MODESTO HIGH SCHOOL DISTRICT Modesto City Schools

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MODESTO HIGH SCHOOL DISTRICT Modesto City Schools Powered By Docstoc
					    MODESTO CITY SCHOOLS
(MODESTO CITY SCHOOL DISTRICT)
(MODESTO HIGH SCHOOL DISTRICT)

     COUNTY OF STANISLAUS

     MODESTO, CALIFORNIA


     FINANCIAL STATEMENTS

WITH SUPPLEMENTARY INFORMATION


FOR THE YEAR ENDED JUNE 30, 2010

              AND

 INDEPENDENT AUDITOR'S REPORT
                                FINANCIAL STATEMENTS
                          WITH SUPPLEMENTARY INFORMATION

                               For the Year Ended June 30, 2010


                                    TABLE OF CONTENTS


                                                                        Page

Independent Auditor's Report                                              1-2

Management's Discussion and Analysis                                     3-11

Basic Financial Statements:

  Government-Wide Financial Statements:

     Statement of Net Assets                                               12

     Statement of Activities                                               13

  Fund Financial Statements:

     Balance Sheet - Governmental Funds                                    14

     Reconciliation of the Governmental Funds Balance Sheet to the
       Statement of Net Assets                                             15

     Statement of Revenues, Expenditures and Change in Fund
        Balances - Governmental Funds                                      16

     Reconciliation of the Statement of Revenues, Expenditures and
       Change in Fund Balances - Governmental Funds - to the
       Statement of Activities                                          17-18

     Statement of Fund Net Assets - Proprietary Fund - Self-Insurance
        Fund                                                               19

     Statement of Revenues, Expenses and Change in Fund Net
        Assets - Proprietary Fund - Self Insurance Fund                    20

     Statement of Cash Flows - Proprietary Fund - Self-Insurance
        Fund                                                               21

     Statement of Fiduciary Net Assets - Agency Funds                      22

  Notes to Basic Financial Statements                                   23-43

Required Supplementary Information:

  General Fund Budgetary Comparison Schedule                               44
                               FINANCIAL STATEMENTS
                         WITH SUPPLEMENTARY INFORMATION

                             For the Year Ended June 30, 2010


                                   TABLE OF CONTENTS
                                       (Continued)

                                                                      Page

Supplementary Information:

  Combining Balance Sheet - All Non-Major Funds                          45

  Combining Statement of Revenues, Expenditures and Change in
    Fund Balances - All Non-Major Funds                                  46

  Combining Statement of Changes in Assets and Liabilities - Agency
    Funds                                                             47-49

  Organization                                                           50

  Schedule of Average Daily Attendance                                   51

  Schedule of Instructional Time                                         52

  Schedule of Expenditure of Federal Awards                           53-54

  Reconciliation of Unaudited Actual Financial Report with Audited
    Financial Statements                                                 55

  Schedule of Financial Trends and Analysis                              56

  Schedule of Charter Schools                                            57

  Notes to Supplementary Information                                  58-59

Independent Auditor's Report on Compliance with State Laws and
   Regulations                                                        60-62

Independent Auditor's 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                                      63-64

Independent Auditor's Report on Compliance with Requirements
   Applicable to Each Major Program and on Internal Control over
   Compliance in Accordance with OMB Circular A-133                   65-66

Findings and Recommendations:

  Schedule of Audit Findings and Questioned Costs                     67-71

  Status of Prior Year Findings and Recommendations                      72
ADMINISTRATION                                                                                 BOARD OF EDUCATION

Arturo M. Flores                                                                               Kimberly Gerber Spina
Superintendent                                                                                 President

Chris G. Flesuras, Jr.                                                                         Sue Zwahlen
Deputy Superintendent                                                                          Vice President
Chief Human Resources Official            MODESTO CITY SCHOOLS                                 Nancy Cline
Pamela Able                                426 Locust Street, Modesto, California 95351-2631   Steven Grenbeaux
Associate Superintendent
Educational Services, Pre-K-6
                                                Administrative Offices (209) 576-4011          Gary A. Lopez
                                                         www.monet.k12.ca.us
                                                                                               Cindy Marks
Randy Fillpot
Associate Superintendent                                                                       Rubén A. Villalobos
Educational Services, 7-12

Craig Rydquist
Associate Superintendent
Educational and Administrative Services




                                            MODESTO CITY SCHOOLS

                                     MANAGEMENT’S DISCUSSION AND ANALYSIS

                                              Fiscal Year Ended June 30, 2010

     This annual report consists of three parts—management’s discussion and analysis (this section),
     the basic financial statements, and required supplementary information.

     The Management’s Discussion and Analysis consists of five sections:

           •     Overview of the Financial Statements - serves as a guide to reading the financial
                 statements provided in the sections following the Management’s Discussion and Analysis.

           •     Financial Analysis of the District as a Whole

           •     Financial Analysis of the District’s Funds - including a sub-section on the District’s
                 General Fund.

           •     Capital Asset and Debt Administration - a look at the District’s investment in capital
                 assets and its level of debt.

           •     Factors Bearing on the District’s Financial Future - a discussion of issues management
                 see as relevant to the future financial health of the District.

     This discussion and analysis of Modesto City Schools’ financial performance provides an
     overview of the District’s financial activities for the fiscal year ended June 30, 2010. It is
     management’s view of the District’s financial condition. It should be read in conjunction with the
     Independent Auditor’s Report, the basic financial statements and the accompanying notes to those
     financial statements.


                                                      OUR FOURTH R IS RESPONSIBILITY
                    OVERVIEW OF THE FINANCIAL STATEMENTS

The basic financial statements include two kinds of statements that present different views of the
District:

   •   Government-Wide. The first two statements are Government-wide financial statements
       that provide both short- and long-term information about the District’s overall financial
       status. Because they include all district funds, certain inter-fund and other types of
       transactions that net to zero have been eliminated so that Government-wide revenues and
       expenditures are not artificially inflated.

   •   Fund-Level. The remaining statements are fund-level financial statements that focus on
       individual parts of the District, reporting the District’s operations in more detail than the
       District-wide statements.

These two statements report the District’s net assets and changes in them. Net assets are the
difference between assets and liabilities, which is one way to measure the District’s financial
health. Over time, increases or decreases in the District’s net assets are one indicator of whether
its financial health is improving or deteriorating.

The financial statements also include notes that explain some of the information in the
statements. These notes are considered to be an integral part of the financial statements and
should be considered with them when looking at the District’s financial picture.

The statements are followed by a section of required supplementary information that further
explains and supports the financial statements with a comparison of the District’s budget for the
year.

In the Government-wide financial statements, activities are shown as Governmental activities.
The District has no funds that are classified as Business-type activities. The fund-level financial
statements provide more detailed information about the District’s most significant funds—not
the District as a whole. The District has three kinds of funds:

   •   Governmental funds—Most of the District’s basic services are included in governmental
       funds, the General Fund being the largest fund in this category.

   •   Proprietary funds—Services for which the District charges a fee, such as the Self-
       Insurance Fund, are generally reported in proprietary funds. Proprietary funds are
       reported in the same way as the Government-wide statements.

   •   Fiduciary Funds—The District is the trustee for assets that belong to others, such as the
       student activities funds and the retiree benefit funds. The District is responsible for
       ensuring that the assets reported in these funds are used only for their intended purposes
       and by those to whom the assets belong. We exclude these activities from the
       Government-wide financial statements because the District cannot use those assets to
       finance its operations.


                                                4
When using these financial statements to assess the overall health of the District you also need to
consider additional non-financial factors, such as the condition of school buildings and other
facilities, and enrollment trends.

                    FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE

The combined total of all funds dropped significantly during 2009/10 (by 15%), as reflected in
the total fund balance figure below, largely because of construction expenditures to complete
Gregori High School (see below).

Table 1 – Ending Fund Balances

                               Fund                            Ending Balances
                                                      June 30, 2009        June 30, 2010
    General                                                 $59,912,753          $ 50,641,122
    Adult Education                                             355,599               168,748
    Child Development                                             4,157                 1,018
    Cafeteria                                                 5,687,881             6,631,882
    Deferred Maintenance                                      4,571,329             4,493,332
    Pupil Transportation                                         76,769               146,451
    Special Reserve – Post Employment Benefits                1,094,847             1,113,982
    Building Fund                                                     0             6,771,919
    Capital Facilities                                        3,543,839             3,014,859
    County School Facilities                                 20,048,083             3,800,719
    Special Reserve                                           7,990,929             8,950,049
    Bond Interest & Redemption                                7,018,744             7,436,243
    Self-Insurance                                           16,466,908            14,804,209
    Total Fund Balances                                    $ 126,771,838         $ 107,974,533


The General Fund will be discussed in detail later in this analysis, but there is one primary reason
that caused a decrease to the ending balance from the previous year –over $7.8 million in
spending of the one-time stimulus funding from the Federal Government.

Besides the General Fund, the funds experiencing the most significant changes to ending fund
balance were the Building Fund, County School Facilities Fund and Self-Insurance Fund. The
significant increase in the Building Fund represents remaining proceeds from the sale of lease
revenue bonds in June 2010. The significant decrease in County School Facilities Fund
represents the spending of funds dedicated to the construction of Gregori High School, as
previously mentioned. Construction of Gregori High School was completed during the 2009/10
year in preparation for the school opening in August 2010. The decrease in Self-Insurance Fund
represents the lowering of the workers compensation rate during the 2009/10 year.

