1. Presentation to the Oversight Board Santa Clara County Auditor-Controller 1

2. Overview The Audit Process Overview of Recognized Obligation Payment Schedule (ROPS) Certification Certified ROPS Approval 2

3. The Audit Process H&S Code section 34182(a)(1): “The county auditor- controller shall conduct or cause to be conducted an agreed upon procedures audit of each redevelopment agency....” Four Parts(§ 34182(a)(2)): Establish each RDA’s assets and liabilities Document and determine each RDA’s passthrough obligations Document and determine the amount and terms of any indebtedness Certify the initial ROPS Final deadline: July 1, 2012 3

4. What are ROPS? Six-month schedules of “enforceable obligation” payments. (§ 34171(h)) Beginning May 1, 2012, “only those payments listed in the [ROPS] may be made by the successor agency....” (§ 34177(a)(3)) 4

5. What are ROPS? (Cont’d) The ROPS must identify the source of funds, and monies from the Redevelopment Property Tax Trust Fund are to be used “only to the extent no other funding source is available or when payment from property tax revenues is required by an enforceable obligation or by the provisions of this part.” (§ 34177(l)(1)) Property tax money will flow from the trust funds maintained by the County Auditor-Controller to trust funds maintained by the successor agencies every six months to pay only those items on ROPS; this is the second priority distribution from the trust fund. (§ 34183(a)(2)) 5

6. What are ROPS? (Cont’d) The initial certified and approved ROPS is due April 15, 2012. (§ 34177(l)(3)) The initial ROPS is certified only for payments between January 1, 2012 and June 30, 2012. Amounts will be “trued up” based on actual payments and final, approved ROPS with every ROPS period. (§ 34186) Future ROPS must still be certified, based on the final audit establishment of assets and liabilities and determination of indebtedness. 6

7. Mandatory Conditions for a Valid ROPS - § 34177(l)(2): A [ROPS] shall not be deemed valid unless all of the following conditions have been met: (A)A draft [ROPS] is prepared by the successor agency for the enforceable obligations of the former [RDA].... [T]he initial draft of that schedule... shall be reviewed and certified, as to its accuracy, by an external auditor designated pursuant to Section 34182. (B) The certified [ROPS] is submitted to and duly approved by the oversight board. (C) A copy of the approved [ROPS] is submitted to the county auditor-controller and both the Controller’s office and Department of Finance and must be posted on the successor agency’s Internet Web site. 7

8. Audit Phase 1: ROPS Certification Timeline: County CPRA Request for Underlying Documents – January 11th Fieldwork Started – Early March Fieldwork Completed – March 29th Exit Conference/Draft Report – Early April Certified ROPS to Oversight Boards – Starting April 5th Approved, Certified ROPS Submitted to State Dept. of Finance et al. – April 15th 8

9. Item Review – Overview ROPS may only include “enforceable obligations” of the former RDA. “Enforceable obligation” is specifically defined by law in ABX1 26. Legal review by the Office of the County Counsel examined underlying documentation using a multi- step process. An identical, consistent process was used countywide to examine every item listed on the draft ROPS by successor agencies to ensure that the statutory criteria were met. 9

10. Item Review Steps Step 1: Does item meet threshold qualification as an “enforceable obligation” under section 34171(d)(1)? Step 2: Is the item excluded by the statute? 10

11. Item Review – Step 1 Does the item meet the threshold qualification under section 34171(d)(1)? The most common problems included: Successor agency was unable to provide documentation to support the existence of the obligation. Documentation provided shows that the obligation was a city obligation, not an RDA obligation. Documentation describes an item that is not a current or future obligation of the agency (e.g., the obligation ended). 11

12. Item Review – Step 2 Is the item excluded by the statute? Most activity initiated after June 28, 2011 violates the “freeze” provisions. (Part 1.8) After June 28, 2011, ABX1 26 prohibited RDAs from entering into new enforceable obligations or expanding any existing obligations. This issue did not arise often as most jurisdictions complied with the freeze and the California Supreme Court’s order keeping the freeze in place while the statute was under review. 12

13. Item Review – Step 2 (Cont’d) Is the item excluded by the statute? “[A]greements, contracts, or arrangements between the [City] that created the redevelopment agency and the redevelopment agency are invalid and shall not be binding on the successor agency....” (§ 34178(a); see also § 34171(d)(2)) There are limited exceptions for loans entered into within two years of the RDA’s formation and for certain agreements related to “indebtedness obligations.” Section 34178(a) allows successor agencies to enter or reenter into agreements with the host city, but only with oversight board approval. Certain indebtedness-related obligations did not meet the narrow exception but are likely strong candidates for certification if the oversight board approves reentering into the relevant agreements. 13

14. Item Review – Step 2 (Cont’d) Is the item excluded by the statute? Certain agreements or contracts with other public agencies are invalid. (§ 34171(d)(3)) These agreements concern services or funding for governmental or private services or capital projects outside of RDA project areas. These agreements rarely arose during the review. 14

15. Payment Review – Overview Documentation was examined to ensure that obligation dollar amounts for the six month period covered by the ROPS were accurate. Adjustments were made: To account for reserves; To match the underlying documentation; To ensure that estimates and other amounts were based on reasonable data; and, Where obligations were only partially certifiable (e.g., only part of the amount was an agency obligation). Total obligation amounts, beyond the six month period, have not yet been certified – they will be reviewed in the audit as part of the establishment of assets and liabilities and determination of indebtedness. 15

16. Reclassifications Certain items listed on draft ROPS were reclassified: Passthrough payments are not ROPS items and are now the responsibility of the County Auditor-Controller. They are not part of the certified ROPS and are subject to a separate phase of the audit. Amounts not currently payable are excluded in the certified ROPS for this time period but will be subject to the final audit determination of liabilities. Administrative costs are listed separately, because they are paid out pursuant to the administrative cost allowance, as a lower priority, and only upon oversight board approval of the administrative budget. 16

17. Administrative Costs The oversight board must approve the administrative budget. (§§ 34171(b), 34177(j)) Administrative costs are subject to a 5% cap on the ROPS amount in this fiscal year, and 3% thereafter, with a minimum of $250,000 each fiscal year subject to oversight board approval. (§ 34171(b)) Administrative cost items cannot be certified until the oversight board approves the administrative budget and approves entering into appropriate agreements for staffing. 17

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19. Certified ROPS Approval Process Oversight boards are asked to approve the certified ROPS. Notwithstanding certification, oversight boards can remove any item that is terminable or renegotiable. (§ 34181(d), (e)) Oversight boards cannot approve an item that is not an “enforceable obligation.” (§ 34181(b)) Consistent with its fiduciary obligations, an oversight board can approve entering or reentering agreements between the successor agency and the host city; the county auditor-controller can subsequently certify the item and it may be added to this or a subsequent ROPS. (§ 34178(a)) If there is a disputed item, we recommend that the board discuss it and provide specific direction to the successor agency staff to work with the county auditor-controller to review the item for potential certification, if appropriate. 19

20. Questions? The County Auditor-Controller’s financial, legal, and internal and external audit staff are available to answer questions related to ROPS certification. 20