700,000$ 31,817,987$ - - - - - - 32,802,454

(575,111) (2,055,591) (4,909,886) (6,179,939) (462,197) (355,591) (26,365,591)

(851,883) - - - (311,953) - (34,016,069)

- - 707 2,867 - - 3,574 - - - - - - (49,829)

(26,994) (70,758) 990,821 352,103 242,019 344,409 4,192,526

- - - - - - 1,158,924 - - - - - - 117,416

- - - - - - 1,276,340

- - - - - - (1,613,847) - - - - - - (8,965) - - - - - - (1,630) - - - - - - 25,471 - - - - - - 58,133 - - - - - - (77,196)

- - - - - - (1,618,034)

543 (102) (5,409) (2,575) (217) (734) (8,494)

543 (102) (5,409) (2,575) (217) (734) (8,494)

(26,451) (70,860) 985,412 349,528 241,802 343,675 3,842,338

513,766 1,436,732 7,923,975 10,332,703 343,102 847,964 26,497,339

487,315$ 1,365,872$ 8,909,387$ 10,682,231$ 584,904$ 1,191,639$ 30,339,677$

(Continued)

Self-Insurance

173

County of Santa CruzCombining Statement of Cash Flows, ContinuedInternal Service FundsFor the year ended June 30, 2013

Central Information Public ServiceDuplicating Services Works Center

RECONCILIATION OF OPERATING

INCOME (LOSS) TO NET CASH PROVIDED

(USED) BY OPERATING ACTIVITIES:

Operating income (loss) 76,675$ 212,415$ 837,860$ 162,634$

Adjustments to reconcile operating income (loss) to netcash provided (used) by operating activities:

Depreciation 7,872 442,031 371,803 452,088

Changes in assets and liabilities:(Increase) decrease in:

Receivables - 24,972 (431,653) 30,504

Inventory - - 46,798 5,632

Prepaid items (10,997) - - -

Increase (decrease) in:Payables (29,735) (26,894) 286,065 (96,732)

Accrued salaries and benefits 116 7,267 5,210 99

Compensated absences 2,494 61,196 (82,103) 5,309

Total adjustments (30,250) 508,572 196,120 396,900

Net cash provided (used) by

operating activities 46,425$ 720,987$ 1,033,980$ 559,534$

172

Risk Dental and Liability and Workers' Employee StateManagement and Health Property Compensation Benefit Unemployment

Self-Insurance Insurance Insurance Insurance Staffing Insurance Total

(35,105)$ (99,515)$ 1,033,863$ (2,301,695)$ 226,154$ 344,409$ 457,695$

- - - - - - 1,273,794

- 11,717 - - - - (364,460) - - - - - - 52,430 - - - - - - (10,997)

6,834 17,040 (43,042) 2,653,798 29,080 - 2,796,414 3,841 - - - (1,162) - 15,371

(2,564) - - - (12,053) - (27,721)

8,111 28,757 (43,042) 2,653,798 15,865 - 3,734,831

(26,994)$ (70,758)$ 990,821$ 352,103$ 242,019$ 344,409$ 4,192,526$

(Concluded)

Self-Insurance

174

175

Property Tax Collections Funds - The Property Tax Collections Funds are used to account for the collectionand distribution of property taxes and interest on bank deposits of other local governmental agencies.

FIDUCIARY FUNDS

Agency Funds - Agency Funds are used to account for the receipt and disbursement of various taxes, deposits,deductions, and property collected by the County, acting in the capacity of an agent for distribution to othergovernmental entities or other organizations.

Payroll Funds - The Payroll Funds are used to account for various employee payroll deductions, taxwithholdings, and employer contributions for fringe benefits.

Intergovernmental Agency Funds - Intergovernmental Agency Funds are used to account for deposits

which are under the control of various single county officers. Disbursement are made from these funds

by the Auditor-Controller based on a properly written authorization from the responsible officer.

Private Purpose Trust Fund - The Private Purpose Turst Fund is used to report the assets, liabilities and activities of the Santa Cruz County Redevelopment Successor Agency.

176

177

County of Santa CruzCombining Statement of Net PositionAll Agency FundsJune 30, 2013

Inter- Property

governmental Tax

Agency Payroll Collection Total

ASSETS

Cash and investments 20,765,595$ 6,688,087$ 9,094,265$ 36,547,947$

Receivables 115,045 - 15,069,632 15,184,677

Total assets 20,880,640$ 6,688,087$ 24,163,897$ 51,732,624$

LIABILITIES

Accounts payable -$ 6,688,087$ -$ 6,688,087$

Due to other governmental units - - 24,163,897 24,163,897

Agency funds held for others 20,880,640 - - 20,880,640

Total liabilities 20,880,640$ 6,688,087$ 24,163,897$ 51,732,624$

178

County of Santa CruzCombining Statement of Changes in Net PositionAgency Funds

Balance Balance

June 30, 2012 Additions Deletions June 30, 2013

Assets:Cash and investments 20,734,644$ 243,307,172$ 243,276,221$ 20,765,595$ Receivables 191,639 228,252 304,846 115,045

Total assets 20,926,283$ 243,535,424$ 243,581,067$ 20,880,640$

Liabilities:Accounts payable -$ 45,993,767$ 45,993,767$ -$ Agency funds held for others 20,926,283 425,201,444 425,247,087 20,880,640

Total liabilities 20,926,283$ 471,195,211$ 471,240,854$ 20,880,640$

Assets:Cash and investments 6,735,692$ 282,701,235$ 282,748,840$ 6,688,087$

Total assets 6,735,692$ 282,701,235$ 282,748,840$ 6,688,087$

Liabilities:Accounts payable 6,735,692 631,807,850 631,855,455 6,688,087

Total liabilities 6,735,692$ 631,807,850$ 631,855,455$ 6,688,087$

Assets:Cash and investments 7,176,363$ 870,483,806$ 868,565,904$ 9,094,265$ Receivables 15,653,898 406,941,023 407,525,289 15,069,632

Total assets 22,830,261$ 1,277,424,829$ 1,276,091,193$ 24,163,897$

Liabilities:Accounts payable 2,566$ 19,536,018$ 19,538,584$ -$ Due to other governmental units 22,827,695 1,287,311,707 1,285,975,505 24,163,897

Total liabilities 22,830,261$ 1,306,847,725$ 1,305,514,089$ 24,163,897$

Assets:Cash and investments 34,646,699$ 1,396,492,213$ 1,394,590,965$ 36,547,947$ Receivables 15,845,537 407,169,275 407,830,135 15,184,677

Total assets 50,492,236$ 1,803,661,488$ 1,802,421,100$ 51,732,624$

Liabilities:Accounts payable 6,738,258$ 697,337,635$ 697,387,806$ 6,688,087$ Due to other governmental units 22,827,695 1,287,311,707 1,285,975,505 24,163,897 Agency funds held for others 20,926,283 425,201,444 425,247,087 20,880,640

Total liabilities 50,492,236$ 2,409,850,786$ 2,408,610,398$ 51,732,624$

Intergovernmental Agency

Payroll

Total Agency Funds

Property Tax Collection

For the year ended June 30, 2013

179

Santa Cruz County Redevelopment Successor AgencyStatement of Net PositionPrivate Purpose Trust FundJune 30, 2013

Santa Cruz County

Redevelopment

Successor Agency

ASSETS

Current Assets:

Cash and investments 20,539,610$

Total current assets: 20,539,610

Noncurrent Assets:

Restricted cash with fiscal agents 12,957,371

Capital assets, net 9,209,579

Total noncurrent assets: 22,166,950

Total assets 42,706,560$

DEFERRED OUTFLOWS OF RESOURCES

Deferred bond issuance costs 3,610,855

Total deferred outflows of resources 3,610,855$

LIABILITIES

Current Liabilities:

Accounts payable - claims 62,638$

Accounts payable - payroll 2,748

Interest payable 4,636,371

Compensated absences - due within one year 14,211

Long-term debt - due within one year 5,120,519

Total current liabilities: 9,836,487

Long-term Liabilities:

Compensated absences - due in more than one year 41,558

Long-term debt - due in more than one year 236,109,499

Total long-term liabilities: 236,151,057

Total liabilities 245,987,544$

DEFERRED INFLOWS OF RESOURCES

Deferred tax increment revenue 7,425,854

Total deferred inflows of resources 7,425,854$

NET POSITION

Fund net position held in trust (207,095,983)$

180

Santa Cruz County Redevelopment Successor AgencyStatement of Changes in Net Position

Private Purpose Trust Funds

For the year ended June 30, 2013

Santa Cruz County

Redevelopment

ADDITIONS: Successor Agency

Investment income (40,026)$ Tax increment received 12,239,109Other revenue 256,003Contributions from other agencies 315,373

Total additions 12,770,459

DEDUCTIONS:

Payments in accordance with enforceable obligations 15,942,667 Contributions to other agencies 1,159,675

Total deductions 17,102,342

Change in net position before extraordinary item (4,331,883)

EXTRAORDINARY GAIN/(LOSS) 16,376,150

Change in net position held in trust: 12,044,267

Net position - beginning (216,894,656) Prior period adjustment (2,245,594) Net position - beginning, as restated (219,140,250)

Net position - ending (207,095,983)$

181

182

Contents Page

Financial TrendsThese schedules contain trend information to help the reader understand how the County'sfinancial performance and well-being have changed over time. 184 - 186

Revenue CapacityThese schedules contain information to help the reader assess the County's most significantlocal revenue source, the property tax. 187 - 192

Debt Capacity

These schedules present information to help the reader assess the affordability of the County'scurrent level of outstanding debt and the County's ability to issue additional debt in the future. 193 - 196

Demographic and Economic InformationThese schedules offer demographic and economic indicators to help the reader understand theenvironment within which the County's financial activities take place. 197 - 201

Operating Information

These schedules contain service and infrastructure data to help the reader understand how theinformation in the County's financial report relates to the services the County provides and theactivities it performs. 202 - 206

STATISTICAL SECTION(UNAUDITED)

This part of the County of Santa Cruz's comprehensive annual financial report presents detailed information as a contextfor understanding what the information in the financial statements, note disclosures, and required supplementaryinformation says about the County's overall financial health.

Sources: Unless otherwise noted, the information in these schedules is derived from the comprehensive annual financial reports for the relevant year.