The Cafeteria fund has an increase due to increased Federal reimbursements and Federal
programs that made several commodity items available at a fraction of normal food costs.

The Special Reserve fund has an increase due to an excess of redevelopment tax revenues over
debt service payments and capital expenditures.


                                                 5
Net Assets. Net assets shown in Table 2 represent the portion of total assets actually owned free
and clear by the District. The District’s total Net Assets for the year ended June 30, 2010 was
$338.3 million.

It should be noted that land is accounted for at purchase value, not market value, and is not
depreciated. Therefore, much of the land owned by the District is valued on the District’s books
at far below current market value because it was acquired decades ago. This valuation is
consistent with accounting rules set forth by the Governmental Accounting Standards Board.

Buildings are recorded at cost of original construction and then depreciated. They are not
recorded at present market value.

Net assets are a frequent indicator of the financial health of an organization, as assets could be
sold and net proceeds used to fund operations. While the land and buildings owned by the
District contribute to its net assets, because of the nature of its operations the District will be
fully utilizing these assets for the foreseeable future. They are not available as assets that could
be liquidated, but are still a partial indication of the overall financial health of the District.

Table 2- Statement of Net Assets


      Assets                                           June 30, 2009       June 30, 2010      % Change
      Cash                                             $   106,895,434     $    93,183,109    -13%
      Investments                                            5,768,005           2,245,761    -61%
      Receivables                                           52,875,959          41,281,488    -22%
      Stores                                                    870,790            724,137    -17%
      Prepaid Expenses                                       1,597,860           2,190,022    37%
      Capital Assets
          Land                                              12,627,754          12,627,754     0%
          Improvements of sites                             11,629,478          11,581,950     0%
          Buildings                                        278,615,029         278,615,029     0%
          Equipment                                         11,367,514          12,299,005     8%
          Work in progress                                 131,070,979         155,634,031    19%
          Less accumulated depreciation                    (85,924,624)        (93,013,176)    8%
               Total Assets                            $   527,394,178     $   517,369,110    -2%
      Liabilities
      Accounts payable and other current liabilities   $    36,556,887     $    23,982,947    -34%
      Deferred revenue                                         3,627,082         6,050,036    67%
      Long term liabilities                                133,717,407         149,059,218    11%
          Total Liabilities                            $   173,901,376     $   179,092,201     3%

      Net Assets
          Total net assets                             $   353,492,802     $   338,276,909    -4%




Changes in Net Assets. Overall, net assets decreased from 08/09 to 09/10, primarily due to
State of California cash deferrals of the revenue limit apportionment and spending of one-time
stimulus funding from the Federal Government.



                                                           6
The two basic categories of a Statement of Net Assets are Assets and Liabilities. Each of these
two categories has current and long term components. Current assets are Cash, Receivables,
Stores and Prepaid Expenses. Cash had a decrease which reflects the spending of money on the
continued construction of Buildings and Improvements of Sites through the modernization
Downey High School and construction of Gregori High School as reflected in the increase in
Capital Assets. Cash did not decrease as much as the Capital Assets increased because of the
issuance of lease revenue bonds (Long term liabilities) for Capital Assets construction.
Receivables had a significant decrease which reflects the drop in anticipated revenue limit
funding caused by the State of California deficit funding at a rate of 18.355%. Accounts payable
and other current liabilities had a significant decrease which reflects the continued drop in
spending pattern that has been imposed. The increase in Deferred Revenue represents funds
received for restricted programs (primarily Federal), but not yet earned.

Table 3 – Statement of Net Activities


  Revenue                                                 2008/09          2009/10      % Change
  Charges for Service                                 $   5,126,106    $   4,379,483        -15%
  Operating Grants and Contributions                     97,045,908       67,805,304        -30%
  Capital Grants and Contributions                       21,034,544           41,466       -100%
  Total General Revenues                                206,086,686      197,873,407         -4%
     Total Revenue                                    $ 329,293.244    $ 270,099,660        -18%


  Expenditures
  Instruction                                         $ 168,615,923    $ 164,601,842         -2%
  Instruction Related Service:
     Supervision of Instruction                           13,944,044       11,785,558       -15%
     Instructional Library, Media & Technology             4,435,217        3,504,460       -21%
     School Site Administration                           19,383,889       18,714,984        -3%
  Pupil Services
     Home to School Transportation                         3,290,491        3,480,672         6%
     Food Services                                         9,874,378        9,787,230        -1%
     All Other Pupil Services                             15,430,412       14,136,897        -8%
  General Administration
     Data Processing                                      3,695,107        4,023,716          9%
     All Other General Services                           8,913,607        8,861,696         -1%
  Plant Services                                         29,489,343       26,863,348         -9%
  Ancillary Services                                      1,459,859        1,182,418        -19%
  Community Services                                      6,606,264        6,574,003          0%
  Enterprise Activities                                     273,543          253,202         -7%
  Interest on Long-Term Debt                              6,800,231        6,744,706         -1%
  Other Outgo                                             4,827,776        4,800,821         -1%
     Total Expenses                                   $ 297,040,084    $ 285,315,553         -4%

  Change in Net Assets                                $   32,253,160   $ (15,215,893)      -147%

  Net Assets – July 1                                   321,239,642      353,492,802         10%
  Net Assets – June 30                                $ 353,492,802    $ 338,276,909         -4%




                                                 7
Table 3, is another view of Net Assets and how operations of the District impact Net Assets.
Revenue minus Expenses will equal the change in Net Assets from year to year. This table looks
at revenue and expenses as they are broken out by the various functions performed by the
District. A comparison between the current year operations and those of the prior year shows
how the District has maintained its focus on core programs and their requirements.

                 FINANCIAL ANALYSIS OF THE DISTRICT’S FUNDS

Core Operating Funds. The core operating funds consist of the General Fund, Adult Education
Fund, Child Development Fund, and Cafeteria Fund. Each experienced different results, for
different reasons, in 2009/10.

The General Fund received less revenue than current year spending; however, as previously
mentioned, this was primarily due to the receipt of one-time funding from Federal stimulus
programs that arrived late in 2008/09. Revenue is projected to remain sluggish as the State’s
current fiscal crisis shows no sign of a quick recovery.

The Adult Education Fund experienced a slight increase in revenue in 2009/10 in comparison to
2008/09. Expenditures increased by $257,000 or 45% in 2009/10 in comparison to 2008/09.
$200,000 of the increase was a transfer of funds to the General Fund under the State flexibility
program. This resulted in deficit spending in 2009/10.

The Child Development Fund ending fund balance did not change significantly. Revenue and
expenditures did increase by $1.37 million, or 15%, in 2009/10 in comparison to 2008/09.

The Cafeteria Fund continued to implement significant process improvements and cost savings
measures resulting in an increased ending fund balance.

Overall, the District’s core operating funds had a combined decrease in fund balance during
2009/10, due completely to the sizable change in the General Fund relative to the other funds.

Capital Funds. The District’s capital funds are: Deferred Maintenance, Pupil Transportation,
Building Fund, Capital Facilities, County Schools Facilities, Redevelopment, and Special
Reserve for Capital Projects. The County Schools Facilities Fund experienced a significant
decline in its ending fund balance. The primary reason was the ongoing expenditure for capital
facilities, namely Gregori High School construction and Downey High School modernization.
The Building Fund was revived in 2009/10 with the sale of $16.42 million of lease revenue
bonds to provide funding for the completion of Gregori High School construction. Deferred
Maintenance basically had no change in its ending fund balance because the 2008/09 State
annual deferred maintenance contribution was transferred from the General Fund to this Fund
during 2009/10. However, the General Fund will retain the state deferred maintenance annual
contributions for the next four years. It is important to note that while this preserves General
Fund balances, required to preserve jobs and in-class programs, this is not a trend that is
sustainable for major facility maintenance. The other funds had minor changes in their ending
fund balances.




                                               8
Self-Insurance Fund. The Self Insurance Fund experienced a $1.66 million decrease in fund
balance due to a planned decrease in the Workers Compensation payroll rate. Operations were
relatively unchanged from the prior year. The District conducted a review of the Workers
Compensation current balance and determined that it was larger than required. Because these
funds were collected expressly for self insurance purposes, they could not be returned to the
General Fund. However, the payroll contribution for Workers Compensation had been reduced
approximately 25% for 2009/10 and expected to retain at this rate for the immediate future. This
will cause the fund balance to slowly reduce over time to a more appropriate level, again
contributing to the General Fund balance in order to preserve jobs and program instruction.

It should be noted that all District funds are self-supporting.                Refer to Table 1 for all
“Governmental Fund” ending balances.

                          GENERAL FUND BUDGETARY HIGHLIGHTS

The District receives revenue for the General Fund from several sources. The primary revenue
sources are shown in Figure 1. It is important to note that due to Federal stimulus funds, Federal
revenue has increased from a historical 8% to 12% in 2008/09 and 11% in 2009/10.
The primary functions of the District are: Instruction, Instruction Related activities, Pupil
Services and Plant Services. Figure 2 identifies the District’s spending in terms of those
functions. It is important to note that General Administration accounts for only 5% of total
expenditures.
When expenditures are viewed by major object, you will note that salaries and employee benefits
consume 86% of total expenditures, as shown in Figure 3.


