County Of Los Angeles Comprehensive Annual Financial

IllHonorable Board of SupervisorsPage 3Los Angeles County was a general law county until 1913 when it became a charter countyas a result of local election. The County is governed by a five member Board ofSupervisors who are elected by district to serve alternating four-year terms. TheAssessor, District Attorney and Sheriff are also elected officials while all other departmentsare headed by appointed officials. On March 5, 2002, County voters approved two charteramendments providing for term limits for the Board of Supervisors and the other electedCounty officials. The affected officials are limited to three consecutive terms commencingDecember 2002.There are over one million residents in the unincorporated areas of the County. Theseresidents receive all municipal services from the County, including law enforcement, fireprotection, land use and zoning, building and business permits, local road building andmaintenance, animal care and control, and public libraries. In addition, the Countyprovides a wide range of services to all County residents.The County also provides municipal services to many incorporated cities within itsboundaries under the Contract Services Plan. Established in 1954, the Plan allows citiesto provide municipal services without incurring the cost of creating numerous citydepartments and facilities by having the County provide, at cost, any or all municipalservices within a city at the same level as provided in unincorporated areas, or at anyhigher level the city may choose. Although the Plan was developed to assist new cities,the great majority of the cities in the County now contract for one or more services.The County's principal functions include seven major areas as required under the County'sCharter, County Ordinances, or by State or federal mandate: general government, publicprotection, public ways and facilities, health and sanitation, public assistance, educationand recreation and cultural services. The State and federal governments mandate certainminimum levels of services in the public assistance and health areas.ECONOMIC CONDITION AND OUTLOOKLos Angeles County serves as the central trade district for the western United States andcontrols nearly three quarters of the Pacific Coast trade with Asia. The County remains aleader in the communications industry, has established itself as a leading financialcenter and serves as the western headquarters for many national industrial andfinancial firms.Since 2001-2002, the County has experienced a modest recession, with anunemployment rate estimated at 6.7% for that period. The County's economic outlookappears to be slowly recovering during 2003, with job increases projected at 39,500. Themodest recovery is supported by defense and aerospace work that has flowed into theCounty. There has also been support from the construction of major projects, including

IVHonorable Board of SupervisorsPage4port expansions, the UCLA Medical Center, and the replacement of the County'sLAC USC Medical Center. Two other significant projects that were recently completedare the Disney Concert Hall and the Gold Line light rail that extends from downtown LosAngeles to the City of Pasadena.The County's real estate market maintained its relative strength in comparison to overalleconomic conditions. With continued high demand for housing, there were increases inboth existing and new home sales, which went from 107,439 in 2001 to 117 ,208 in 2002.The increase in annual home sales has been accompanied by a decline in industrialvacancy rates, defaults, and foreclosures. The decline in vacant office space reflects, inparticular, the increasing space needs of the growing motion picture, multimedia, andbusiness services industries.Construction activity has increased steadily since 1997. The lack of inventory fromprevious years has added to the demand for new construction. As a result, the number ofresidential building permits issued each year has nearly doubled from 11,692 in 1997 to19,271 in 2002. Annual building permit valuations (both residential and non-residential)have steadily increased from 5.9 billion in 1997 to 7.2 billion in 2002.FINANCIAL INFORMATIONINTERNAL AND BUDGETARY CONTROLSThe County has developed a system of internal accounting controls designed to providereasonable, but not absolute, assurance that assets are safeguarded against loss fromunauthorized use and to provide reliable records for preparing financial statements andmaintaining accountability for assets. The concept of reasonable assurance recognizesthat the costs of a system of internal accounting controls should not outweigh relatedbenefits and that the evaluation of costs and benefits requires estimates and judgments bymanagement.All internal accounting control evaluations occur within the aboveframework. We believe that the County's system of internal accounting controlsadequately safeguards assets and also provides reasonable assurance of properrecording of financial transactions.In accordance with the provisions of Section 29000-29144 of the Government Code,commonly known as the County Budget Act, the County prepares and adopts a budget onor before August 30 of each fiscal year. Expenditures are controlled at the object level forall budget units within the County, except for fixed asset expenditures which are controlledat the sub-object level.