183

County of Santa CruzNet Position by ComponentLast Ten Fiscal Years(Reported in Thousands)

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Governmental activities

Net investment in capital assets 448,657$ 455,726$ 215,172$ 212,557$ 242,858$ 327,708$ 332,526$ 263,521$ 244,386$ 46,942$

Restricted 67,014 96,980 117,713 40,865 31,660 55,167 39,024 96,829 103,442 16,192

Unrestricted (65,133) (66,913) (61,396) 36,955 32,147 (21,529) 6,532 3,703 13,017 2,545Total governmental activities net position 450,538$ 485,793$ 271,489$ 290,377$ 306,665$ 361,346$ 378,082$ 364,053$ 360,845$ 65,679$

Business-type activities

Net investment in capital assets 25,023$ 25,442$ 24,677$ 26,662$ 26,327$ 27,280$ 23,266$ 23,032$ 22,869$ 21,425$

Restricted 44 256 253 317 83 187 250 261 255 308

Unrestricted 7,634 6,520 5,803 6,553 7,433 6,797 12,628 12,972 13,041 14,013Total business-type activities net position 32,701$ 32,218$ 30,733$ 33,532$ 33,843$ 34,264$ 36,144$ 36,265$ 36,165$ 35,746$

Total primary government

Net investment in capital assets 473,680$ 481,168$ 239,849$ 239,219$ 269,185$ 354,988$ 355,792$ 286,553$ 267,255$ 68,367$

Restricted 67,058 97,236 117,966 41,182 31,743 55,354 39,274 97,090 103,697 16,500

Unrestricted (57,499) (60,393) (55,593) 43,508 39,580 (14,732) 19,160 16,675 26,058 16,558Total primary government net position 483,239$ 518,011$ 302,222$ 323,909$ 340,508$ 395,610$ 414,226$ 400,318$ 397,010$ 101,425$

Fiscal Year

184

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Expenses

Government activities:

General government 22,735$ 27,417$ 39,206$ 30,407$ 37,098$ 48,765$ 29,116$ 25,887$ 27,948$ 25,066$

Public protection 127,640 124,721 125,065 122,743 146,283 117,001 113,608 112,832 104,329 115,996

Public ways and facilities 47,167 32,192 36,694 45,826 32,859 47,209 26,840 39,017 7,589 41,230

Health and sanitation 111,370 113,242 107,497 105,239 111,310 112,560 105,039 97,340 33,103 81,903

Public assistance 104,961 105,835 101,990 108,121 110,208 101,454 98,679 97,378 84,028 83,910

Education 5,005 5,033 5,194 5,140 5,153 5,209 4,714 4,502 85,081 3,926

Recreation and culture 5,867 6,670 6,386 6,617 8,499 8,558 7,399 6,662 3,977 7,949

Interest on long tern debt 3,321 10,262 17,144 15,782 13,098 13,211 16,026 12,205 8,986 8,453

Total government activities expenses 428,066 425,372 439,176 439,875 464,508 453,967 401,421 395,823 355,041 368,433

Business-type activities:

County Disposal Site CSA 9C 10,904$ 10,506$ 14,792$ 12,283$ 14,317$ 16,088$ 13,540$ 13,022$ 11,831$ 12,381

Boulder Creek CSA 7 344 295 299 298 417 438 299 353 317 327

Rolling Woods CSA 10 14 14 12 44 93 78 62 62 57 46

Septic Tank Maintenance CSA 12 1,017 943 1,050 951 1,148 966 875 718 997 793

Freedom County Sanitation CSA 441 857 825 551 891 609 602 533 280 551

Davenport County Sanitation District CSA 458 532 477 701 550 420 410 432 501 401

Place de Mer CSA 2 21 37 70 32 52 39 64 50 68 36

Sand Dollar Beach CSA 5 260 265 315 252 254 314 216 220 181 148

Trestle Beach CSA 20 36 41 43 71 61 73 40 45 30 26

Summit West CSA 54 1 1 1 1 1 31 4 4 4 4

Graham Hill CSA 57 35 33 27 27 27 13 20 18 6 7

Total business-type activities expense 13,531 13,524 17,911 15,211 17,811 19,069 16,131 15,457 14,272 14,720 Total primary government expenses 441,597$ 438,896$ 457,087$ 455,086$ 482,319$ 473,036$ 417,552$ 411,280$ 369,313$ 383,153$

Program Revenues

Governmental activities:

Charges for services

General government 18,071$ 17,695$ 18,305$ 17,083$ 18,494$ 16,953$ 16,467$ 16,797$ 23,169$ 4,499$

Health, sanitation & public assistance 23,238 33,029 27,635 24,754 27,137 23,675 25,324 22,307 16,727 32,130

Public protection 20,742 20,623 20,954 20,961 22,364 24,795 23,792 23,328 23,428 20,050

Public ways & facilities, and recreation 8,869 9,412 8,453 8,555 8,633 7,672 7,933 5,939 7,664 7,318

Operating grants and contributions 219,341 207,264 199,689 209,932 187,859 208,047 196,695 192,287 175,187 184,464

Capital grants and contributions 10,678 8,016 11,298 8,673 7,885 3,542 7,508 5,632 6,828 -

Total governmental activities program revenues 300,939 296,039 286,334 289,958 272,372 284,684 277,719 266,290 253,003 248,461

Business-type activities:

Charges for services 13,137 13,313 13,058 13,166 13,350 13,237 13,299 13,223 12,723 12,185

Operating grants and contributions 208 573 289 964 338 123 127 101 258 320

Capital grants and contributions 60 345 1,097 15 50 25 8 4 20 2

Total business-type activities program revenues 13,405 14,231 14,444 14,145 13,738 13,385 13,434 13,328 13,001 12,507 Total primary government program revenues 314,344$ 310,270$ 300,778$ 304,103$ 286,110$ 298,069$ 291,153$ 279,618$ 266,004$ 260,968$

Net (expense)/revenue

Governmental activities (127,127)$ (129,333)$ (152,843)$ (149,917)$ (192,136)$ (169,283)$ (123,702)$ (129,533)$ (102,038)$ (119,972)$

Business-type activities (126) 707 (3,467) (1,066) (4,073) (5,685) (2,697) (2,129) (1,271) (2,213) Total primary government net expense (127,253)$ (128,626)$ (156,310)$ (150,983)$ (196,209)$ (174,968)$ (126,399)$ (131,662)$ (103,309)$ (122,185)$

Fiscal Year

(Reported in Thousands)

County of Santa CruzGovernment-Wide Changes in Net PositionLast Ten Fiscal Years(accrual basis of accounting)

185

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004General Revenue and Other

Changes in Net Position

Governmental activities:

Property taxes 84,795$ 97,716$ 109,837$ 111,224$ 115,179$ 111,745$ 104,814$ 95,746$ 82,709$ 64,881$

Other taxes 17,201 16,044 15,265 12,978 13,951 15,622 15,133 14,443 14,796 14,212

Grants and contributions not restricted

for specific purposes 117

Use of money and property 1,254 2,741 2,827 3,373 5,805 11,858 14,628 11,655 6,040 3,673

Miscellaneous 4,854 52,099 6,033 4,606 2,546 13,402 3,155 11,576 8,388 10,953

Gain (Loss) on sale of assets 26 1,005 (6) 101 37 (79) - - - -

Total governmental activities 108,247 169,605 133,956 132,282 137,518 152,548 137,730 133,420 111,933 93,719

Business-type activities:

Property taxes 25 25 25 24 25 - - - - -

Use of money and property (24) 45 12 13 174 756 1,064 859 511 293

Miscellaneous 609 705 631 760 1,068 3,048 1,513 1,370 1,179 642

Gain (Loss) on sale of assets - 2 - 3 - - - - - -

Total business-type activities 610 777 668 800 1,267 3,804 2,577 2,229 1,690 935 Total primary government 108,857$ 170,382$ 134,624$ 133,082$ 138,785$ 156,352$ 140,307$ 135,649$ 113,623$ 94,654$

Extraordinary Item: (16,377)$ 174,033$ -$ -$ -$ -$ -$ -$ -$ -$

Change in Net Position

Governmental activities (35,257)$ 214,305$ (18,887)$ (17,635)$ (54,618)$ (16,735)$ 14,028$ 3,887$ 9,895$ (26,253)$

Business-type activities 484 1,484 (2,799) (266) (2,806) (1,881) (120) 100 419 (1,278) Total primary government (34,773)$ 215,789$ (21,686)$ (17,901)$ (57,424)$ (18,616)$ 13,908$ 3,987$ 10,314$ (27,531)$

Fiscal Year

Government-Wide Changes in Net Position, ContinuedLast Ten Fiscal Years

(Reported in Thousands)(accrual basis of accounting)

County of Santa Cruz

186

County of Santa Cruz

FiscalYear

CurrentProperty

Taxes

PriorProperty

Taxes1

DelinquentPenaltiesand Costs

Sales and Use Tax

OccupancyTax

PropertyTransfer

TaxOtherTaxes

Total TaxRevenues

2004 34,412$ 52$ 4,328$ 1,850$ 3,375$ 2,770$ 285$ 2 47,072$

2005 51,892 28 3,036 7,218 3,806 3,213 69 69,262

2006 61,118 49 2,904 7,865 3,732 2,243 72 77,983

2007 66,783 117 2,741 7,961 3,931 1,481 72 83,086

2008 70,879 187 3,595 8,904 4,622 1,464 74 89,725

2009 72,032 224 5,291 8,038 3,887 1,532 74 91,078

2010 69,970 89 4,671 7,212 3,511 1,630 74 87,157

2011 69,606 118 5,156 7,892 4,101 1,709 72 88,654

2012 69,497 77 4,249 8,378 4,605 1,528 72 88,406

2013 69,152 65 3,522 9,129 4,515 1,936 72 88,391

2 Includes utility tax, which was repealed in 2005.

1 The County uses the Alternative Tax Apportionment Method, which treats prior taxes as payments against an outstanding taxes receivable balance. Amounts shown are either past adjustments or present delinquent payments applicable to the supplemental tax roll.

General Fund Tax Revenues by SourceLast Ten Fiscal Years(Reported in Thousands)

187

County of Santa Cruz

2009 2008 2007 2006 2005 2004General Fund

Reserved 2,919$ 2,151$ 3,893$ 5,433$ 2,151$ 3,266$ Unreserved 14,674 25,008 37,115 30,688 26,807 19,137

Total general fund 17,593$ 27,159$ 41,008$ 36,121$ 28,958$ 22,403$

All other governmental fundsReserved 59,340$ 38,930$ 44,736$ 36,209$ 40,215$ 46,242$ Unreserved, reported in:

Special revenue funds 146,538 121,946 123,244 131,835 67,317 76,479Capital project funds 3,181 10,273 1,369 5,277 6,226 8,123

Total all other governmental funds 209,059$ 171,149$ 169,349$ 173,321$ 113,758$ 130,844$

2013 2012 2011 2010

General Fund1

Nonspendable 3,544$ 3,739$ 4,118$ 1,525$ Restricted 2 1 - - Committed 16,166 13,706 12,847 11,748Assigned 20,857 24,722 22,231 15,430Unassigned - - 171 -

Total general fund 40,569$ 42,168$ 39,367$ 28,703$

All other governmental fundsNonspendable 56,077$ 49,883$ -$ -$ Restricted 67,030 97,824 166,676 183,044Committed - - - - Assigned - - - - Unassigned (17) (22) (37) -

Total all other governmental funds 123,090$ 147,685$ 166,639$ 183,044$

1 In fiscal year 2010-2011 the County implemented GASB 54 under which governmental fund balances are reported as nonspendable, restricted, committed, assigned, and unassigned.

Fund Balances of Government FundsLast Ten Fiscal Years(modified accrual basis of accounting)

Fiscal Year

(Reported in Thousands)

Fiscal Year

188

County of Santa Cruz

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004Revenues

Taxes 101,997$ 113,760$ 125,101$ 123,718$ 129,130$ 127,367$ 119,947$ 110,189$ 97,506$ 79,092$

Licenses and permits 9,819 10,356 9,046 9,247 9,177 10,085 10,183 9,481 10,072 9,013

Fines, forfeitures and penalties 4,474 4,737 5,200 5,231 5,088 4,911 5,673 6,440 12,784 5,199

Use of money and property 1,264 2,635 2,718 3,197 5,451 11,082 13,929 11,109 5,802 3,673

Aid from other governmental agencies 230,019 215,280 210,987 219,090 195,758 211,572 204,203 198,214 182,007 184,745

Charges for services 56,626 65,666 61,115 56,845 62,364 58,100 58,091 54,653 47,738 49,786

Other revenues 5,320 2,274 5,341 4,617 4,815 14,617 3,150 9,417 8,347 11,308

Total revenues 409,519 414,708 419,508 421,945 411,783 437,734 415,177 399,503 364,256 342,816

Expenditures

Current

General government 28,311 26,747 29,084 26,198 29,994 33,490 28,024 24,086 25,718 23,639

Public protection 129,562 118,671 117,531 118,848 126,014 123,435 112,395 111,868 104,108 105,350

Public ways and facilities 41,232 32,074 37,534 53,095 45,023 37,736 41,335 39,119 7,440 26,519

Health and sanitation 108,688 107,810 104,191 102,048 103,920 109,152 104,326 95,717 42,176 83,238

Public assistance 101,437 101,204 99,120 100,294 101,562 102,976 97,981 95,987 83,982 85,585

Education 4,781 4,810 4,974 4,921 5,420 5,040 4,711 4,502 84,639 4,017

Recreation and culture 6,900 7,004 6,928 7,345 7,876 9,189 7,789 7,377 3,971 7,918