          Figure 1                                   Figure 2                                  Figure 3

Revenue        %     Value          Expenditures         %        Value         Expenditures       %        Value
                                    by Function                                 by Object
Revenue       66%    $155,901,289   Instruction         61%     $150,347,874    Certificated      57%     $139,564,623
Limit                                                                           Salaries
                                    Instruction         13%       31,429,648
Federal       11%      24,879,472   Related                                     Classified        16%       39,535,310
                                                                                Salaries
                                    Pupil Services      7%        17,323,632
State         20%      48,838,153                                               Employee          13%       32,625,264
                                    Ancillary /         2%         4,272,583    Benefits
                                    Community
Local/Other   3%        6,916,527                                               Books and          4%         8,663,119
                                    Services
                                                                                Supplies
TOTAL         100%   $236,535,441   General Admin       5%        11,676,386
                                                                                Services           8%       19,097,341
                                    Plant Services      10%       24,692,139    Capital            2%         6,435,370
                                                                                Outlay/Other
                                    All Other           2%         6,178,762
                                    TOTAL              100%     $245,921,027    TOTAL             100%    $245,921,027




                                                       9
Approach to Budgeting. Over the course of fiscal year 2009/10, the District revised the annual
operating budget several times. These budget amendments resulted primarily from the following
events:

    •    Reallocation of appropriations to reflect changes in program priorities and operations,
         including major analysis utilizing formal interim financial reports and multi-year
         projections. During the 2009/10 year, the District was able to absorb several million in
         cuts and adjustments with minimal program cuts due to the District’s budgeting
         approach.

    •    Monthly reviews of revenue limit forecasts based on changes in enrollment and average
         daily attendance.

The result of this approach to budgeting is reflected in a historical review of revenue vs.
expenditures, see table 4 below. While the District takes the same diligent approach to all funds
and has a well-established record of sound financial management, this table looks only at
unrestricted funds, as the District has the greatest influence over these funds.

Table 4 – Change in Fund Balance – General Fund – Unrestricted resources only

      Change in            Actual        Actual            Actual        Actual         Actual
     Fund Balance          2005/06       2006/07           2007/08       2008/09       2009/10
Revenues                  184,344,833   197,210,937    200,850,111      189,263,488   175,345,944
Expenditures              185,109,858   194,788,862    201,463,040      176,459,876   181,566,136
Increase/(Decrease)       $ (765,025)    $2,422,075        $(612,929)   $12,803,612   $(6,220,192)



The challenge of balancing expenditures with revenues to avoid deficit spending is constant, and
the District has a solid record of success through anticipation of funding changes and a long-term
approach to fiscal management. In 2009/10, this balancing is skewed as the District began a two
year expenditure plan from the receipt of one-time stimulus funding from the Federal
Government that arrived late in the 2008/09 year as revenue. The balancing will be critical as
the District meets the fiscal challenges of the 2010/11 fiscal year and beyond.

                      CAPITAL ASSET AND DEBT ADMINISTRATION

Capital Assets. By the end of 2009/10, the District had invested a total of $241 million, net of
depreciation and related debt, in a broad range of capital assets, including school buildings and
land, athletic facilities, computer and audio visual equipment, various types of vehicles, and
other types of equipment.

The District’s fiscal year 2010/11 budget anticipates spending $4 million for construction
projects. Some of this money will be used for the finishing touches on the construction work for
Gregori High School.

Long-Term Debt. At year-end the District had $149 million in long-term debt outstanding, an
increase of $15 million from the previous year. This was a result of the District issuing lease
revenue bonds in the amount of $16.42 million during 2009/10 to provide funds for the
completion of Gregori High School construction.

                                                      10
           FACTORS BEARING ON THE DISTRICT’S FINANCIAL FUTURE

Challenges. At the time these financial statements were prepared and audited, the District was
aware of the following circumstances that could significantly affect its financial health in the
future:

   •   Fiscal Uncertainty from the State. The State of California has an unresolved budget crisis
       and its budget for the 2010/11 fiscal year has already been identified as yielding a
       significant deficit that potentially could result in further mid-year cuts. Additionally,
       there continues to be no true consensus on a workable long term solution for the
       structural fiscal challenges the state faces.

   •   Exhaustion of Federal Stimulus Funding. The District received one-time stimulus
       funding from the Federal Government that is required to be fully expended by September
       30, 2011. This funding stream allowed a band aid to be applied to funding requirements
       that the District needs to maintain for the current educational programs. With the
       exhaustion of these funds, the District is left to determine which programs will remain,
       which programs will be modified and/or how other cuts in expenditures can take place to
       ensure fiscal solvency.

Strengths. There are also factors that work in the District’s favor when looking at the long-term
financial future of Modesto City Schools:

   •   Health insurance cost containment. It should be noted that two significant challenges
       facing many districts, rising health costs and escalating retiree benefit obligations, are not
       factors for the District as these were capped many years ago. While the District has
       increased its contribution to health benefits beginning in January 2007 in recognition of
       the increased cost to employees, these contributions are capped and offset by reduced
       future salary increases.

   •   Employee relations. The District works to maintain a healthy relationship with its
       employee organizations.

            CONTACTING THE DISTRICT’S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, customers, investors and
creditors with a general overview of the District’s finances and to demonstrate the District’s
accountability for the money it receives. If you have questions about this report or need
additional financial information, contact the office of Director, Business Services - Fiscal,
Modesto City Schools, 426 Locust Street, Modesto, CA 95351-2631, (209) 550-3301 ext. 5406.




                                                11
BASIC FINANCIAL STATEMENTS
                                        MODESTO CITY SCHOOLS

                                      STATEMENT OF NET ASSETS

                                                  June 30, 2010


                                                                               Governmental
                                                                                 Activities

                         ASSETS

Cash and investments (Note 2)                                              $      95,428,870
Accounts receivable                                                               41,281,488
Stores inventory                                                                     724,137
Prepaid expenditures                                                               2,190,022
Capital assets, net of accumulated
 depreciation (Note 4)                                                           377,744,593

     Total assets                                                                517,369,110

                    LIABILITIES

Accounts payable                                                                  16,440,947
Unpaid claims and claim adjustment expense (Note 10)                               7,542,000
Deferred revenue                                                                   6,050,036
Long-term liabilities (Note 5):
 Due within one year                                                               9,363,223
 Due after one year                                                              139,695,995

     Total liabilities                                                           179,092,201

                    NET ASSETS

Invested in capital assets, net of related debt                                  241,522,217
Restricted (Note 6)                                                               65,690,623
Unrestricted                                                                      31,064,069

     Total net assets                                                      $     338,276,909




                                  The accompanying notes are an integral
                                    part of these financial statements.

                                                       12
                                               MODESTO CITY SCHOOLS

                                              STATEMENT OF ACTIVITIES

                                            For the Year Ended June 30, 2010

                                                                                                                           Net (Expense)
                                                                                                                           Revenues and
                                                                                                                            Changes in
                                                                              Program Revenues                              Net Assets
                                                              Charges             Operating              Capital
                                                                for              Grants and             Grants and         Governmental
                                          Expenses            Services          Contributions          Contributions         Activities

Governmental activities (Note 4):
 Instruction                          $   164,601,842    $         338,800    $      28,966,608    $          41,466   $     (135,254,968)
 Instruction-related services:
   Supervision of instruction              11,785,558               65,526            7,750,598                                (3,969,434)
   Instructional library, media and
      technology                            3,504,460                   66             388,179                                 (3,116,215)
   School site administration              18,714,984               10,802             963,017                                (17,741,165)
 Pupil services:
   Home-to-school transportation            3,480,672               235,080           1,447,039                                (1,798,553)
   Food services                            9,787,230             2,157,424           8,614,401                                   984,595
   All other pupil services                14,136,897                43,634           4,275,355                                (9,817,908)
 General administration:
   Data processing                          4,023,716                                                                          (4,023,716)
   All other general administration         8,861,696              100,593            1,462,077                                (7,299,026)
 Plant services                            26,863,348              208,268            1,720,326                               (24,934,754)
 Ancillary services                         1,182,418                1,027               48,958                                (1,132,433)
 Community services                         6,574,003              105,379            5,988,203                                  (480,421)
 Enterprise activities                        253,202               11,671               53,156                                  (188,375)
 Interest on long-term liabilities          6,744,706                                                                          (6,744,706)
 Other outgo                                4,800,821             1,101,213           6,127,387                                 2,427,779

      Total governmental activities   $   285,315,553    $        4,379,483   $      67,805,304    $          41,466         (213,089,300)

                                      General revenues:
                                       Taxes and subventions:
                                         Taxes levied for general purposes                                                    44,308,828
                                         Taxes levied for debt service                                                         6,670,014
                                         Taxes levied for other specific purposes                                              1,756,096
                                       Federal and state aid not restricted to specific purposes                             140,983,035
                                       Interest and investment earnings                                                          765,772
                                       Interagency revenues                                                                    2,484,623
                                       Miscellaneous                                                                             905,039

                                                          Total general revenues                                             197,873,407

                                                          Change in net assets                                                (15,215,893)

                                                          Net assets, July 1, 2009                                           353,492,802

                                                          Net assets, June 30, 2010                                    $     338,276,909




                                          The accompanying notes are an integral
                                            part of these financial statements.