vHonorable Board of SupervisorsPage 5Encumbrance accounting is utilized to ensure effective budgetary control andaccountability. Unencumbered appropriations lapse at year-end and encumbrancesoutstanding at the time are reported as reservations of fund balance for subsequent yearexpenditures.The Board of Supervisors must approve all transfers of appropriations between budgetunits and transfers exceeding 250,000 within budget units. The Board must also approvenecessary supplemental appropriations, normally financed by unanticipated revenuesearned during the year.In addition to these procedural controls, the Auditor-Controller's Audit Division performsperiodic internal control, operational and management audits of the various departments tohelp ensure that prescribed procedures are followed and that operations are conducted inan efficient manner. In addition, the Auditor-Controller operates a fraud hotline thatprovides County employees and citizens with a way to anonymously report perceivedfraudulent activities by County employees, vendors, contractors, inspectors, etc.Allegations reported over the hotline are evaluated and investigated.A substantial portion of the County's overall budget is appropriated for contracted services.During 2002-2003, the Auditor-Controller evaluated the effectiveness of the County'scontract monitoring program. This effort was focused on a small group of Countydepartments that administer a significant volume of contracts at relatively high dollarvalues. With support from the Board of Supervisors, the Auditor-Controller has begun toimplement a series of pilot projects to test the merits of centralizing the contract monitoringfunction in the Auditor-Controller in order to improve its effectiveness.CASH MANAGEMENTThe majority of the entities included in the CAFR have their funds on deposit with the LosAngeles County Treasury Pool (LACTP). The Treasurer invests LACTP funds primarily incertificates of deposit, obligations of various agencies of the federal government and ofLos Angeles County, corporate notes, repurchase agreements, and commercial paper. Inaccordance with Governmental Accounting Standards Board Statement No. 31,"Accounting and Financial Reporting for Certain Investments and for External InvestmentPools," the basic financial statements reflect the fair value of investments.The Treasurer's investment policy is to minimize credit and market risks while maintaininga competitive yield on its portfolio. Investments are placed in conformance with State lawand Treasurer's investment policy approved by the Board. Any deviations from the policyare reported to the Los Angeles County Board of Supervisors monthly and the TreasuryOversight Committee quarterly.

VIHonorable Board of SupervisorsPage 6While the Treasurer did not enter into any reverse repurchase agreements during 20022003, the Treasurer has determined that, prudently managed and controlled, the use ofreverse repurchase agreements can provide incremental gains thereby adding value to theportfolio. The Treasurer's policy limits the maximum par value to 500 million andproceeds from reverse repurchase agreements may only be reinvested in instruments withmaturities at or before the maturity of the reverse repurchase agreement.Floating rate notes (derivatives) are used as part of the Treasurer's investment strategy.The Treasurer's investment policy precludes the use of complex or hybrid structuredinvestments such as inverse floating rate notes, range notes, and interest only stripsderived from mortgage pools.As of June 30, 2003, LACTP investments had the following maturity ranges:Maturity Period1to60 days61 days to 1 yearOver 1 year% of Total33.4%20.7%45.9%The Retirement Association's Board of Investments manages the Pension Trust Fund. Itsinvestments are made in accordance with State law which authorizes a "Prudent Expert"guideline as to the form and type of investments which may be purchased. Examples ofthe fund's investments include domestic and global stocks and convertibles, obligations ofvarious federal agencies, domestic corporate bonds, and real estate.The average earnings rate for LACTP for 2002-2003 was 2.16 percent. The PensionTrust Fund's total fund return earned a positive yield of 3.6 percent, reversing a two-yeartrend of negative earnings that were due to declining stock markets.The Governmental Accounting Standards Board has established rating criteria to beutilized as indicators, but not absolute measurements, of credit risk for deposits andinvestments. Credit risk is the risk that the issuer of a security will not redeem it. A lowrisk category is not necessarily good and a high risk category is not necessarily bad.Additional factors such as the internal controls and financial stability of the parties involvedmust be taken into consideration. As of June 30, 2003, all of the County's investmentswere in the low risk category. Note 4 to the basic financial statements provides additionalinformation regarding deposits and investments.

viiHonorable Board of SupervisorsPage 7CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONSArticle XlllA and XlllBArticle XlllA of the California Constitution limits the taxing powers of California publicagencies. Article XI llA provides that the maximum ad valorem tax on real property cannotexceed one percent of the "full cash value" of the property, and effectively prohibits thelevying of any other ad valorem property tax except for taxes which are required to paydebt 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, newlyconstructed, or a change in ownership has occurred after the 1975 assessment." The "fullcash value" is subject to annual adjustment to reflect inflation at a rate not to exceed twopercent or a reduction in the consumer price index or comparable local data, or decliningproperty value caused by damage, destruction or other factors.The foregoing limitation does not apply to ad valorem taxes or special assessments to paythe interest and redemptiori Charges on any indebtedness approved by the voters beforeJuly 1, 1978 or any bonded indebtedness for the acquisition or improvement of realproperty approved by two-thirds of the voters voting on a proposition subsequent to thatdate.RISK MANAGEMENTThe County purchases insurance for certain risk exposures such as aviation, employeefidelity, boiler and machinery in certain structures, art objects, catastrophic hospital generalliability, volunteer, crime, special events, public official bond, public safety reserveemployee death and disability, and fiduciary liability for the deferred co

for inclusion in this report include the City of Los Angeles, Los Angeles Unified School District and Los Angeles County Sanitation Districts. The Los Angeles County Superior Court is not included due to legislation (AB233) which transferred oversight respo