Capital outlay - - 35,417 769 3,380 10,671 10,299 3,451 3,825 5,417

Debt service

Principal 3,815 7,790 7,603 6,958 6,836 7,344 7,126 6,339 7,136 4,512

Bond redemption - - - - 771 - - - 335 -

Bond issue costs - - 1,127 - 181 263 738 1,998 - 2,117

Interest and fiscal charges 3,318 10,482 15,677 15,742 12,360 13,343 14,652 10,842 9,292 8,697

Total expenditures 428,044 416,592 459,186 436,218 443,337 452,639 429,376 401,286 372,622 357,009

Excess of Revenues Over (Under) Expenditures (18,525) (1,884) (39,678) (14,273) (31,554) (14,905) (14,199) (1,783) (8,366) (14,193)

Other Financing Sources (Uses)

Sale of capital assets - 1,139 - 57 (33) 1,255 - - - 5

Gain/(Loss) on land held for resale - (137) (9) - - (34) - - - -

Debt issue cost - (248) - - - - - - - -

Escrow Transfers In - - 29,876 - 49,411 - - - - -

Escrow Transfers Out - - (29,876) - - - - - - -

Proceeds from long-term debt - 7,490 - - - - - 68,860 - 23,000

Contributed capital 233 45,701 35,410 - - - 9,000 - - -

Bond premium/discount - (23) (914) - - 225 (63) 423 (67) (167)

Gain on conversion of receivables - 5,024 - - - - - - -

Proceeds from refunding bonds - - - - 60,492 7,370 10,755 - 10,580 48,435

Payment to bond refunding escrow agent - (1,399) - - - (8,012) (10,366) - (11,590) (46,392)

Transfers in 17,620 24,252 145,035 29,843 29,760 31,921 27,593 88,914 20,241 37,819

Transfers out (18,379) (24,282) (145,709) (30,551) (79,777) (32,043) (27,795) (89,008) (20,241) (60,019)

Inception of capital lease 36 80 123 - 110 94 5,990 - - 109

Total other financing sources (uses) (490) 57,597 33,936 (651) 59,963 776 15,114 69,189 (1,077) 2,790

Extraordinary Item (7,179) (71,866) - - - - - - - -

Net change in Fund Balance (26,194)$ (16,153)$ (5,742)$ (14,924)$ 28,409$ (14,129)$ 915$ 67,406$ (9,443)$ (11,403)$

Debt service as a percentage

of noncapital expenditures 1.79% 4.59% 5.76% 5.57% 4.66% 4.85% 5.56% 4.48% 4.76% 3.85%

Fiscal Year

Changes in Fund Balances of Governmental FundsLast Ten Fiscal Years(modified accrual basis of accounting)(Reported in Thousands)

189

County of Santa CruzProperty Tax Levies and CollectionsLast Ten Fiscal Years(Reported in Thousands)

Fiscal YearEndedJune 30

Total SecuredTax Levy for

Fiscal Year 1 AmountPercentage

of Levy

Collections in Subsequent

Years 3Total Tax

CollectionsPercentage

of Levy

2004 286,021$ 281,778$ 98.5% 4,164$ 285,942$ 100.0%2005 309,733 305,178 98.5% 4,464 309,642 100.0%2006 340,053 333,817 98.2% 5,986 339,803 99.9%2007 361,430 352,091 97.4% 8,990 361,081 99.9%2008 387,834 373,296 96.3% 13,969 387,265 99.9%2009 402,589 387,153 96.2% 13,808 400,961 99.6%2010 395,628 383,707 97.0% 10,095 393,802 99.5%2011 394,498 385,099 97.6% 5,658 390,757 99.1%2012 395,546 388,135 98.1% 4,190 392,325 99.2%2013 399,146 393,223 98.5% 0 393,223 98.5%

Collections within the

Fiscal Year of the Levy 2 Total Collections to Date

1 Secured tax levy for the County itself, school districts, cities and special districts under the supervision of their own governing boards. 2 Included are amounts collected by the County on behalf of itself, school districts, cities and special districts under the supervision of their own governing boards. 3 Under the Alternative Method of Tax Apportionment (the Teeter Plan) the County allocates to all taxing jurisdictions under the County, 100% of the secured property taxes billed, even if not yet collected. In return, the County retains the subsequent delinquent payments and associated penalties and interest. Refer to schedule of General Fund Tax Revenues by Source for property tax collections applicable to the County.

190

County of Santa CruzAssessed Value of Taxable Property and Actual Value of Property 1

Last Ten Fiscal Years(Reported in Thousands)

Fiscal Year Total Taxable Total Direct

Beginning July 1, Secured 2 Unsecured Assessed Value 3 Tax Rate 4

2004 25,106,093$ 748,200$ 25,854,293$ 1.00%2005 27,584,028 792,922 28,376,950 1.00%2006 30,238,488 811,727 31,050,215 1.00%

2007 32,504,394 843,037 33,347,431 1.00%2008 33,586,675 861,576 34,448,251 1.00%2009 32,531,717 865,265 33,396,982 1.00%2010 32,390,765 801,371 33,192,136 1.00%2011 32,332,271 767,714 33,099,985 1.00%2012 32,033,769 767,064 32,800,833 1.00%2013 33,625,169 764,939 34,390,108 1.00%

1 Assessed value of taxable property represents all taxable property within the County except as excluded or exempted by the State Constitution and the Legislature. 2 Includes unitary properties (e.g., railroads, utilities), which are assessed by the State Board of Equalization. 3 The County does not track the estimated actual value of all County properties due in part to the manner in which assessed value is calculated following the passage of California Proposition 13. Thus, the total taxable assessed value reported represents all property within the County.4 The maximum tax rate is 1% of the full cash value or $1/$100 of the assessed value, excluding the tax rate for debt service .

191

County of Santa CruzProperty Tax RatesDirect and Overlapping GovernmentsLast Ten Fiscal Years

Property Tax RatesPer $100 of

Fiscal Assessed ValuationYear Low High

2004 1.055 1.202 25.0 5.0 57.0 13.0 100.02005 1.062 1.200 25.0 5.0 57.0 13.0 100.02006 1.040 1.162 26.0 5.0 56.0 13.0 100.02007 1.049 1.132 26.5 5.0 56.0 12.5 100.02008 1.056 1.147 26.5 5.0 56.0 12.5 100.02009 1.064 1.161 26.5 5.0 56.0 12.5 100.02010 1.059 1.174 26.5 5.0 56.0 12.5 100.02011 1.065 1.190 26.5 5.0 56.0 12.5 100.02012 1.067 1.195 26.5 5.0 56.0 12.5 100.02013 1.064 1.197 26.5 5.0 56.0 12.5 100.0

SpecialDistricts TotalCounty Cities

SchoolDistricts

192

County of Santa CruzRatios of Outstanding Debt by TypeLast Ten Fiscal Years(Reported in Thousands, Except Per Capita Information)

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Governmental activities

Capital leases 5,075$ 5,337$ 5,544$ 5,673$ 5,942$ 6,051$ 6,000$ 53$ 337$ 671$

Refunding Certificates of Participation 24,534 25,959 27,334 28,634 29,889 31,086 32,921 34,686 36,541 27,177

Lease Revenue Bonds 6,450 6,670 6,885 7,090 7,290 7,840 8,375 9,135 9,875 10,595

Lease Revenue Refunding Bonds 1,812 1,866 1,404 1,535 1,667 1,797 1,918 2,037 2,153 15,064

Revenue Bonds - 405 785 1,145 1,480 1,800 2,100 2,385 2,655 2,910

Local Agency Revenue Bonds 225 250 275 295 320 360 445 520 585 655

Certificates of Participation 31,278 33,024 29,110 30,746 32,312 28,822 27,916 21,915 22,441 23,027

City of Scotts Valley Writ of Mandate 1,450 2,175 - - - - - - - -

McGaffigan Mill Road HOA 1 33 63 91 - - - - - -

CA Health Facilities Financing

Authority (CHFFA) - - - - 510 711 898 1,072 1,233 1,382

CA Transportation Finance Bank - - - - 600 600 - - - -

Local Assessment Bonds - - - - - - - - - 40

RDA Tax Allocation Bonds - - 247,995 217,472 220,938 168,549 172,144 174,677 108,147 110,816

RDA CERTS Loans Payable - - - - - - - - 352 679

Internal Service Funds 16 29 22 - - 329 653 1,171 1,699 2,208

Business-type activities

Loans Payable 531 570 608 646 404 448 2,860 1,188 1,817 2,374

Capital leases 3 - - - 178 605 - - - -

Total Primary government171,375$ 76,318$ 320,025$ 293,327$ 301,530$ 248,998$ 256,230$ 248,840$ 187,835$ 197,598$

Percentage of personal income2,4 0.55% 0.62% 2.70% 2.28% 2.35% 2.08% 2.34% 2.32% 1.87% 1.98%

Per capita3,4 270$ 290$ 1,231$ 1,143$ 1,190$ 990$ 1,019$ 986$ 742$ 776$

4 Some prior period personal and per capita income data was revised by the Bureau of Economic Analysis and thus some prior period calculations have been restated here.

1 Excludes Component Unit. Total primary government, percentage of personal income and per capita data for prior periods were restated here to exclude amounts related to the Component Unit.

3 Per capita data is calculated from per capita income data for the preceding calendar year (e.g. per capita for Fiscal Year 2013 is based on 2011 calendar year per capita income data). Per capita income data is provided by the Bureau of Economic Analysis.

Fiscal Year

2 Percentage of personal income is calculated from personal income data for the preceding calendar year (e.g. percentage of personal income for Fiscal Year 2013 is based on 2011 calendar year personal income data). Personal income data is provided by the Bureau of Economic Analysis

193

County of Santa CruzComputation of Legal Debt MarginLast Ten Fiscal Years

Fiscal yearAssessed

Value1

LegalDebt Limit2

Total Net Applicable Debt

LegalDebt Margin

Debt Margin/Debt Limit

2004 25,106,093,420$ 313,826,168$ -$ 313,826,168$ 100%

2005 27,584,028,124 344,800,352 - 344,800,352 100%

2006 30,238,488,053 377,981,101 - 377,981,101 100%

2007 32,504,394,093 406,304,926 - 406,304,926 100%

2008 33,586,675,030 419,833,438 - 419,833,438 100%

2009 32,531,716,741 406,646,459 - 406,646,459 100%

2010 32,390,764,838 404,884,560 - 404,884,560 100%

2011 32,332,270,918 404,153,386 - 404,153,386 100%

2012 32,033,769,082 400,422,114 - 400,422,114 100%

2013 33,625,169,225 420,314,615 - 420,314,615 100%

2 Section 29909 of the California Government Code limits the General Obligation Bond indebtedness to 1.25 percent of the total full cash valuation of all real and personal property within the County. The Legal Debt Margin is the Legal Debt Limit reduced by the General Bonded Debt. The County does not have any General Bonded Debt.

1 Total Assessed Value includes exempt property.

194

County of Santa Cruz

(Reported in Thousands)

2012-2013 Total Net Assessed Valuation 32,849,679$

PercentageApplicable1

Net DebtOutstanding

Overlapping Tax and Assessment and General Obligation Debt

SCHOOL DISTRICTSLive Oak Elementary 100% 16,621$ Santa Cruz City Elementary 100% 20,076 Soquel Union Elementary 100% 11,740 Santa Cruz City High 100% 40,372 Bonny Doon Elementary 100% 350 Scotts Valley Unified 100% 15,950 San Lorenzo Valley Unified 100% 32,114 Pajaro Valley Unified 100% 131,459 Cabrillo College 100% 126,370

SPECIAL DISTRICTSZayante Fire 100% 175 Lompico Water 100% 306 Rolling Woods Water 100% 1,155 Rolling Woods Sewer Improvements 100% 790 North Polo Drive Sewer Extension 100% 175 Felton Community Facilities - District No. 1 100% 9,820

Total Overlapping Tax and Assessment and General Obligation Debt 407,473

Direct DebtSanta Cruz County2 100% 70,841

Total Direct Debt 70,841

Total Combined Overlapping and Direct Debt 478,314$

Ratio to 2012-2013 Assessed Valuation

Total Overlapping Tax and Assessment and General Obligation Debt 1.24%Total Direct Debt 0.22%

Total Combined Direct Debt and Overlapping Debt 1.46%

1 Percentage of overlapping agency's assessed valuation located within the boundaries of the County.

Statement of Direct and Overlapping DebtJune 30, 2013

2 Governmental activities debt excluding tax and revenue anticipation notes, compensated absences and estimated claims, business-type activities and debt related to the Santa Cruz County Sanitation District.