                                                             13
                                            MODESTO CITY SCHOOLS

                                                 BALANCE SHEET

                                             GOVERNMENTAL FUNDS

                                                   June 30, 2010


                                                                                                     Total
                                                                   General          Non-Major     Governmental
                                                                    Fund             Funds           Funds

                   ASSETS

Cash and investments:
 Cash in County Treasury                                       $   31,792,661   $    36,217,132   $   68,009,793
 Cash in revolving fund                                                50,000               677           50,677
 Cash with Fiscal Agent                                                               6,976,090        6,976,090
 Local Agency Investment Fund                                           3,201                              3,201
Accounts receivable                                                38,686,405         2,554,010       41,240,415
Due from other funds                                                1,315,997           950,298        2,266,295
Stores inventory                                                      457,535           266,602          724,137
Prepaid expenditures                                                  121,942            30,386          152,328

     Total assets                                              $   72,427,741   $    46,995,195   $ 119,422,936

            LIABILITIES AND
            FUND BALANCES

Liabilities:
  Accounts payable                                             $   14,653,104   $     1,497,881   $   16,150,985
  Deferred revenue                                                  5,368,124           681,912        6,050,036
  Due to other funds                                                1,765,391         2,286,200        4,051,591

     Total liabilities                                             21,786,619         4,465,993       26,252,612

Fund balances:
 Reserved for:
   Revolving fund                                                      50,000              677            50,677
   Prepaid expenditures                                               121,942           30,386           152,328
   Stores inventory                                                   457,535          266,602           724,137
   Unspent categorical revenue                                     12,966,130                         12,966,130
 Unreserved, reported in:
   General Fund                                                    37,045,515                         37,045,515
   Special Revenue Funds                                                             12,257,748       12,257,748
   Capital Projects Funds                                                            22,537,546       22,537,546
   Debt Service Funds                                                                 7,436,243        7,436,243

     Total fund balances                                           50,641,122        42,529,202       93,170,324

     Total liabilities and fund balances                       $   72,427,741   $    46,995,195   $ 119,422,936




                                       The accompanying notes are an integarl
                                         part of these financial statements.

                                                        14
                                       MODESTO CITY SCHOOLS

              RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET
                           TO THE STATEMENT OF NET ASSETS

                                               June 30, 2010


Total fund balances - Governmental Funds                                                  $    93,170,324

Amounts reported for governmental activities in the
 statement of net assets are different because:

 Capital assets used for governmental activities are not
  financial resources and, therefore, are not reported as
  assets in governmental funds. The cost of the assets
  is $470,757,769 and the accumulated depreciation is
  $93,013,176 (Note 4).                                                                       377,744,593

 Long-term liabilities are not due and payable in the
  current period and, therefore, are not reported as
  liabilities in the funds. Long-term liabilities at
  June 30, 2010 consisted of (Note 5):
     General Obligation Bonds                                        $     (75,657,408)
     Accreted Interest on General Obligation Bonds                         (42,790,136)
     Certificates of Participation                                          (7,705,000)
     Child Care Revolving Loan                                                (273,000)
     Capital leases                                                           (352,922)
     Qualified School Construction Bonds payable                           (16,420,000)
     Compensation benefits                                                    (662,213)
     Retiree benefits                                                       (2,677,291)
     Teacher Retirement Incentive Liability                                 (1,995,840)
     Compensated absences                                                     (525,408)

                                                                                              (149,059,218)

 In government funds, interest on long-term debt is not
   recognized until the period in which it matures and is
   paid. In the government-wide statements, it is recog-
   nized in the period that it is incurred.                                                       (120,693)

 In government funds, debt issue costs are recognized as
   expenditures in the period they are incurred. In the
   government-wide statements, debt issue costs are
   amortized over the life of the debt.                                                          1,737,694

 Internal service funds are used to conduct certain activities
   for which costs are charged to other funds on a full cost-
   recovery basis. Because internal service funds are
   presumed to operate for the benefit of governmental
   activities, assets and liabilities of internal service funds
   are reported with governmental activities in the statement
   of net assets.                                                                              14,804,209

        Total net assets - governmental activities                                        $ 338,276,909




                                  The accompanying notes are an integral
                                    part of these financial statements.

                                                      15
                                            MODESTO CITY SCHOOLS

                                   STATEMENT OF REVENUES, EXPENDITURES
                                       AND CHANGE IN FUND BALANCES

                                            GOVERNMENTAL FUNDS

                                        For the Year Ended June 30, 2010


                                                                                        All            Total
                                                                  General            Non-Major      Governmental
                                                                   Fund               Funds            Funds

Revenues:
 Revenue limit sources:
   State apportionment                                        $ 114,788,552                         $ 114,788,552
   Local sources                                                 41,112,737                            41,112,737

     Total revenue limit                                          155,901,289                           155,901,289

 Federal sources                                                   24,879,472    $    12,956,286         37,835,758
 Other state sources                                               48,838,153          7,973,383         56,811,536
 Other local sources                                                6,916,527         12,614,938         19,531,465

     Total revenues                                               236,535,441         33,544,607        270,080,048

Expenditures:
 Certificated salaries                                            139,564,623          3,205,832        142,770,455
 Classified salaries                                               39,535,310          6,695,379         46,230,689
 Employee benefits                                                 32,625,264          3,072,710         35,697,974
 Books and supplies                                                 8,663,119          8,100,558         16,763,677
 Contract services and operating
   expenditures                                                    19,097,341          3,241,287         22,338,628
 Capital outlay                                                       256,607         25,043,496         25,300,103
 Other outgo                                                        4,684,015            341,700          5,025,715
 Debt service:
   Principal retirement                                             1,281,878          5,964,408          7,246,286
   Interest                                                           212,870          2,048,257          2,261,127

     Total expenditures                                           245,921,027         57,713,627        303,634,654

     Deficiency of revenues
      under expenditures                                           (9,385,586)       (24,169,020)       (33,554,606)

Other financing sources (uses):
 Operating transfers in                                             1,535,344         11,287,412         12,822,756
 Operating transfers out                                           (1,421,389)       (11,401,367)       (12,822,756)
 Proceeds from issuance
   of debt                                                                            16,420,000         16,420,000

     Total other financing sources (uses)                            113,955          16,306,045         16,420,000

     Net change in fund balances                                   (9,271,631)        (7,862,975)       (17,134,606)

Fund balances, July 1, 2009                                        59,912,753         50,392,177        110,304,930

Fund balances, June 30, 2010                                  $    50,641,122    $    42,529,202    $    93,170,324




                                      The accompanying notes are an integarl
                                        part of these financial statements.

                                                       16
                                       MODESTO CITY SCHOOLS

           RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND
                  CHANGE IN FUND BALANCES - GOVERNMENTAL FUNDS -
                           TO THE STATEMENT OF ACTIVITIES

                                   For the Year Ended June 30, 2010


Net change in fund balances - Total Governmental Funds                                   $   (17,134,606)

Amounts reported for governmental activities in the statement
 of activities are different because:

 Acquisition of capital assets is an expenditure in the
  governmental funds, but increases capital assets in
  the statement of net assets (Note 4).                               $   25,556,993

 Depreciation of capital assets is an expense that is not
  recorded in the governmental funds (Note 4).                             (7,195,408)

 Resulting gains or losses from disposal of capital assets
  are recorded for the statement of activities whereas
  the entire proceeds from disposal is reported as revenue
  in governmental funds (Note 4).                                              (3,122)

 Repayment of principal on long-term liabilities is an expend-
  iture in the governmental funds, but decreases the long-
  term liabilities in the statement of net assets (Note 5).                7,246,286

 Accreted interest is an expense that is not recorded in the
  governmental funds (Note 5).                                             (4,517,064)

 Amortization of costs associated with the issuance of
  liabilities are not uses of financial resources and,
  therefore, are not reported as expenditures in govern-
  mental funds.                                                              189,574

 Proceeds from debt are recognized as other financing
  sources. In government-wide statements, proceeds
  from debt are reported as increases to liabilities.
  Amounts recognized in government funds as proceeds
  from debt were (Note 5):                                                (16,420,000)

 Retiree benefit and teacher retirement incentive costs are
  recognized when employer contributions are made. In
  statement of activities, retiree benefit costs are recognized
  on the accrual basis. This year the difference between
  retiree benefit costs and actual employer contributions
  was (Note 5):                                                            (1,679,904)

 Internal service funds are used to conduct certain activities
   for which costs are charged to other funds on a full cost-
   recovery basis. Because internal service funds are
   presumed to operate for the benefit of governmental
   activities, internal service activities are reported as
   governmental in the statement of activities.                            (1,662,699)


                                                (Continued)

                                                     17
                                       MODESTO CITY SCHOOLS

           RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND
                  CHANGE IN FUND BALANCES - GOVERNMENTAL FUNDS -
                           TO THE STATEMENT OF ACTIVITIES
                                        (Continued)
                             For the Year Ended June 30, 2010


 Unmatured interest on long-term liabilities is not recorded
  in the governmental funds until it becomes due, but
  increases the liabilities in the statement of net assets.          $     33,486

 In governmental funds, debt issue costs are recognized as
   expenditures in the period they are incurred. In government-
   wide statements, issue costs are amortized over the life of
   the debt. Debt issue costs in the current year were:                   341,700

 In the statement of activities, expenses related to compen-
   sation benefits and compensated absences are measured
   by the amounts earned during the year. In the governmental
   funds, expenditures are measured by the amount of financial
   resources used (Note 5).                                                28,871   $    1,918,713

Change in net assets of governmental activities                                     $   (15,215,893)




                                 The accompanying notes are an integral
                                   part of these financial statements.