195

County of Santa CruzOutstanding Debt of the Public Financing Authority1

(Reported in Thousands)

YEAR OF ISSUANCE PRINCIPAL INTEREST TOTAL

Debt 2

1996 16,365$ 7,191$ 23,556$ 1999 225 45 270

2001B 6,450 3,229 9,6792002 2,020 1,225 3,2452004 15,205 4,652 19,8572005 6,100 1,065 7,1652006 7,055 3,937 10,9922008 3,380 684 4,0642011 5,605 3,654 9,259

2012A 1,830 1,024 2,854

Total debt outstanding forthe Public Financing Authority 64,235$ 26,706$ 90,941$

June 30, 2013

1 The Public Financing Authority is a separate legal entity for whose debt the County is not liable.2 Certificates of Participation, Refunding Certificates of Participation, Lease Revenue Bonds, Lease Revenue Refunding Bonds, Revenue Bonds, and Local Agency Revenue Bonds.

196

County of Santa CruzGeneral InformationLast Ten Fiscal Years

Budget Budget Per Current Taxes PerFiscal Year Population1 Requirements2 Capita Property Taxes Capita

(in thousands) (in thousands) (in thousands)

2004 260 371,187$ 1,428$ 34,412$ 132$ 2005 260 368,492 1,417 51,892 200 2006 262 398,859 1,522 61,118 233 2007 264 434,371 1,645 66,783 253 2008 267 441,194 1,652 70,879 265 2009 269 441,726 1,642 72,032 268 2010 272 411,120 1,511 69,970 257 2011 264 422,464 1,600 69,606 264 2012 266 432,514 1,626 69,497 261 2013 267 447,006 1,674 69,152 259

Assessed Per Capita Personal School UnemploymentFiscal Year Valuation Income3 Income3 Enrollment4 Rate5

(in thousands) (in thousands)

2004 25,106,093$ 39,135$ 9,961,111$ 67,596 7.8%2005 27,584,028 39,626 10,026,336 67,224 7.0%2006 30,238,488 42,575 10,744,154 67,387 6.3%2007 32,507,394 43,625 10,966,384 66,501 5.6%2008 33,586,675 47,658 11,991,600 68,647 5.9%2009 32,531,717 50,692 12,840,550 69,640 7.3%2010 32,390,765 50,063 12,842,091 69,958 11.3%2011 32,332,271 45,647 11,868,723 68,543 12.6%2012 32,033,769 46,586 12,246,607 69,336 12.3%2013 33,625,169 48,883 12,919,550 69,194 11.1%

SOURCES1 Based on information compiled by the California Department of Finance.2 Santa Cruz County Final/Adopted Budgets.

5 Data reflects the annual average rate for the calendar year (e.g., Fiscal Year 2013 is annual average for 2012 calendar year) as calculated by the California Employment Development Department. Calendar year 2012 was revised by the EDD and has been restated here.

Santa Cruz County is the second smallest county in the State of California, with an area of 440 square miles. It is alsoone of the original 27 counties formed in 1850, and prior to California's independence it was one of three SpanishPueblos in California.

Santa Cruz County is located in the northern crescent of Monterey Bay, 74 miles south of San Francisco, 375 miles northof Los Angeles, 159 miles southwest of Sacramento, and 164 miles northwest of Fresno.

3 U.S. Bureau of Economic Analysis (BEA). Figures are for the preceding calendar year (e.g., Fiscal Year 2013 is 2011 calendar year data). Some prior period numbers were revised by the BEA and have been restated here.4 Total includes data obtained from the California Department of Education, the University of California at Santa Cruz, and Cabrillo College.

197

County of Santa CruzProperty Value, Construction and Bank DepositsLast Ten Calendar Years

Deposits2

Calendar Year

SingleFamily

MultipleFamily

TotalUnits Residential

Non-Residential

TotalValuation

Amount(in thousands)

2003 654 548 1,202 238,334 36,602 274,936 3,853,001

2004 739 65 804 216,038 37,611 253,649 3,970,008

2005 669 225 894 208,121 49,300 257,421 4,112,131

2006 432 28 460 139,416 51,658 191,074 4,165,185

2007 236 342 578 165,997 62,612 228,609 4,238,971

2008 194 63 257 100,176 66,206 166,382 4,108,322

2009 107 2 109 54,300 50,809 105,109 4,224,669

2010 92 23 115 61,446 40,841 102,287 4,172,547

2011 79 111 190 58,010 40,165 3 98,175 3 4,235,090

2012 80 173 253 68,932 51,671 120,603 4,308,423

3 2011 calendar year non-residential and total valuation amounts have been restated here.

1 Compiled by the California Department of Finance - Economic Research Unit. Calendar year 2013 new construction and property valuation data is not available.2 Complied by the Federal Deposit Insurance Corporation (FDIC) as reported in the Deposit Market Share Report reflecting deposits as of June 30, 2012.

Valuation of New Units1 (in thousands)New Dwelling Units1

198

County of Santa CruzSpecial Assessment Billings and CollectionsLast Ten Fiscal Years

Special Special Special SpecialYear ended Assessment Assessment Assessment Assessment

June 30, Billed Collected Billed Collected

2004 80,523$ 88,249$ 186,878$ 186,878$ 2005 36,663 36,663 154,503 154,4792006 36,701 36,693 154,044 157,6882007 131,731 131,731 157,990 157,028

132,072 132,072 114,938 114,938129,337 128,488 92,315 92,307206,325 203,641 90,075 90,139201,300 201,300 92,629 92,653199,146 223,739 89,947 89,946195,230 199,209 92,052 92,171

Note: The billings and collections shown are for those special assessment bonds for which the County has established redemption funds for the purpose of facilitating bond payment in the case of delinquent accounts.

20082009201020112012

Enterprise FundsDebt Service Funds

2013

199

County of Santa CruzPrincipal TaxpayersCurrent and Ten Years Ago

Taxpayer Type of BusinessAssessed Value

2012-2013

Pacific Gas & Electric Company Gas & Electric Utility 225,458,856$ 0.69 %Santa Cruz Seaside Company Amusement Park 67,868,390 0.21Macerich Partnership L P Commercial Real Estate 61,199,999 0.19Neven Development LLC Hospital 58,289,484 0.18Pacific Bell Telephone Co. Telephone Utility 52,153,174 0.16S C Beach Hotel Partners LLC Hotel 44,143,577 0.13Cypress Point RE Investors LLC Real Estate 39,811,821 0.12George Ow, Jr. et al Real Estate 37,515,680 0.11Safeway Inc Food Retailer 37,439,682 0.11SC Shaffer Road Investors Real Estate 34,433,102 0.10

Totals $658,313,765 2.00 %

Taxpayer Type of BusinessAssessed Value

2003-2004

Pacific Gas & Electric Company Gas & Electric Utility 142,691,693$ 0.59 %Lone Star Cement Manufacturer 72,351,949 0.30Pacific Bell Telephone Company Telephone Utility 71,782,384 0.30Santa Cruz Seaside Company Amusement Park 64,336,891 0.27Macerich Partnership L P Commercial Real Estate 60,138,629 0.25Watsonville Hospital Corporation Hospital 56,335,250 0.23Enterprise Way Associates Software Producer 52,787,770 0.22Sequoia Equities-Cypress Point Real Estate 44,170,166 0.18Seagate Technology Electronic Manufacturer 40,882,373 0.17Paradise Park Masonic Club Housing Development 26,951,656 0.11

Totals $632,428,761 2.62 %

1 Percentage of total assessed valuation for 2012-2013 is calculated from the total net assessed valuation of $32,849,679,306.2 Percentage of total assessed valuation for 2003-2004 is calculated from the total net assessed valuation of $24,106,889,832.

Note: Data for fiscal year 2003-2004 is derived from the 2003 tax roll, which was billed and collected during 2004.

Note: Principal taxpayer data for fiscal year 2012-2013 is derived from the 2012 tax roll, which was billed and collected during 2013.

Percentageof Total Assessed

Valuation 2012-20131

Percentageof Total Assessed

Valuation 2003-20042

200

County of Santa CruzPrincipal EmployersCurrent and Five Years Ago

Employer Product/Service

Number ofEmployees2012-20131

University of California at Santa Cruz Education 1,000-4,999 2.10 %

County of Santa Cruz County Services 1,000-4,999 2.10Pajaro Valley Unified School District Education 1,000-4,999 2.10Dominican Hospital Hospital 1,000-4,999 2.10Santa Cruz Beach Boardwalk Amusement/Recreation 1,000-4,999 2.10Cabrillo College Education 500-999 0.52City of Santa Cruz City Services 500-999 0.52Threshold Enterprises Manufacturing 500-999 0.52Watsonville Community Hospital Hospital 500-999 0.52West Marine Retail 500-999 0.52Plantronics Telephone Apparatus Mfg. 500-999 0.52Santa Cruz City School District Education 500-999 0.52

Employer3 Product/Service3

Number ofEmployees2008-20093

University of California at Santa Cruz Education 1,000-4,999 2.04 %Pajaro Valley Unified School District Education 1,000-4,999 2.04County of Santa Cruz County Services 1,000-4,999 2.04Dominican Hospital Hospital 1,000-4,999 2.04Santa Cruz Beach Boardwalk Amusement/Recreation 1,000-4,999 2.04Cabrillo College Education 500-999 0.51Santa Cruz City School District Education 500-999 0.51City of Santa Cruz City Services 500-999 0.51Seagate Technology Manufacturing 500-999 0.51Watsonville Hospital Hospital 500-999 0.51West Marine Retail 500-999 0.51Plantronics Manufacturing 500-999 0.51

Percentage ofTotal Employment

2012-20132

Percentage ofTotal Employment

2008-20093

1 Number of employees reflects a range provided by California Employment Development Department (EDD) data. 2 Average of the reported range divided by total civilian employment of 149,400 as reported by the EDD for June 2013.3 Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2009.

201

County of Santa CruzOperating Indicators by FunctionLast Ten Fiscal Years

Function 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Public Assistance Human Services Department

Adult Protective Services

Referrals received 658 2 626 1 547 542 585 610 585 664 618 574

Investigations completed 460 2 386 1 352 320 416 468 432 370 390 361

Family and Children's Services

Annual referrals (families) 2,651 2 3,200 1 2,870 2,624 3,096 3,093 2,979 3,100 3,348 3,062

Finalized adoptions 50 2 51 1 41 32 42 41 43 41 41 31

Licensed foster homes (monthly average) 112 2 112 1 105 100 109 124 123 113 109 108

Benefit Services

Average number of Medi-Cal recipients 32,806 2 31,624 1 30,786 28,998 27,487 26,655 25,427 24,135 21,723 20,990

Public Ways and Facilities Public Works

Roads

Miles of road maintained 600 600 600 600 600 600 600 600 600 600

Potholes repaired 3,700 4,500 3,552 2,500 2,500 3,500 3 5,500 3 5,500 3 5,500 3 5,500

Minor culverts maintained 2,262 2,262 4 1,010 2,000 2,000 2,000 2,200 2,262 2,261 2,260

Bridges and major culverts maintained 160 160 160 160 160 160 159 159 159 159

Traffic signs replaced/repaired 1,463 1,516 1,850 1,029 1,400 1,475 2,200 2,425 2,400 2,350

Miles of street swept 1,800 1,555 1,465 4,000 4,500 5,000 5,000 4,550 5,000 4,900

Sanitation

Miles of pipe maintained 236 230 230 230 222 222 222 222 222 222

Maintenance call responses 138 168 182 238 216 272 501 381 127 122

Landfill

Waste generated (tons) 139,529 138,448 139,365 153,873 164,717 183,993 229,877 230,000 201,000 205,971

Waste disposed (tons) 60,974 61,503 71,470 71,701 76,203 77,745 99,423 87,400 86,430 94,745

Recreation and Cultural Services Parks, Open Space and Cultural Services

Facility bookings 6,877 6,114 5,545 5,942 5,772 6,114 7,389 7,238 7,096 6,677

Recreation registrations 6,218 6,165 6,273 5,518 5,888 4,982 4,898 4,777 4,343 7,228

Swim admissions 130,059 5 77,022 76,334 90,771 86,834 82,800 78,126 76,746 77,522 74,676

Sources: Various County Departments

1 Prior period reported an estimate which has been restated here to reflect actual data.2 Data is estimated as presented in the 2013-2014 Proposed Budget. 3 Prior periods reported a range which has been averaged here.

Fiscal Year

4 Prior period restated here consistent with Capital Assets Statistics by Function.5 Current period includes admissions for POSCS-sponsored programs and private parties. Prior periods included only admissions for POSCS-sponsored programs.

202

County of Santa CruzOperating Indicators by Function, ContinuedLast Ten Fiscal Years

Function 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Public Protection Agricultural Commissioner

High risk quarantine inspections 1,601 2 1,450 1 1,669 1,900 2,800 2,640 2,894 2,686 2,600 2,300 District Attorney

Criminal Prosecution

Felony filings 2,180 2 2,164 1 2,169 2,457 2,155 2,128 2,210 2,251 2,551 2,314

Juvenile filings 724 2 799 1 503 594 731 1,046 813 714 1,046 1,262

Consumer Affairs

Number of calls received 2,245 2 2,345 1 2,410 2,622 2,880 2,960 3,008 3,165 3,046 3,012

Number of written complaints received 216 2 272 1 302 462 288 440 375 228 206 195 Planning

Building permits issued 3,000 2 2,899 2,787 2,463 2,611 3,162 3,651 3,894 3,616 3,588

Building permit inspection sites visited 8,700 2 8,601 7,620 7,093 9,353 10,061 11,862 12,157 12,247 11,420

Code compliance cases resolved 240 2 249 228 400 574 1,192 871 907 1,025 1,064 Probation

Juvenile division referrals n/a 3 1,453 1,613 1,649 2,323 2,378 2,411 2,222 2,671 2,353

Juvenile division petitions filed n/a 3 637 851 880 1,166 1,148 1,260 1,216 1,236 1,293

Juvenile court investigations n/a 3 96 110 116 178 183 218 249 284 232 Public Defender

Total cases 11,042 2 10,731 1 10,311 10,805 12,385 12,455 12,642 12,604 12,290 13,864 Sheriff/Coroner (Investigation Division)

Total cases reviewed n/a 3 10,989 11,750 12,535 12,929 12,617 12,529 13,046 13,046 12,222

Total arrests n/a 3 98 4 215 307 238 254 347 420 584 617 Detention

Main jail bookings 9,658 10,699 12,274 12,716 13,576 12,941 13,479 13,109 12,721 12,834 Weights and Measures

Establishments visited 850 2 1,027 1 1,139 1,500 1,742 1,836 2,093 2,175 2,051 1,951

Special District

Mosquito Abatement/Vector Control CSA #53

Mosquito inspections 3,900 2 3,885 1 4,500 5,515 5,515 4,396 4,462 4,547 3,052 3,112

Sources: Various County Departments

1 Prior period reported an estimate which has been restated here to reflect actual data.2 Data is estimated as presented in the 2013-2014 Proposed Budget. 3 Data is presented on a calendar year basis, which is not yet available. 4 Most misdemeanor cases previously handled by the Investigation Division were referred for follow-up to the Patrol Division.

Fiscal Year

203

County of Santa CruzBudgeted PositionsLast Ten Fiscal Years

DEPARTMENT/FUNCTION 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

COUNTY ADMINISTRATIVE OFFICE 18.30 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00

AGRICULTURAL COMMISSIONER1 19.00 20.00 20.00 21.00 22.00 22.00 19.75 19.70 19.60 19.40

MOSQUITO ABATEMENT/VECTOR CONTROL 3.71 4.00 4.00 8.00 8.00 9.00 9.00 8.00 8.00 8.00

AGRICULTURAL EXTENSION 2.00 2.00 2.00 2.00 2.00 2.00 1.75 1.00 1.00 1.00

ASSESSOR 38.00 38.00 38.00 38.00 38.00 37.50 35.50 33.50 33.25 33.25

AUDITOR-CONTROLLER 29.00 29.00 29.00 29.50 29.50 29.50 29.00 29.00 29.00 29.00

BOARD OF SUPERVISORS 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00

RECORDER 16.00 12.00 13.00 13.00 13.00 11.00 11.00 11.00 11.00 11.00

COUNTY CLERK/ELECTIONS 7.50 11.00 10.00 12.00 14.00 14.00 14.00 14.00 14.00 14.00

COUNTY COUNSEL 20.00 19.00 19.50 19.50 19.50 19.00 18.50 18.50 18.50 18.50

DISTRICT ATTORNEY 87.50 84.50 81.50 85.50 91.50 92.50 92.50 90.50 89.50 89.50

CHILD SUPPORT SERVICES 85.75 70.50 68.50 68.50 69.50 66.50 66.50 65.50 62.00 63.00

EMERGENCY SERVICES 3.25 3.00 1.75 1.75 2.00 3.75 2.00 2.00 2.00 2.00

COMMUNICATIONS 7.00 6.00 6.00 - - - - - - -

FIRE MARSHALL 1.00 1.00 1.00 1.55 2.30 - - - - -

GENERAL SERVICES 9.00 9.00 11.00 11.00 11.00 9.00 9.00 9.00 8.80 8.80

FACILITIES MAINTENANCE 39.00 36.00 37.00 38.00 47.75 47.00 47.00 44.00 44.00 44.00

CENTRAL STORES/DUPLICATING 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00

PURCHASING 4.00 4.00 4.00 4.00 4.00 4.00 4.00 3.00 3.00 3.00

SERVICE CENTER 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.00 5.00 5.00

HEALTH SERVICES 571.70 546.60 577.60 647.75 661.05 526.55 486.50 498.25 522.00 508.05

HUMAN SERVICES 440.10 432.60 481.10 511.10 527.60 463.00 445.50 434.50 435.50 441.00

PUBLIC GUARDIAN2 14.00 9.00 - - - - - - - -

WORKFORCE INVESTMENT ADMIN 5.00 - - - - - - - - -

VETERANS SERVICES 3.00 3.00 5.00 5.00 5.00 4.00 4.00 4.00 4.00 3.00

IHSS PUBLIC AUTHORITY 4.00 - - - - - - - - -

INFORMATION SERVICES/TELEPHONE 78.50 73.25 71.25 78.25 78.25 76.25 65.00 65.00 64.00 64.50

INFORMATION SERVICES/COMM. TECH. - - - 6.00 6.00 6.00 6.00 6.00 6.00 6.00

PARKS OPEN SPACE & CULTURAL SERVICES 63.50 53.55 53.05 53.75 57.00 56.00 47.50 42.10 29.80 34.80

PERSONNEL 23.50 22.50 22.50 23.50 27.50 27.50 25.50 24.50 24.25 24.25

RISK MANAGEMENT 10.75 10.75 9.75 10.75 10.75 10.75 12.00 11.00 11.00 11.00

PLANNING 90.50 98.50 99.25 99.25 100.00 100.00 87.25 75.60 63.25 66.00

PROBATION 86.50 86.00 88.00 90.00 101.00 94.00 81.00 77.00 77.50 93.75

JUVENILE HALL 29.00 33.00 32.00 31.00 31.00 31.00 30.50 30.50 30.50 30.50

PUBLIC WORKS 303.00 298.00 296.00 303.50 300.50 290.00 274.00 272.50 272.50 267.50

RDA 16.00 11.00 13.00 13.00 14.00 14.00 22.00 22.00 1.00 1.00

SHERIFF-CORONER 175.50 169.00 170.50 172.75 177.25 176.25 173.75 170.75 171.00 171.00

CORRECTIONS 137.00 136.00 138.00 144.00 148.00 168.00 165.25 155.00 156.50 164.50

COURT SECURITY 22.00 22.00 23.00 24.00 26.00 26.00 26.00 25.00 24.00 24.00

TREASURER-TAX COLLECTOR 14.50 15.50 15.75 16.25 16.25 16.75 14.75 13.50 13.50 13.50

TOTAL 2,504.06 2,413.25 2,486.00 2,627.15 2,705.20 2,496.80 2,370.00 2,318.90 2,292.95 2,311.80

1 Weights and Measures was incorporated-into the Agricultural Commissioner2 On July 1, 2005, the Public Guardian was transferred to Health Services Agency. Its positions are incorporated into Health Services Agency.

204

County of Santa Cruz

COVERAGE DETAILS OF COVERAGE LIMITS

Property CSAC-EIABlanket buildings and equipment including EDP, Vehicles, Contractors'Equipment, Boiler & Machinery. All Risk, flood, replacement cost-agreedamount including earthquake at scheduled locationsAll Risk Limits (portion of limits are shared) 600,000,000$ Earthquake Limits (portion of limits are shared) 390,000,000 Deductible 5,000

Crime Bond Blanket Program CSAC-EIAFaithful Performance Bond (covers failure to faithfully perform duties 15,000,000 and employee dishonesty). Includes all employees and Treasurer Deductible 2,500

Non-owned aircraft National Union Fire Insurance CompanyIncludes passengers' bodily injury, terrorism and property damage 5,000,000 combined each occurrenceMedical Expense/Passenger Deductible 5,000

Excess Workers' Compensation CSAC-EIAEmployer's Liability Workers' Compensation Statutory Limits

Employer's Liability$500,000 Self-Insured Retention Deductible (per occurrence)Workers' Compensation and Employer's Liability

Medical Malpractice and CSAC-EIAGeneral Liability Comprehensive hospital professional and general liability for HSA 21,500,000

staff and operations and Jail Medical UnitDeductible 10,000

Fine Arts Travelers 125,000 Deductible 500

Excess Liability (GLII) CSAC-Excess Insurance Authority Excess Liability Insurance 25,000,000 $1,000,000 Self-Insured Retention to $25,000,000

Optional Excess CSAC - Excess Insurance Authority$10,000,000 excess of $25,000,000 35,000,000

Catastrophic Liability CSAC - Excess Insurance AuthorityUpper layer of coverage in Optional Excess and GLII 50,000,000

County Fire Auto & ABD Services, American Alternative Insurance Corp. 3,000,000 Liability Insurance Includes property insurance for County owned fire stations including

contents, business interruption, money & securities, boiler & machineryDeductible 1,000 Equipment Deductible 100 Host Liquor Liability (included in GL) Auto Liability 1,000,000 Sublimits: Uninsured/Underinsured 60,000

Pollution Program CSAC-EIAPollution Program (per occurrence) 10,000,000 Self-Insured Retention Deductible 250,000

Schedule of Insurance in EffectJune 30, 2013

205

County of Santa CruzCapital Assets Statistics by FunctionLast Ten Fiscal Years

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Function

Public protectionJail facilities 3 3 3 3 3 3 3 3 3 3 Rehabilitation center 1 1 1 1 1 1 1 1 1 1 Juvenile center 1 1 1 1 1 1 1 1 1 1 Courthouses 3 3 3 3 3 3 2 2 2 2 Morgue 1 1 1 1 1 1 1 1 1 1

Public assistanceChild day care center 1 1 1 1 1 1 1 1 1 1 Elder day care center 1 1 1 1 1 1 1 1 1 1 Residential care facility 1 1 1 1 1 1 1 1 1 1 Volunteer center 1 1 1 1 1 1 1 1 1 1 Veterans centers2 2 2 2 2 2 2 2 2 2 2

Recreation and cultureParks acreage 226 225 223 223 223 223 223 223 223 223 Sites 59 59 57 57 57 57 55 56 55 55 Athletic fields 17 17 17 17 17 17 17 17 17 17 Swimming pools 4 4 4 4 4 2 2 2 2 2

Public ways and facilities Roads

Pavement (miles) 600 600 600 600 600 600 600 600 600 600 Junction structures 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 Minor culverts 2,262 2,262 1,010 2,000 2,000 2,000 2,200 2,262 2,261 2,260 Bridges and major culverts 160 160 160 160 160 160 159 159 159 159

SanitationPipe (miles) 236 230 230 230 222 222 222 222 222 222 Pump stations/treatment plants 63 62 62 62 62 62 62 62 62 62

General government Administrative/other facilities1 11 11 10 10 10 10 10 10 10 10

1 Includes buildings and centers utilized by various departments within different functions.2 The Veterans Memorial Building was temporarily vacated on January 21, 2010, to repair identified structural issues that rendered the building unsafe for occupancy.