                                                    18
                                      MODESTO CITY SCHOOLS

                        STATEMENT OF FUND NET ASSETS - PROPRIETARY FUND

                                       SELF-INSURANCE FUND

                                             June 30, 2010


                        ASSETS

Cash and investments:
 Cash in County Treasury                                                  $   17,982,077
 Cash with Fiscal Agent                                                          164,472
 Local Agency Investment Fund                                                    203,810
 Investments                                                                   2,038,750
Accounts receivable, local government and other                                   41,073
Due from other funds                                                           1,785,330
Prepaid expenditures                                                             300,000

    Total assets                                                              22,515,512

                   LIABILITIES

Accounts payable                                                                 169,269
Due to other funds                                                                    34
Unpaid claims and claim adjustment expenses                                    7,542,000

    Total liabilities                                                          7,711,303

                   NET ASSETS

Restricted                                                                $   14,804,209




                                 The accompanying notes are an integral
                                   part of these financial statements.

                                                  19
                                     MODESTO CITY SCHOOLS

                     STATEMENT OF REVENUES, EXPENSES AND CHANGE IN
                          FUND NET ASSETS - PROPRIETARY FUND

                                      SELF-INSURANCE FUND

                                 For the Year Ended June 30, 2010


Operating revenues:
 In-District premiums                                                    $    3,734,445
 Other local revenues                                                            13,651

    Total operating revenues                                                  3,748,096

Operating expenses:
 Certificated salaries                                                           13,964
 Classified salaries                                                            435,587
 Employee benefits                                                               86,062
 Books and supplies                                                             213,485
 Contract services and operating expenses                                     4,980,483

    Total operating expenses                                                  5,729,581

    Operating loss                                                           (1,981,485)

Non-operating income/expense:
 Interest income                                                               318,786

    Change in net assets                                                     (1,662,699)

Net assets, July 1, 2009                                                     16,466,908

Net assets, June 30, 2010                                                $   14,804,209




                                The accompanying notes are an integral
                                  part of these financial statements.

                                                 20
                                        MODESTO CITY SCHOOLS

                        STATEMENT OF CASH FLOWS - PROPRIETARY FUND

                                        SELF-INSURANCE FUND

                                    For the Year Ended June 30, 2010


Cash flows from operating activities:
 Cash received from premiums                                               $    3,699,115
 Cash received from other local revenues                                           92,082
 Cash paid for benefits                                                           (86,062)
 Cash paid for salaries                                                          (449,551)
 Cash paid for supplies and operating expenses                                 (4,816,317)

          Net cash used in operating activities                                (1,560,733)

Cash flows from investing activities:
 Change in investments                                                          3,522,265
 Interest income                                                                  318,786

          Net cash provided by investing activities                             3,841,051

Increase in cash and cash equivalents                                           2,280,318

Cash and cash equivalents, July 1, 2009                                        15,866,231

Cash and cash equivalents, June 30, 2010                                   $   18,146,549

Reconciliation of operating loss to net cash used in
 operating activities:
  Operating loss                                                           $   (1,981,485)
  Adjustments to reconcile operating loss to net cash
    used in operating activities:
     Decrease in accounts receivable                                              78,431
     Increase in due from other funds                                            (35,330)
     Increase in accounts payable                                                133,939
     Decrease in due to other funds                                              (16,288)
     Increase in unpaid claims and claim adjustment                              260,000

          Total adjustments                                                      420,752

Net cash used in operating activities                                      $   (1,560,733)




                                  The accompanying notes are an integral
                                    part of these financial statements.

                                                      21
                                     MODESTO CITY SCHOOLS

                             STATEMENT OF FIDUCIARY NET ASSETS

                                        AGENCY FUNDS

                                          June 30, 2010


                                                  Warrant              Student          Agency
                                                Pass Through            Body             Fund
                                                    Fund                Funds            Total

                ASSETS

Cash on hand and in banks (Note 2)                               $      3,066,530   $    3,066,530
Stores inventory                                                           68,819           68,819

    Total assets                                                        3,135,349        3,135,349

               LIABILITIES

Due to student groups                                                   3,135,349        3,135,349

               NET ASSETS

Unrestricted                                    $         -      $        -         $      -




                              The accompanying notes are an integral
                                part of these financial statements.

                                               22
                                MODESTO CITY SCHOOLS

                        NOTES TO BASIC FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Modesto City Schools (the "District") accounts for its financial transactions in
     accordance with the policies and procedures of the California Department of Education's
     California School Accounting Manual. The accounting policies of the District conform to
     accounting principles generally accepted in the United States of America as prescribed
     by the Governmental Accounting Standards Board and the American Institute of
     Certified Public Accountants. The following is a summary of the more significant
     policies.

     Reporting Entity

     The Board of Education is the level of government which has governance
     responsibilities over all activities related to public school education in the District. The
     Board is not included in any other governmental "reporting entity" as defined by the
     Governmental Accounting Standards Board since Board members have decision-
     making authority, the power to designate management, the responsibility to significantly
     influence operations and primary accountability for fiscal matters.

     Basis of Presentation - Financial Statements

     The basic financial statements include a Management's Discussion and Analysis
     (MD & A) section providing an analysis of the District's overall financial position and
     results of operations; financial statements prepared using full accrual accounting for all
     of the District's activities, including infrastructure, and a focus on the major funds.

     Basis of Presentation - Government-Wide Financial Statements

     The Statement of Net Assets and the Statement of Activities display information about
     the reporting government as a whole. Fiduciary funds are not included in the
     government-wide financial statements. Fiduciary funds are reported only in the
     Statement of Fiduciary Net Assets at the fund financial statement level.

     The Statement of Net Assets and the Statement of Activities are prepared using the
     economic resources measurement focus and the accrual basis of accounting.
     Revenues, expenses, gains, losses, assets and liabilities resulting from exchange and
     exchange-like transactions are recognized when the exchange takes place. Revenues,
     expenses, gains, losses, assets and liabilities resulting from nonexchange transactions
     are recognized in accordance with the requirements of Governmental Accounting
     Standards Board Codification Section (GASB Cod. Sec.) N50.118-.121.

     Program revenues: Program revenues included in the Statement of Activities derive
     directly from the program itself or from parties outside the District's taxpayers or
     citizenry, as a whole; program revenues reduce the cost of the function to be financed
     from the District's general revenues.




                                             23
                               MODESTO CITY SCHOOLS

                      NOTES TO BASIC FINANCIAL STATEMENTS
                                   (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Basis of Presentation - Government-Wide Financial Statements (Continued)

     Allocation of indirect expenses: The District reports all direct expenses by function in
     the Statement of Activities. Direct expenses are those that are clearly identifiable with a
     function. Depreciation expense is specifically identified by function and is included in
     the direct expense of each function. Interest on general long-term liabilities is
     considered an indirect expense and is reported separately on the Statement of
     Activities.

     Basis of Presentation - Fund Accounting

     The accounts of the District are organized on the basis of funds, each of which is
     considered to be a separate accounting entity. The operations of each fund are
     accounted for with a separate set of self-balancing accounts that comprise its assets,
     liabilities, fund equity, revenues, and expenditures, as appropriate. District resources
     are allocated to and accounted for in individual funds based upon the purpose for which
     they are to be spent and the means by which spending activities are controlled. The
     District's accounts are organized into three broad categories which, in aggregate,
     include six fund types as follows:

     A -    Governmental Fund Types

            1 -     General Fund:

                    The General Fund is the general operating fund of the District and
                    accounts for all revenues and expenditures of the District not
                    encompassed within other funds. All general tax revenues and other
                    receipts that are not allocated by law or contractual agreement to some
                    other fund are accounted for in this fund. General operating expenditures
                    and the capital improvement costs that are not paid through other funds
                    are paid from the General Fund.

            2 -     Special Revenue Funds:

                    The Special Revenue Funds are used to account for the proceeds of
                    specific revenue sources that are legally restricted to expenditures for
                    specified purposes. This classification includes the Charter Schools
                    Special Revenue, Adult Education, Child Development, Cafeteria,
                    Deferred Maintenance, Pupil Transportation Equipment, and Special
                    Reserve for Other than Capital Outlay.

            3 -     Capital Projects Funds:

                    The Capital Projects Funds are used to account for resources used for
                    the acquisition or construction of major capital facilities and equipment.
                    This classification includes the Building, Capital Facilities, County School
                    Facilities, and Special Reserve for Capital Outlay Projects Funds.


                                              24
                              MODESTO CITY SCHOOLS

                     NOTES TO BASIC FINANCIAL STATEMENTS
                                  (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Basis of Presentation - Fund Accounting (Continued)

     A -    Governmental Fund Types (Continued)

            4 -    Debt Service Fund:

                   The Debt Service Fund is used to account for the accumulation of
                   resources for, and the repayment of, general long-term debt principal,
                   interest, and related costs. This classification includes the Bond Interest
                   and Redemption Fund.

     B - Proprietary Fund

            1 -    Self-Insurance Fund:

                   The Self-Insurance Fund is used to account for workers' compensation,
                   property, liability and dental coverage on a cost-reimbursement basis.

     C -    Fiduciary Fund Type

            1 -    Agency Funds:

                   Agency Funds are used to account for assets of others for which the
                   District has an agency relationship with the activity of the fund. This
                   classification consists of the Warrant Pass Through and Student Body
                   Funds.