Fiscal Year

206

207

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

To the Honorable Board of Supervisors of the County of Santa Cruz, California Santa Cruz, California We have audited, in accordance with the auditing standards generally accepted 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, the financial statements of the governmental activities, the business-type activities, the discretely presented component units, each major fund, and the aggregate remaining fund information of the County of Santa Cruz, California (County), as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the County’s basic financial statements, and have issued our report thereon dated June 30, 2013. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the County'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 opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the County’s internal control. Accordingly, we do not express an opinion on the effectiveness of the County’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 assigned 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 purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

Marcum LLP n 2 Park Plaza n Suite 1200 n Irvine, California 92614 n Phone 949.236.5600 n Fax 949.236.5601 n marcumllp.com

208

To the Honorable Board of Supervisors of the County of Santa Cruz, California Santa Cruz, California Compliance and Other Matters As part of obtaining reasonable assurance about whether the County'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 compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 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 compliance. Accordingly, this communication is not suitable for any other purpose. Irvine, California December 18, 2013

209

GLOSSARY (UNAUDITED)

210

ACCOUNTS PAYABLE. A short-term liability account reflecting amounts owed to private persons or organizations for goods and services received by a government. ACCOUNTS RECEIVABLE. An asset account reflecting amounts due from private persons or organizations for goods and services furnished by a government (but not including amounts due from other funds or other governments). ACCRUAL BASIS. The recording of the financial effects on a government of transactions and other events and circumstances that have cash consequences for the government in the periods in which those transactions, events and circumstances occur, rather than only in the periods in which cash is received or paid by the government. ACCUMULATED DEPRECIATION. A contra-asset account used to report the accumulation of periodic credits to reflect the expiration of the estimated service life of capital assets. ADVANCE FROM OTHER FUNDS. A liability account used to record noncurrent portions of a long-term debt owed by one fund to another fund within the same reporting entity. See DUE TO OTHER FUNDS and INTERFUND RECEIVABLE/PAYABLE. ADVANCE TO OTHER FUNDS. An asset account used to record noncurrent portions of a long-term loan from one fund to another fund within the same reporting entity. See DUE FROM OTHER FUNDS. AGENCY FUND. A fund normally used to account for assets held by a government as an agent for individuals, private organizations or other governments and/or other funds. AMORTIZATION. (1) The portion of the cost of a limited-life or intangible asset charged as an expense during a particular period. (2) The reduction of debt by regular payments of principal and interest sufficient to retire the debt by maturity. APPROPRIATION. A legal authorization granted by a legislative body to make expenditures and to incur obligations for specific purposes. An appropriation usually is limited in amount and time it may be expended. ASSESSED VALUATION. A valuation set upon real estate or other property by a government as a basis for levying taxes. ASSIGNED FUND BALANCE. Amounts that are constrained by the County's intent to be used for specific purposes. The intent can be established at either the highest level of decision making or by a body or an official designated for that purpose. This is also the classification for residual funds in the County's special revenue funds. AUDITOR'S REPORT. In the context of a financial audit, a statement by the auditor describing the scope of the audit and the auditing standards applied in the examination, and setting forth the auditor's opinion on the fairness of presentation of the financial information in conformity with GAAP or some other comprehensive basis of accounting. BALANCE SHEET. The financial statement disclosing the assets, liabilities and equity of an entity at a specified date in conformity with GAAP.

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BASIC FINANCIAL STATEMENTS (BFS). The minimum combination of financial statements and note disclosures required for fair presentation in conformity with GAAP. Basic financial statements have three components: government-wide financial statements, fund financial statements and notes to the financial statements. BASIS OF ACCOUNTING A term used to refer to when revenues, expenditures, expenses, and transfers - and the related assets and liabilities are recognized in the accounts and reported in the financial statements. Specifically, it relates to the timing of the measurements made, regardless of the nature of the measurement, on either the cash or the accrual method. BUDGET. A plan of financial operation embodying an estimate of proposed expenditures for a given period and the proposed means of financing them. Used without any modifier, the term usually indicates a financial plan for a single fiscal year. The term "budget" is used in two senses in practice. Sometimes it designates the financial plan presented to the appropriating governing body for adoption, and sometimes, the plan finally approved by that body. BUDGETARY CONTROL. The control or management of a government or enterprise in accordance with an approved budget to keep expenditures within the limitations of available appropriations and available revenues. CAPITAL ASSETS. Long-lived tangible assets obtained or controlled as a result of past transactions, events or circumstances. Capital assets include buildings, equipment, improvements other than buildings, land and infrastructure. In the private sector, these assets are referred to most often as property, plant and equipment. CAPITAL EXPENDITURES. Expenditures resulting in the acquisition of or addition to the government's general capital assets. CAPITALIZATION POLICY. The criteria used by a government to determine which outlays should be reported as capital assets. CAPITAL LEASE. An agreement that conveys the right to use property, plant or equipment, usually for a stated period of time. See LEASE-PURCHASE AGREEMENTS. CAPITAL PROJECTS FUND. A fund created to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds). CASH BASIS. A basis of accounting under which transactions are recognized only when cash is received or disbursed. CASH WITH FISCAL AGENT. An asset account reflecting deposits with fiscal agents, such as commercial banks, for the payment of bond principal and interest CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING PROGRAM. A voluntary program administered by the GFOA to encourage governments to publish efficiently organized and easily readable CAFRs and to provide technical assistance and peer recognition to the finance officers preparing them. CHANGE IN THE FAIR VALUE OF INVESTMENTS. The difference between the fair value of investments at the beginning of the year and at the end of the year, taking into consideration investment purchases, sales, and redemptions.

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COMMITTED FUND BALANCE. Amounts that can only be used for specific purposes determined by formal action of the County's highest level of decision-making authority (the Board of Supervisors), and that remain binding unless removed in the same manner. The underlying action that imposed the limitation needs to occur no later than the close of the reporting period. COMPENSATED ABSENCES. Absences, such as vacation, and illness, for which it is expected employees will be paid. The term does not encompass severance or termination pay, postretirement benefits, deferred compensation or other long-term fringe benefits, such as group insurance and long-term disability pay. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR). A financial report that encompasses all funds and component units of the government. The CAFR should contain (a) the basic financial statements and required supplementary information, (b) combining statements to support columns in the basic financial statements that aggregate information from more than one fund or component unit, and (c) individual fund statements as needed. The CAFR is the governmental unit's official annual report and also should contain introductory information, schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, and statistical data. CONTINGENT LIABILITY. Items that may become liabilities as a result of conditions undetermined at a given date, such as guarantees, pending lawsuits, judgments under appeal, unsettled disputed claims, unfilled purchase orders and uncompleted contracts. Contingent liabilities should be disclosed within the financial statements (including the notes) when there is a reasonable possibility a loss may have been incurred. Guarantees, however, should be disclosed even though the possibility of loss may be remote. COST-SHARING MULTIPLE-EMPLOYER PLAN. A single plan with pooling (cost-sharing) arrangements for the participating employers. All risks, rewards, and costs, including benefit costs, are shared and are not attributed individually to the employers. A single actuarial valuation covers all plan members and the same contribution rate(s) applies for each employer. CURRENT FINANCIAL RESOURCES MEASUREMENT FOCUS. Measurement focus according to which the aim of a set of financial statements is to report the near-term (current) inflows, outflows, and balances of expendable (spendable) financial resources. The current financial resources measurement focus is unique to accounting and financial reporting for state and local governments and is used solely for reporting the financial position and results of operations of governmental funds. DEBT. An obligation resulting from the borrowing of money or from the purchase of goods and services. Debts of governments include bonds, time warrants and notes. DEBT SERVICE FUND. A fund established to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. DEFERRED CHARGES. Expenditures that are not chargeable to the fiscal period in which they were made but that are carried as an asset on the balance sheet, pending amortization or other disposition (e.g. bond issuance costs). Deferred charges differ from prepaid items in that they usually extend over a long period of time (more than five years) and are not regularly recurring costs of operation. DEFERRED INFLOWS AND OUTFLOWS OF RESOURCES. The consumption or acquisition of net assets in one period that are applicable to future periods. DEFICIT. (1) The excess of the liabilities of a fund over its assets. (2) The excess of expenditures over revenues during an accounting period or, in the case of proprietary funds, the excess of expenses over revenues during an accounting period.

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DEFINED BENEFIT PENSION PLAN. A pension plan having terms that specify the amount of pension benefits to be provided at a future date or after a certain period of time; the amount specified usually is a function of one or more factors such as age, years of service, and compensation. DEPRECIATION. (1) Expiration in the service life of capital assets, other than wasting assets, attributable to wear and tear, deterioration, action of the physical elements, inadequacy and obsolescence. (2) The portion of the cost of a capital asset, other than a wasting asset, charged as an expense during a particular period. In accounting for depreciation, the cost of a capital asset, less any salvage value, is prorated over the estimated service life of such an asset, and each period is charged with a portion of such cost. Through this process, the entire cost of the asset is ultimately charged off as an expense. DUE FROM OTHER FUNDS. An asset account used to indicate amounts owed to a particular fund by another fund for goods sold or services rendered. This account includes only short-term obligations on open account, not interfund loans. DUE TO OTHER FUNDS. A liability account reflecting amounts owed by a particular fund to another fund for goods sold or services rendered. These amounts include only short-term obligations on open account, not interfund loans. ECONOMIC RESOURCES MEASUREMENT FOCUS. Measurement focus under which the aim of a set of financial statements is to report all inflows, outflows, and balances affecting or reflecting an entity's net assets. The economic resources measurement focus is used for proprietary and fiduciary funds, as well as for government-wide financial reporting. It is also used by business enterprises in the private sector. ENCUMBRANCES. Commitments related to unperformed (executory) contracts for goods or services. Used in budgeting, encumbrances are not GAAP expenditures or liabilities, but represent the estimated amount of expenditures ultimately to result if unperformed contracts in process are completed. ENTERPRISE FUND. Proprietary fund type used to report an activity for which a fee is charged to external users for goods and services. EXPENDITURE-DRIVEN GRANTS. Government-mandated or voluntary nonexchange transactions in which expenditure is the prime factor for determining eligibility. Also referred to as reimbursement grants. EXCHANGE-LIKE TRANSACTION. Transaction in which there is an identifiable exchange between the reporting government and another party, but the values exchanged may not be quite equal or the direct benefits of the exchange may not be exclusively for the parties to the exchange. EXPENDITURES. Decreases in net financial resources. Expenditures include current operating expenses requiring the present or future use of net current assets, debt service and capital outlays, and intergovernmental grants, entitlement and shared revenues. EXPENSES. Outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services or carrying out other activities that constitute the entity's ongoing major or central operations. EXTERNAL AUDITORS. Independent auditors typically engaged to conduct an audit of a government's financial statements.

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EXTERNAL INVESTMENT POOL. An arrangement that commingles (pools) the moneys of more than one legally separate entity and invests, on the participants' behalf, in an investment portfolio; one or more of the participants is not part of the sponsors reporting entity. An external investment pool can be sponsored by an individual government, jointly by more than one government or by a nongovernmental entity. An investment pool that is sponsored by an individual state or local government is an external investment pool if it includes participation by a legally separate entity that is not part of the same reporting entity as the sponsoring government. If a government-sponsored pool includes only the primary government and its component units, it is an internal investment pool and not an external investment pool. FAIR VALUE. The amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. FIDUCIARY FUNDS. The trust and agency funds used to account for assets held by a government unit in a trustee capacity or as an agent for individuals, private organizations, other government units and/or other funds. FINANCIAL RESOURCES. Resources that are or will become available for spending. Financial resources include cash and resources ordinarily expected to be converted to cash (e.g. receivables, investments). Financial resources may also include inventories and prepaids (because they obviate the need to expend current available resources). FISCAL AGENT. A fiduciary agency, usually a bank or county treasurer, who performs the function of paying debt principal and interest when due. FUND. A fiscal and accounting entity with a self-balancing set of accounts in which cash and other financial resources, all related liabilities and residual equities, or balances, and changes therein, are recorded and segregated to carry on specific activities or attain certain objectives in accordance with special regulations, restrictions or limitations. FUND BALANCE. The difference between fund assets and fund liabilities of governmental and similar trust funds. FUND FINANCIAL STATEMENTS. Basic financial statements presented on the basis of funds. Term used in contrast with government-wide financial statements. FUND TYPE. Any one of seven categories into which all funds are classified in governmental accounting. The seven fund types are: general, special revenue, debt service, capital projects, enterprise, internal service, and trust and agency. GENERAL REVENUES. All revenues that are not required to be reported as program revenues. All taxes, even those that are levied for a specific purpose, are general revenues and should be reported by type of tax - for example, property tax, sales tax, transient occupancy tax. All other nontax revenues (including interest, grants and contributions) that do not meet the criteria to be reported as program revenues should also be reported as general revenues. GENERAL FUND. The general fund is one of five governmental fund types and typically serves as the chief operating fund of the government. The general fund is used to account for all financial resources except those required to be accounted for in another fund. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). The conventions, rules, and procedures that serve as the norm for the fair presentation of financial statements. The various sources of GAAP for state and local governments are set forth by SAS No. 69, The Meaning of "Present Fairly in Conformity with Generally Accepted Accounting Principles" in the Independent Auditor's Report.

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GOVERNMENTAL ACCOUNTING. The composite activity of analyzing, recording, summarizing, reporting and interpreting the financial transactions of governments. GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB). The ultimate authoritative accounting and financial reporting standard-setting body for state and local governments. The GASB was established in June 1984 to replace the National Council on Governmental Accounting (NCGA). GOVERNMENTAL FUNDS. Funds generally used to account for tax-supported activities. There are five different types of governmental funds: the general fund, special revenue funds, debt service funds, capital projects funds and permanent funds. GOVERNMENT-WIDE FINANCIAL STATEMENTS. Financial statements that incorporate all of a government's governmental and business-type activities, as well as its nonfiduciary component units. There are two basic government-wide financial statements: the statement of net position and the statement of activities. Both basic governmental financial statements are presented using the economic resources measurement focus and the accrual basis of accounting. INFRASTRUCTURE. Long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams and lighting systems. INTERFUND RECEIVABLE/PAYABLE. Short-term loans made by one fund to another, or the current portion of an advance to or from another fund.

INTERFUND TRANSFERS. Flow of assets (such as cash or goods) between funds and blended component units of the primary government without equivalent flows of assets in return and without a requirement for payment. INTERNAL SERVICE FUND. A fund used to account for the financing of goods or services provided by one department or agency to other departments or agencies of a government, or to other governments, on a cost-reimbursement basis. JOINT VENTURE. A legal entity or other contractual arrangement in which a government participates as a separate and specific activity for the benefit of the public or service recipients and in which the government retains an ongoing financial interest. LAPSE. As applied to appropriations, the automatic termination of an appropriation. Except for indeterminate appropriations and continuing appropriations, an appropriation is made for a certain period of time. At the end of this period, any unexpended or unencumbered balance thereof lapses, unless otherwise provided by law. LEASE-PURCHASE AGREEMENTS. Contractual agreements that are termed leases, but that in substance are purchase contracts. LEGAL LEVEL OF BUDGETARY CONTROL. The level at which spending in excess of budgeted amounts would be a violation of law. LEVEL OF BUDGETARY CONTROL. The level at which a government's management may not reallocate resources without special approval from the legislative body.

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LIABILITIES. Probable future sacrifices of economic benefits, arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. LOANS RECEIVABLE. An asset account reflecting amounts loaned to individuals or organizations external to a government, including notes taken as security for such loans. Loans to other funds and governments should be recorded and reported separately. MAJOR FUND. A governmental fund or enterprise fund reported as a separate column in the basic fund financial statements. The general fund is always a major fund. Otherwise, major funds are funds whose revenues/expenditures, assets or liabilities are at least 10 percent of corresponding totals for all government or enterprise funds and at least 5 percent of the aggregate amount for all governmental and enterprise funds for the same item. Any other government or enterprise fund may be reported as a major fund if the government's officials believe that fund is particularly important to financial statement users. MANAGEMENT'S DISCUSSION AND ANALYSIS. A component of required supplementary information used to introduce the basic financial statements and to provide an analytical overview of the entity's financial activities. MEASUREMENT FOCUS. A way of presenting an entity's financial performance and position by considering which resources are measured (financial or economic) and when the effects of transactions or events involving those resources are recognized (the basis of accounting). The measurement focus of government-wide financial statements, proprietary fund financial statements and fiduciary fund financial statements is economic resources. The measurement focus of governmental fund financial statements is current financial resources. MODIFIED ACCRUAL BASIS. The accrual basis of accounting adapted to the governmental fund-type measurement focus. Under it, revenues and other financial resource increments (e.g. bond issue proceeds) are recognized when they become susceptible to accrual, that is when they become both "measurable" and "available to finance expenditures of the current period." "Available" means collectible in the current period or soon enough thereafter to be used to pay liabilities of the current period. Generally, expenditures are recognized when the fund liability is incurred. All governmental funds, expendable trust funds and agency funds are accounted for using the modified accrual basis of accounting. NET INVESTMENT IN CAPITAL ASSETS. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction or improvement of those assets. NET POSITION. The residual of all other elements of the statement of financial position. In other words, the difference between assets and deferred outflows of resources and liabilities and deferred inflows of resources. NONSPENDABLE FUND BALANCE. Amounts that cannot be spent because they are either (1) not spendable in form or (2) legally or contractually required to be maintained intact. OTHER FINANCING SOURCES. An increase in current financial resources that is reported separately from revenues to avoid distorting revenue trends. The use of the other financing sources category is limited to items so classified by GAAP. OTHER FINANCING USES. A decrease in current financial resources that is reported separately from expenditures to avoid distorting expenditure trends. The use of other financing uses category is limited to items so classified by GAAP.

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OVERLAPPING DEBT. The proportionate share that property within each government must bear of the debts of all local governments located wholly or in part within the geographic boundaries of the reporting government. Except for special assessment debt, the amount of debt of each unit applicable to the reporting unit is arrived at by (1) determining what percentage of the total assessed value of the overlapping jurisdiction lies within the limits of the reporting unit, and (2) applying this percentage to the total debt of the overlapping jurisdiction. Special assessment debt is allocated on the basis of the ratio of assessment receivable in each jurisdiction, which will be used wholly or in part to pay off the debt, to total assessments receivable, which will be used wholly or in part for this purpose. PROGRAM REVENUES. Term used in connection with the government-wide statement of activities. Revenues that derive directly from the program itself or from parties outside the reporting government's taxpayers or citizenry, as a whole; they reduce the net cost of the function to be financed from the government's general revenues.

PROPRIETARY FUNDS. Funds that focus on the determination of operating income, changes in net assets (or cost recovery), financial position, and cash flows. There are two different types of proprietary funds: enterprise funds and internal service funds. PRIVATE-PURPOSE TRUST FUND. Trust Fund used to report resources of other trust arrangements in which principal and income benefit individuals, private organizations, or other governments.

REBATABLE ARBITRAGE. A term used in connection with the reinvestment of the proceeds of tax-exempt debt. A requirement to remit to the federal government interest revenue in excess of interest costs when the proceeds from the sale of tax-exempt securities are reinvested in a taxable money market instrument with a materially higher yield. REPORTING ENTITY. The oversight unit and all of its component units, if any, that are combined in the CAFR/BFS.

REQUIRED SUPPLEMENTARY INFORMATION. Consists of statements, schedules, statistical data or other information which, according to the GASB, is necessary to supplement, although not required to be a part of the basic financial statements. RESERVED FUND BALANCE. The portion of a governmental fund's net assets that is not available far appropriation.

RESTRICTED ASSETS. Assets whose use is subject to constraints that are either (1) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or (2) imposed by law through constitutional provisions or enabling legislation.

RESTRICTED FUND BALANCE. Amounts with constraints placed on their use that are either (1) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or (2) imposed by law through constitutional provisions or enabling legislation.

RESTRICTED NET ASSETS. A component of net assets calculated by reducing the carrying value of restricted assets by the amount of any related debt outstanding. REVENUE BONDS. Bonds whose principal and interest are payable exclusively from earnings of an enterprise fund. In addition to a pledge of revenues, such bonds sometimes contain a mortgage on the enterprise fund's property. RISK MANAGEMENT. All the ways and means used to avoid accidental loss or to reduce its consequences if it does occur.

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SELF-INSURANCE. A term often used to describe the retention by an entity of a risk of loss arising out of the ownership of property or from some other cause, instead of transferring that risk to an independent third party through the purchase of an insurance policy. It is sometimes accompanied by the setting aside of assets to fund any related losses. Because no insurance is involved, the term self-insurance is a misnomer. SINGLE AUDIT. An audit performed in accordance with the Single Audit Act of 1997 and Office of Management and Budget's (OMB) Circular A-133, Audits of State and Local Governments and Non-Profit Organizations. The Single Audit Act allows or requires governments (depending on the amount of federal assistance received) to have one audit performed to meet the needs of all federal agencies. SPECIAL DISTRICT. An independent unit of local government organized to perform a single government function or a restricted number of related functions. Special districts usually have the power to incur debt and levy taxes; however, certain types of special districts are entirely dependent upon enterprise earnings and cannot impose taxes. Examples of special districts are water districts, drainage districts, flood control districts, hospital districts, fire protection districts, transit authorities, port authorities and electric power authorities. SPECIAL REVENUE FUND. A fund used to account for the proceeds of specific revenue sources (other than expendable trusts or major capital projects) that are legally restricted to expenditure for specified purposes. TAX AND REVENUE ANTICIPATION NOTES (TRANS). Notes issued in anticipation of the collection of taxes and revenues, usually retirable only from tax collections, and frequently only from the proceeds of the tax and revenues levy whose collection they anticipate. TRUST FUNDS. Funds used to account for assets held by a government in a trustee capacity for individuals, private organizations, other governments and/or other funds. UNASSIGNED FUND BALANCE. The residual classification for the County's General Fund that includes amounts not contained in the other classifications. In other funds, the unassigned classification is used only if expenditures incurred for specific purposes exceed the amounts restricted, committed, or assigned to those purposes.

UNEARNED REVENUE. Resource inflows that do not yet meet the criteria for revenue recognition. Unearned amounts are always reported as unearned revenue. In governmental funds, earned amounts also are reported as unearned revenue until they are available to liquidate liabilities of the current period. UNQUALIFIED OPINION. An opinion rendered without reservation by the independent auditor that financial statements are fairly presented.

UNRESERVED FUND BALANCE. That portion of a fund balance available for spending or appropriation in the future. UNRESTRICTED NET ASSETS. That portion of net assets that is neither restricted nor invested in capital assets (net of related debt).