     Basis of Accounting

     Basis of accounting refers to when revenues and expenditures or expenses are
     recognized in the accounts and reported in the basic financial statements. Basis of
     accounting relates to the timing of the measurement made, regardless of the
     measurement focus applied.

     A - Accrual

           The governmental activities in the government-wide financial statements and the
           proprietary and fiduciary fund financial statements are presented on the accrual
           basis of accounting. Revenues are recognized when earned and expenses are
           recognized when incurred.




                                           25
                               MODESTO CITY SCHOOLS

                        NOTES TO BASIC FINANCIAL STATEMENTS
                                     (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Basis of Accounting (Continued)

     B - Modified Accrual

          The governmental funds financial statements are presented on the modified
          accrual basis of accounting. Under the modified accrual basis of accounting,
          revenues are recorded when susceptible to accrual; i.e., both measurable and
          available. "Available" means collectible within the current period or within 60 days
          after year end. Expenditures are generally recognized under the modified accrual
          basis of accounting when the related liability is incurred. The exception to this
          general rule is that principal and interest on general obligation long-term liabilities,
          if any, is recognized when due.

     Budgets and Budgetary Accounting

     By state law, the Board of Education must adopt a final budget by July 1. A public
     hearing is conducted to receive comments prior to adoption. The Board of Education
     complied with these requirements.

     The District employs budget control by major object code and by individual appropriation
     accounts. Expenditures cannot legally exceed appropriations by major object code.
     The budgets are revised during the year by the Board of Education to provide for
     unanticipated revenues and expenditures. The originally adopted and final revised
     budgets of the General Fund are presented as Required Supplementary Information.

     Stores Inventory

     Inventory in the General and Cafeteria Funds consists mainly of consumable supplies
     held for future use and are valued at average cost. Inventories are recorded as
     expenditures at the time individual inventory items are transferred from the warehouse
     to schools. Maintenance and other supplies held for physical plant repair, transportation
     supplies, and operating supplies are not included in inventories; rather, these amounts
     are recorded as expenditures when purchased.

     Cafeteria Food Purchases

     The Cafeteria Fund reflects supplies expense of $3,958,446. Included in this amount is
     a handling charge for the delivery of government surplus food commodities. The state
     does not require the Cafeteria Fund to record the fair market value of these
     commodities. The supplies expenditures would have been greater had the District paid
     fair market value for the government surplus food commodities.




                                             26
                               MODESTO CITY SCHOOLS

                      NOTES TO BASIC FINANCIAL STATEMENTS
                                   (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Capital Assets

     Capital assets purchased or acquired, with an original cost of $15,000 or more, are
     recorded at historical cost or estimated historical cost. Contributed assets are reported
     at fair market value as of the date received. Additions, improvements and other capital
     outlay that significantly extend the useful life of an asset are capitalized. Other costs
     incurred for repairs and maintenance are expensed as incurred. Capital assets are
     depreciated using the straight-line method over 4 - 50 years depending on asset types.

     Compensated Absences

     Compensated absences totaling $525,408 are recorded as a liability of the District.

     Accumulated Sick Leave

     Accumulated sick leave benefits are not recognized as liabilities of the District. The
     District's policy is to record sick leave as an operating expenditure in the period taken
     since such benefits do not vest nor is payment probable; however, unused sick leave is
     added to the creditable service period for calculation of retirement benefits when the
     employee retires.

     Deferred Revenue

     Revenue from federal, state, and local special projects and programs is recognized
     when qualified expenditures have been incurred. Funds received but not earned are
     recorded as deferred revenue until earned.

     Property Taxes

     Secured property taxes are attached as an enforceable lien on property as of March 1.
     Taxes are due in two installments on or before December 10 and April 10. Unsecured
     property taxes are due in one installment on or before August 31. The County of
     Stanislaus bills and collects taxes for the District. Tax revenues are recognized by the
     District when received.




                                            27
                                MODESTO CITY SCHOOLS

                      NOTES TO BASIC FINANCIAL STATEMENTS
                                   (Continued)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Restricted Net Assets

     Restrictions of the ending net assets indicate the portions of net assets not appropriable
     for expenditure or amounts legally segregated for a specific future use. The restrictions
     for revolving cash, stores inventory and prepaid expenditures reflect the portion of net
     assets represented by revolving fund cash, stores inventory and prepaid expenditures,
     respectively. These amounts are not available for appropriation and expenditure at the
     balance sheet date.       The restriction for unspent categorical program revenues
     represents the portion of net assets restricted for specific program use. The restriction
     for capital projects represents the amount the District plans to expend for capital
     projects. The restriction for debt service represents the portion of net assets available
     for the retirement of debt. The restriction for special revenues represents the amount
     the District plans to expend for special revenue activities. The restriction for self-
     insurance represents the portion of net assets available for self-insurance activities.

     Custodial Relationships

     The balance sheet for agency funds represents the assets, liabilities and trust accounts
     of various student organizations and scholarship funds within the District. As the funds
     are custodial in nature, no measurement of operating results is involved. The District's
     deferred compensation investment and liability is recorded in the Special Reserve for
     Post-Employment Benefits Fund.

     Encumbrances

     Encumbrance accounting is used in all budgeted funds to reserve portions of applicable
     appropriations for which commitments have been made. Encumbrances are recorded
     for purchase orders, contracts and other commitments when they are written.
     Encumbrances are liquidated when the commitments are paid. All encumbrances are
     liquidated at June 30.

     Eliminations and Reclassifications

     In the process of aggregating data for the Statement of Net Assets and the Statement of
     Activities, some amounts reported as interfund activity and balances in the funds were
     eliminated or reclassified. Interfund receivables and payables were eliminated to
     minimize the "grossing up" effect on assets and liabilities within the governmental
     activities column.

     Estimates

     The preparation of financial statements in conformity with accounting principles
     generally accepted in the United States of America requires management to make
     estimates and assumptions. These estimates and assumptions affect the reported
     amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
     date of the financial statements and the reported amounts of revenues and expenditures
     during the reporting period. Accordingly, actual results may differ from those estimates.


                                             28
                                       MODESTO CITY SCHOOLS

                           NOTES TO BASIC FINANCIAL STATEMENTS
                                        (Continued)

2.   CASH AND INVESTMENTS

     Cash and investments at June 30, 2010 are reported at fair value and consisted of the
     following:

                                                            Governmental Activities
                                                 Governmental    Proprietary                             Fiduciary
                                        Rating      Funds           Fund                 Total           Activities

     Pooled Funds:
      Cash in County Treasury                    $   68,009,793    $   17,982,077   $   85,991,870
      Local Agency Investment Fund                        3,201           203,810          207,011
      Cash with Fiscal Agent                          6,976,090           164,472        7,140,562

          Total pooled funds                         74,989,084        18,350,359       93,339,443

     Deposits:
      Cash on hand and in banks                                                                      $     3,066,530
      Cash in revolving fund                              50,677                           50,677

          Total deposits                                  50,677                           50,677          3,066,530

     Investments:
       United States Agency - FHLB       AAA                            2,038,750        2,038,750

          Total cash and investments             $   75,039,761    $   20,389,109   $   95,428,870   $     3,066,530


     Investment security ratings reported as of June 30, 2010 are defined by Standard and
     Poors.

     Pooled Funds

     In accordance with Education Code Section 41001, the District maintains substantially
     all of its cash in the Stanislaus County Treasury. The County pools and invests the
     cash. These pooled funds are carried at cost which approximates fair value. Interest
     earned is deposited annually to participating funds. Any investment losses are
     proportionately shared by all funds in the pool.

     Because the District's deposits are maintained in a recognized pooled investment fund
     under the care of a third party and the District's share of the pool does not consist of
     specific, identifiable investment securities owned by the District, no disclosure of the
     individual deposits and investments or related custodial credit risk classifications is
     required.

     In accordance with applicable state laws, the Stanislaus County Treasurer may invest in
     derivative securities with the State of California. However, at June 30, 2010, the
     Stanislaus County Treasurer has represented that the Pooled Investment Fund
     contained no derivatives or other investments with similar risk profiles.




                                                     29
                                MODESTO CITY SCHOOLS

                      NOTES TO BASIC FINANCIAL STATEMENTS
                                   (Continued)

2.   CASH AND INVESTMENTS (Continued)

     Pooled Funds - Local Agency Investment Fund

     The District places certain funds with the State of California's Local Agency Investment
     Fund (LAIF). The District is a voluntary participant in LAIF, which is regulated by
     California Government Code Section 16429 under the oversight of the Treasurer of the
     State of California and the Pooled Money Investment Board. The State Treasurer's
     Office pools these funds with those of other governmental agencies in the state and
     invests the cash. The fair value of the District's investment in the pool is reported in the
     accompanying financial statements based upon the District's pro-rata share of the fair
     value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of
     that portfolio). The monies held in the pooled investments funds are not subject to
     categorization by risk category. The balance available for withdrawal is based on the
     accounting records maintained by LAIF, which are recorded on an amortized cost basis.
     Funds are accessible and transferable to the master account within twenty-four hours
     notice. Included in LAIF's investment portfolio are collateralized mortgage obligations,
     mortgage-backed securities, other asset-backed securities, and floating rate securities
     issued by federal agencies, government-sponsored enterprises and corporations. LAIF
     is administered by the State Treasurer. This fund currently yields approximately 3.11%
     interest annually. LAIF investments are audited annually by the Pooled Money
     Investment Board and the State Controller's Office. Copies of this audit may be
     obtained from the State Treasurer's Office: 915 Capitol Mall; Sacramento, California
     95814. The Pooled Money Investment Board has established policies, goals, and
     objectives to make certain that their goal of safety, liquidity and yield are not
     jeopardized.