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APPENDIX C

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This CONTINUING DISCLOSURE CERTIFICATE (the “Disclosure Certificate”) is executed and delivered by the COUNTY OF SANTA CRUZ (the “County”) in connection with the execution and delivery of $6,285,000 County of Santa Cruz, California, 2014 Refunding Certificates of Participation (the “Certificates”). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of March 1, 2014, by and among The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), the County and the Santa Cruz County Public Financing Authority (the “Trust Agreement”). The County covenants and agrees as follows:

Section 1. Purpose of this Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the County for the benefit of the Owners and Beneficial Owners of the Certificates and in order to assist the Participating Underwriter in complying with the Rule (defined below).

Section 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the County pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

“Beneficial Owner” shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Certificates for federal income tax purposes.

“Dissemination Agent” shall mean the County or any successor Dissemination Agent designated in writing by the County and which has filed with the County a written acceptance of such designation. In the absence of such a designation, the County shall act as the Dissemination Agent.

“EMMA” or “Electronic Municipal Market Access” means the Electronic Municipal Market Access system of the MSRB.

“Listed Events” shall mean any of the events listed in Section 5(a) and (b) of this Disclosure Certificate.

“MSRB” means shall mean the Municipal Securities Rulemaking Board and any successor entity designated under the Rule as the repository for filings made pursuant to the Rule.

“Official Statement” shall mean the Official Statement relating to the Certificates, dated March 20, 2014.

“Participating Underwriter” shall mean Stifel, Nicolaus & Company, Inc.

“Repository” shall mean the MSRB or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Unless otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the EMMA website of the MSRB, currently located at http://emma.msrb.org.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

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“State” shall mean the State of California.

Section 3. Provision of Annual Reports.

(a) Delivery of Annual Report to MSRB. The County shall, or shall cause the Dissemination Agent to, not later than February 15 in each year, commencing with the report for the 2013-14 Fiscal Year, which is due not later than February 15, 2015 and to file with EMMA, in a readable PDF or other electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the County may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date.

(b) Change of Fiscal Year. If the County’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(d).

(c) Delivery of Annual Report to Dissemination Agent. Not later than fifteen days prior to the date specified in subsection (a) for providing the Annual Report to EMMA, the County shall provide the Annual Report to the Dissemination Agent (if other than the County). If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall notify the County.

(d) Report of Non-Compliance. If the County is unable to provide an Annual Report by the date required in subsection (a), the Dissemination Agent shall send a notice to EMMA in the form required by the Repository stating that the Annual Report has not been filed.

(e) Annual Compliance Certification. The Dissemination Agent shall, if the Dissemination Agent is other than the County, file a report with the County certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided.

Section 4. Content of Annual Reports. The County’s Annual Report shall contain or incorporate by reference the following:

(a) Audited financial statements of the County, prepared in accordance with generally accepted auditing standards for municipalities in the State of California. If the County’s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

(b) To the extent not included in the audited final statement of the County, the Annual Report shall also include the following information, insofar as available from public records:

(i) Gross Assessed Value of All Taxable Property;

(ii) General Fund Property Tax Levies and Collections;

(iii) Tax Revenues by Source;

(iv) General Fund Statement of Revenues, Expenditures and Changes in Fund Balance

(c) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the County or related public entities, which have

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been submitted to EMMA or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the MSRB. The County shall clearly identify each such other document so included by reference.

Section 5. Reporting of Significant Events.

(a) Reportable Events. The County shall, or shall cause the Dissemination (if not the County) to, give notice of the occurrence of any of the following events with respect to the Certificates:

(1) Principal and interest payment delinquencies.

(2) Unscheduled draws on debt service reserves reflecting financial difficulties.

(3) Unscheduled draws on credit enhancements reflecting financial difficulties.

(4) Substitution of credit or liquidity providers, or their failure to perform.

(5) Defeasances.

(6) Rating changes.

(7) Tender offers.

(8) Bankruptcy, insolvency, receivership or similar event of the obligated person.

(9) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security.

(b) Material Reportable Events. The County shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material:

(1) Non-payment related defaults.

(2) Modifications to rights of security holders.

(3) Bond calls or prepayments

(4) The release, substitution, or sale of property securing repayment of the securities.

(5) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms.

(6) Appointment of a successor or additional trustee, or the change of name of a trustee.

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(7) Unless described in paragraph 5(a)(9) above, notices or determinations by the Internal Revenue Service with respect to the tax status of the Certificates or other material events affecting the tax status of the Certificates.

(c) Determination of Materiality of Listed Events. Whenever the County obtains knowledge of the occurrence of a Listed Event, the County shall as soon as possible determine if such event would be material under applicable federal securities laws.

(d) Notice to Dissemination Agent. If the County has determined that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the County shall promptly notify the Dissemination Agent (if other than the County) in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (d).

(e) Notice of Listed Events. The County shall file, or cause the Dissemination Agent to file, a notice of the occurrence of a Listed Event, if material, with EMMA, in a readable PDF or other electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of the Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(5) and (b)(3) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Certificate holders of affected Certificates.

Section 6. Termination of Reporting Obligation. The County’s obligations under this Disclosure Certificate shall terminate upon the defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the County shall give notice of such termination in the same manner as for a Listed Event under Section 5.

Section 7. Dissemination Agent.

(a) Appointment of Dissemination Agent. The initial Dissemination Agent shall be the County. The County may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such agent, with or without appointing a successor Dissemination Agent. If the Dissemination Agent is not the County, the Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the County pursuant to this Disclosure Certificate.

(b) Compensation of Dissemination Agent. The Dissemination Agent, if not the County, shall be paid compensation by the County for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the County from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the County, Holders or Beneficial Owners, or any other party. The Dissemination Agent may rely and shall be protected in acting or refraining from acting upon any direction from the County or an opinion of nationally recognized bond counsel. The Dissemination Agent may at any time resign by giving written notice of such resignation to the County.

Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the County may amend this Disclosure Certificate (and the Dissemination Agent shall agree to any amendment so requested by the County that does not impose any greater duties or risk of liability on the Dissemination Agent), and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) Change in Circumstances. If the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Certificates, or the type of business conducted;

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(b) Compliance as of Issue Date. The undertaking, as amended or taking into account such waiver, would, in the opinion of a nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) Consent of Holders; Non-impairment Opinion. The amendment or waiver either (i) is approved by the Certificate holders in the same manner as provided in the Trust Agreement for amendments to the Trust Agreement with the consent of Certificate holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Certificate holders or Beneficial Owners.

If this Disclosure Certificate is amended or any provision of this Disclosure Certificate is waived, the County shall describe such amendment or waiver in the next following Annual Report and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the County. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(d), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the County from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the County chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the County shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 10. Default. In the event of a failure of the County to comply with any provision of this Disclosure Certificate, any Certificate holder or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the County to comply with its obligations under this Disclosure Certificate. The sole remedy under this Disclosure Certificate in the event of any failure of the County to comply with this Disclosure Certificate shall be an action to compel performance.

Section 11. Duties, Immunities and Liabilities of Dissemination Agent. All of the immunities, indemnities, and exceptions from liability in Article IX of the Trust Agreement insofar as they relate to the Trustee shall apply to the Dissemination Agent in this Disclosure Certificate. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the County (if the Dissemination Agent is other than the County) agrees to indemnify and save the Dissemination Agent, and its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of the disclosure of information pursuant to the Disclosure Certificate or arising out of or in the exercise of performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent (if the Dissemination Agent is other than the County) shall have no duty of obligation to review any information provided to it hereunder and shall not be deemed to be acting in any fiduciary capacity for the County, the owner of a Certificate, or any other party. The Trustee shall have no liability to any party for any monetary damages or other financial liability of any kind whatsoever related to or arising from any breach of this Disclosure Certificate. No person shall have any right to commence any action against the Dissemination Agent seeking any remedy other than to compel specific performance of this Disclosure Certificate. The

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Dissemination Agent may rely and shall be protected in acting or refraining from acting upon any written direction from the County or an opinion of Special Counsel. The obligations of the County under this Section shall survive resignation or removal of the Dissemination Agent or the Trustee and payment of the Certificates.

Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the County, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Certificates, and shall create no rights in any other person or entity.

Date: April 10, 2014 COUNTY OF SANTA CRUZ By: ____________________________________ Its: Assistant County Administrative Officer

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APPENDIX D

FORM OF SPECIAL COUNSEL OPINION

April 10, 2014

Board of Supervisors County of Santa Cruz 701 Ocean Street Santa Cruz, CA 95060

Re: $6,285,000 2014 Refunding Certificates of Participation Evidencing the Direct, UndividedFractional Interests of the Owners Thereof in Lease Payments to be Made by the Countyof Santa Cruz to the Santa Cruz County Public Financing Authority; Final Opinion ofSpecial Counsel

Honorable Board of Supervisors:

We have acted as Special Counsel in connection with the delivery by the County of Santa Cruz (the “County”) of a Third Supplement to Sub-Sublease, dated as of March 1, 2014 (the “Lease Agreement”) between the Santa Cruz County Public Financing Authority (the “Authority”) as lessor and the County as lessee. Under a Trust Agreement, dated as of March 1, 2014 (the “Trust Agreement”) among the County, the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee thereunder (the “Trustee”), the Trustee has executed and delivered $6,285,000 aggregate principal amount of 2014 Refunding Certificates of Participation (the “Certificates”) evidencing the direct, undivided fractional interests of the owners thereof in lease payments to be made by the County under the Lease Agreement (the “Lease Payments”) which have been assigned by the Authority to the Trustee under an Assignment Agreement, dated as of March 1, 2014, between the Authority and the Trustee (the “Assignment Agreement”). The Certificates have been sold to Stifel, Nicolaus & Company, Incorporated (the “Underwriter”). We have examined the law and such certified proceedings and other papers as we deem necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of the County contained in the Lease Agreement and the Trust Agreement, and in certified proceedings and other certifications of public officials and others furnished to us, without undertaking to verify the same by independent investigation.

Based upon the foregoing, we are of the opinion, under existing law, as follows:

1. The County is a political subdivision duly organized and validly existing under the Constitution and laws of the State of California with the full power to enter into the Lease Agreement and the Trust Agreement and to perform the agreements on its part contained therein.

2. The Lease Agreement and the Trust Agreement have been duly approved by the County and constitute valid and binding obligations of the County enforceable against the County in accordance with their respective terms.

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Board of Supervisors April 10, 2014 Page 2

3. The Certificates have been validly executed and delivered by the Trustee under the Trust Agreement and, by virtue of the assignment made under the Assignment Agreement, the owners of the Certificates are entitled to the benefits of the Lease Agreement.

4. The portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, receipt or accrual of such interest in respect of a Certificate owned by a corporation may affect the computation of its alternative minimum taxable income. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Tax Code will be computed. The opinions set forth in the preceding sentence are subject to the condition that the County comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the delivery of the Lease Agreement in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The County has covenanted in the Lease Agreement and the Trust Agreement and other instruments relating to the Certificates to comply with each of such requirements. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of delivery of the Lease Agreement. We express no opinion regarding other federal tax consequences arising with respect to the Lease Agreement and the Certificates.

5. The portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is exempt from personal income taxation imposed by the State of California.

6. The rights of the owners of the Certificates and the enforceability of the Lease Agreement and the Trust Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in accordance with principles of equity or otherwise in appropriate cases.

Respectfully submitted,

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APPENDIX E DTC AND THE BOOK-ENTRY-ONLY SYSTEM

The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, interest and other payments on the Certificates to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Certificates and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

Neither the issuer of the Certificates (the “Issuer”) nor the trustee, fiscal agent or paying agent appointed with respect to the Certificates (the “Agent”) take any responsibility for the information contained in this Appendix.

No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Certificates, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Certificates, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Certificates, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Certificates (the “Securities”). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.

2. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange

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Commission. More information about DTC can be found at www.dtcc.com. The information contained on this Internet site is not incorporated herein by reference.

3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC’s records. The ownership interest of each actual purchaser of each Security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds and distributions on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption

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proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

10. Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.

11. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.