     Cash with Fiscal Agent

     Cash with Fiscal Agent in the Self Insurance Fund totaling $164,472 represents
     amounts held in the District's name with third party custodians.

     Cash with Fiscal Agent in the Building Fund and the Special Reserve for Capital Outlay
     Projects Funds totaling $6,976,090 is the proceeds from long-term liabilities held by a
     trustee. The amount held by the trustee is fully collateralized.

     Deposits - Custodial Credit Risk

     Cash balances held in banks and revolving funds are insured up to $250,000 by the
     Federal Depository Insurance Corporation (FDIC) and are collateralized by the
     respective financial institution. At June 30, 2010, the carrying amount of the District's
     accounts was $3,117,207, and the bank balances were $3,216,114. Of the bank
     balances, $2,053,618 was not covered by the FDIC insurance, but was fully
     collateralized.




                                             30
                                 MODESTO CITY SCHOOLS

                          NOTES TO BASIC FINANCIAL STATEMENTS
                                       (Continued)

2.   CASH AND INVESTMENTS (Continued)

     Investments - Interest Rate Risk

     The District's investment policy limits investment maturities as a means of managing its
     exposure to fair value losses arising from increasing interest rates. The District's
     investment policy limits investment purchases to investments with a term not to exceed
     three years. Investments purchased with maturity terms greater than three years
     requires approval by the Board of Education. Investments purchased with maturities
     greater than one year require written approval by the Superintendent prior to
     commitment. Maturities of investments held at June 30, 2010 consist of the following:

                                                                              Maturity
                                                                                     One Year
                                                       Fair           Less Than       Through
                                                      Value           One Year       Five Years

     Investment maturities:
       United States Agency - FHLB                $   2,038,750   $    2,038,750   $      -

     Investments - Credit Risk

     The District's investment policy limits investment choices to obligations of local, state
     and federal agencies, commercial paper, certificates of deposit, repurchase
     agreements, corporate notes, banker acceptances, and other securities allowed by
     State Government Code Section 53600. At June 30, 2010, all investments represented
     governmental securities which were issued, registered and held by the District's agent in
     the District's name.

     Investments - Concentration of Credit Risk

     The District does not place limits on the amount it may invest in any one issuer. At
     June 30, 2010, the District had the following investments that represents more than five
     percent of the District's net investments.

                 Federal Home Loan Bank                                        100%

3.   INTERFUND TRANSACTIONS

     Interfund Activity

     Transactions between funds of the District are recorded as interfund transfers. The
     unpaid balances at year end, as a result of such transactions, are shown as due to and
     due from other funds.




                                            31
                               MODESTO CITY SCHOOLS

                       NOTES TO BASIC FINANCIAL STATEMENTS
                                    (Continued)

3.   INTERFUND TRANSACTIONS (Continued)

     Interfund Receivables/Payables

     Individual fund interfund receivable and payable balances at June 30, 2010 were as
     follows:

                                                                  Interfund            Interfund
                           Fund                                  Receivables           Payables

     Major Fund:
       General                                                 $   1,315,997 $          1,765,391

     Non-Major Funds:
       Charter Schools Special Revenue                                    14,063
       Adult Education                                                                    221,554
       Child Development                                                     27            59,125
       Cafeteria                                                             87         1,015,539
       Deferred Maintenance                                                                56,901
       County School Facilities                                      936,121               15,901
       Capital Facilities                                                                  15,815
       Special Reserve for Capital Outlay Projects                                        901,365

     Proprietary Fund:
        Self Insurance Fund                                        1,785,330                   34

              Totals                                           $   4,051,625 $          4,051,625

     Interfund Transfers

     Interfund transfers consist of operating transfers from funds receiving revenue to funds
     through which the resources are to be expended.

     Interfund transfers for the 2009-2010 fiscal year were as follows:

     Transfer from the General Fund to the Charter Schools Special
        Revenue Fund to cover start up costs associated with
        developing and opening a new charter school.                               $       14,063
     Transfer from the General Fund to the Child Development Fund
        to post and correct negative interest for child development
        programs.                                                                           2,949
     Transfer from the General Fund to the Deferred Maintenance
        Fund to reclassify 2008/2009 state deferred maintenance
        contributions.                                                                  1,056,045
     Transfer from the General Fund to Pupil Transportation
        Equipment Fund to cover capital replacement charges for
        bus mileage usage.                                                                 68,355
     Transfer from the General Fund to the Special Reserve for
        Other than Capital Outlay Fund for MCS managers
        retiree medical reserve and CSEA.                                                247,837

                                             32
                               MODESTO CITY SCHOOLS

                      NOTES TO BASIC FINANCIAL STATEMENTS
                                   (Continued)

3.   INTERFUND TRANSACTIONS (Continued)

     Interfund Transfers (Continued)

     Transfer from the General Fund to the Special Reserve for
        Capital Outlay Projects Fund for the equipment replacement
        charges for internal use of auditorium.                          $     32,140
     Transfer from the Adult Education Fund to General Fund for
        Tier III categorical flexibility sweep.                               200,000
     Transfer from the Adult Education Fund to the General Fund
        for indirect expenses.                                                 21,554
     Transfer from the Child Development Fund to the General Fund
        for reimbursement of expenditures and indirect expenses.              403,508
     Transfer from the Cafeteria Fund to the General Fund for NCS
        Maintenance and indirect expenses.                                    383,869
     Transfer from the Cafeteria Fund to the General Fund for NCS
        related jobs/projects.                                                275,149
     Transfer from the Special Reserve for Other Than Capital
        Outlay to General Fund for 2009/2010 actual retiree
        medical expenditures.                                                 247,432
     Transfer from the Building Fund to the County Schools Facilities
        Fund for the Gregori High School Project.                            9,000,000
     Transfer from the Capital Facilities Fund to the General Fund for
        administrative fee for developer fees collected.                        3,832
     Transfer from the Special Reserve for Capital Outlay Projects
        Fund to the County Schools Facilities Fund for the Gregori
        High School Project.                                                  866,023

                                                                         $ 12,822,756




                                            33
                               MODESTO CITY SCHOOLS

                       NOTES TO BASIC FINANCIAL STATEMENTS
                                    (Continued)

4.   CAPITAL ASSETS

     A schedule of changes in capital assets for the year ended June 30, 2010 is shown
     below:

                                   Balance            Transfers           Transfers          Balance
                                    July 1,              and                 and             June 30,
                                     2009             Additions          Deductions            2010

     Non-depreciable:
      Land                     $    12,627,754                                           $    12,627,754
      Work-in-process              131,070,979    $   24,563,052     $     (4,169,100)       151,464,931
     Depreciable:
      Improvement of sites          11,629,478          3,508,447            (47,528)         15,090,397
      Buildings                    278,615,029            660,653                            279,275,682
      Equipment                     11,367,514            993,941            (62,450)         12,299,005

         Totals, at cost           445,310,754        29,726,093           (4,279,078)       470,757,769

     Less accumulated
      depreciation:
        Improvement of sites        (2,115,751)          (581,684)            47,528          (2,649,907)
        Buildings                  (77,038,582)        (5,902,884)                           (82,941,466)
        Equipment                   (6,770,291)          (710,840)            59,328          (7,421,803)

         Total accumulated
          depreciation             (85,924,624)        (7,195,408)           106,856         (93,013,176)

     Governmental activities
      capital assets, net      $ 359,386,130      $   22,530,685     $     (4,172,222) $ 377,744,593

     Depreciation expense was charged to governmental activities as follows:

        Instruction                                                                      $    5,634,755
        Instructional library, media and technology                                             183,682
        School site administration                                                              113,063
        Home-to-school transportation                                                           158,433
        Food services                                                                           401,383
        Community services                                                                      260,001
        Enterprise activities                                                                     1,790
        All other general administration                                                        285,507
        Plant services                                                                          156,794

              Total depreciation expense                                                 $    7,195,408




                                                 34
                                                 MODESTO CITY SCHOOLS

                                 NOTES TO BASIC FINANCIAL STATEMENTS
                                              (Continued)

5.   LONG-TERM LIABILITIES

     General Obligation Bonds

     The outstanding general obligation bonded debt of the District at June 30, 2010 is as
     follows:
                                                       Amount of            Outstanding        Issued           Matured            Outstanding
       Date of        Year of         Rate of           Original             June 30,          During           During              June 30,
        Bond          Maturity        Interest           Issue                 2009             Year             Year                 2010

     Modesto City Elementary School District:

        5/2/02        5/1/27         4.8-5.93%     $    16,998,337      $     16,998,337                    $      1,035,286   $     15,963,051

     Modesto City High School District:

        5/2/02        5/1/27        3.79-5.95%          64,996,180            63,140,583                           3,446,226         59,694,357

                                                   $    81,994,517      $     80,138,920   $      -         $      4,481,512   $     75,657,408


     Payments on the 2002 Modesto City Elementary School District Series A General
     Obligation Bonds commence in August 2009. The annual requirement to amortize the
     2002 Modesto City Elementary School District Series A General Obligation Bonds
     payable outstanding at June 30, 2010, is as follows:

                  Year Ended
                   June 30,                                                 Principal                   Interest                   Total

                     2011                                            $        1,120,269 $                 549,731 $ 1,670,000
                     2012                                                     1,095,747                   634,253    1,730,000
                     2013                                                     1,067,323                   722,677    1,790,000
                     2014                                                     1,041,323                   813,677    1,855,000
                     2015                                                     1,008,115                   911,885    1,920,000
                   2016-2020                                                  4,581,922                 6,068,078   10,650,000
                   2021-2025                                                  3,929,441                 8,715,559   12,645,000
                   2026-2027                                                  2,118,911                 6,581,089    8,700,000

                                                                     $ 15,963,051 $ 24,996,949 $ 40,960,000




                                                                   35
                             MODESTO CITY SCHOOLS

                    NOTES TO BASIC FINANCIAL STATEMENTS
                                 (Continued)

5.   LONG-TERM LIABILITIES (Continued)

     General Obligation Bonds (Continued)

     Payments on the 2002 Modesto High School District Series A General Obligation Bonds
     commenced in August 2005. The annual requirement to amortize the 2002 Modesto
     High School District Series A General Obligation Bonds payable outstanding at
     June 30, 2010, is as follows:

             Year Ended
              June 30,                           Principal    Interest        Total

               2011                          $    3,645,907 $ 1,789,093 $ 5,435,000
               2012                               3,616,600    2,093,400   5,710,000
               2013                               3,577,620    2,422,380   6,000,000
               2014                               3,567,443    2,787,557   6,355,000
               2015                               3,517,902    3,182,098   6,700,000
             2016-2020                           16,849,635   22,390,365  39,240,000
             2021-2025                           15,840,112   35,274,889  51,115,001
             2026-2027                            9,079,138   28,210,861  37,289,999

                                             $ 59,694,357 $ 98,150,643 $157,845,000

     The annual requirement to amortize all District General Obligation Bonds payable
     outstanding at June 30, 2010, is as follows:

             Year Ended
              June 30,                           Principal    Interest        Total

               2011                          $    4,766,176 $ 2,338,824 $ 7,105,000
               2012                               4,712,347    2,727,653   7,440,000
               2013                               4,644,943    3,145,057   7,790,000
               2014                               4,608,766    3,601,234   8,210,000
               2015                               4,526,017    4,093,983   8,620,000
             2016-2020                           21,431,557   28,458,443  49,890,000
             2021-2025                           19,769,553   43,990,448  63,760,001
             2026-2027                           11,198,049   34,791,950  45,989,999

                                             $ 75,657,408 $123,147,592 $198,805,000




                                            36
                                 MODESTO CITY SCHOOLS

                       NOTES TO BASIC FINANCIAL STATEMENTS
                                    (Continued)

5.   LONG-TERM LIABILITIES (Continued)

     Certificates of Participation

     1998 Certificates

     On November 1, 1998, the District entered into a lease-purchase agreement with the
     Modesto City School District Financing Corporation for the issuance of Certificates of
     Participation in the amount of $19,705,000. The Certificates of Participation were sold
     on behalf of the District to provide funds for the current refunding of the outstanding
     variable rate demand Certificates of Participation (the "1991 Certificates") and the
     acquisition and construction of certain projects. The Certificates of Participation bear
     interest rates between 3.50% and 4.50% and mature annually through September 1,
     2011. At June 30, 2010, the principal outstanding was $3,770,000. The redemption
     schedule is as follows:

              Year Ended
               June 30,                           Principal       Interest          Total

                  2011                        $    1,845,000 $      126,754 $      1,971,754
                  2012                             1,925,000         43,313        1,968,313

                                              $    3,770,000 $      170,067 $      3,940,067

     2001 Certificates

     On July 1, 2001, the District entered into a lease-purchase agreement with the Modesto
     City School District Financing Corporation for the issuance of Certificates of
     Participation in the amount of $7,260,000. The Certificates of Participation were sold on
     behalf of the District to provide funds for the acquisition and construction of certain
     projects. The Certificates of Participation bear interest rates between 2.80% and 4.90%
     and mature annually through September 1, 2016. At June 30, 2010, the principal
     outstanding was $3,935,000. The redemption schedule is as follows:

              Year Ended
               June 30,                           Principal       Interest          Total

                 2011                         $      490,000 $      170,710 $        660,710
                 2012                                515,000        149,599          664,599
                 2013                                535,000        126,886          661,886
                 2014                                560,000        102,516          662,516
                 2015                                585,000         75,583          660,583
               2016-2017                           1,250,000         61,985        1,311,985

                                              $    3,935,000 $      687,279 $      4,622,279




                                            37
                                MODESTO CITY SCHOOLS

                      NOTES TO BASIC FINANCIAL STATEMENTS
                                   (Continued)

5.   LONG-TERM LIABILITIES (Continued)

     Qualified School Construction Bonds Payable

     On June 1, 2010, Modesto City Schools issued Qualified School Construction Bonds in
     the amount of $16,420,000. The proceeds from the Bonds will be used to finance
     improvements to public high schools within the District. A portion of the proceeds will be
     used for the final phase of construction of Joseph A. Gregori High School. The
     Qualified School Construction Bonds bear an interest rate of 7.00% per annum and
     mature on June 1, 2027.

     Child Care Revolving Loan

     On July 1, 2000, the District was awarded seven Child Care Facilities Revolving Fund
     loans in the amount of $130,000, for the purchase, transportation, and installation of
     facilities for replacement and/or expansion of capacity for provision of child care and
     development services for a total loan amount of $910,000. The loan is repayable in
     equal payments of $91,000 over a 10-year period beginning on the date of the first
     repayment. The loan does not bear interest.

     Future minimum payments on the Child Care Facilities Revolving Fund are as follows:

                      Year Ending
                       June 30,                                     Payments

                         2011                                   $       91,000
                         2012                                           91,000
                         2013                                           91,000

                                                                $      273,000

     Capital Leases

     The District has entered into various long-term lease-purchase agreements with future
     minimum lease payments as follows:

                      Year Ending                                     Lease
                       June 30,                                     Payments

                         2011                                   $      202,516
                         2012                                          164,578

                                                                       367,094

                   Less amount representing interest                   (14,172)

                   Present value of net minimum lease
                      payments                                  $      352,922

     The District will receive no sublease rental revenues nor pay any contingent rentals for
     the leased equipment.
                                             38
                                         MODESTO CITY SCHOOLS

                           NOTES TO BASIC FINANCIAL STATEMENTS
                                        (Continued)

5.   LONG-TERM LIABILITIES (Continued)

     Teacher Retirement Incentive Liability

     The district offered retirement incentives in the amount of $30,000 to employees that
     were at least 55 years of age and had 25 years of STRS credible service. Currently, the
     district has 83 retired employees that are participating in the program and are receiving
     monthly payments.

     Future minimum payments on the Teacher Retirement Incentive are as follows:

                          Year Ending
                           June 30,                                                      Payments

                             2011                                                   $        474,960
                             2012                                                            474,960
                             2013                                                            474,960
                             2014                                                            474,960
                             2015                                                             52,800
                           2016-2018                                                          43,200

                                                                                    $      1,995,840

     Compensation Benefits
     The District entered into collective bargaining agreements with the certificated personnel
     to provide retirees a One-Year Final Compensation Benefit if certain requirements are
     met. Upon calculation of the benefit liability for each retiree by State Teachers'
     Retirement System (STRS), the liability is paid by the District to STRS. Currently,
     22 individuals qualify for this benefit. At June 30, 2010, the total remaining estimated
     obligation is $662,213, which is expected to be paid within the next 12 months.

     Schedule of Changes in Long-Term Liabilities

     A schedule of changes in long-term liabilities for the fiscal year ended June 30, 2010 is
     shown below:
                                         Balance                                              Balance           Amounts
                                          July 1,                                             June 30,         Due Within
                                           2009           Additions         Deductions          2010           One Year

     General Obligation Bonds        $   80,138,920                     $    (4,481,512) $    75,657,408   $     4,766,176
     Accreted interest                   38,273,072   $     6,355,552        (1,838,488)      42,790,136
     Certificates of Participation        9,950,000                          (2,245,000)       7,705,000         2,335,000
     Child Care Revolving Loan              364,000                             (91,000)         273,000            91,000
     Capital leases                         781,696                            (428,774)         352,922           192,530
     Qualified School Construction
       Bonds payable                                       16,420,000                         16,420,000
     Compensation benefits                  662,213                                              662,213           662,213
     Retiree benefits (Note 8)            2,993,227                            (315,936)       2,677,291           315,936
     Teacher Retirement
       Incentive liability                                  1,995,840                          1,995,840           474,960
     Compensated absences                   554,279                             (28,871)         525,408           525,408

          Totals                     $ 133,717,407    $    24,771,392   $    (9,429,581) $ 149,059,218     $     9,363,223


                                                          39
                               MODESTO CITY SCHOOLS

                        NOTES TO BASIC FINANCIAL STATEMENTS
                                     (Continued)

5.   LONG-TERM LIABILITIES (Continued)

     Schedule of Changes in Long-Term Liabilities (Continued)

     Payments on the capital leases, Child Care Revolving Loan and Certificates of
     Participation are made from various District funds. Payments on the General Obligation
     Bonds are made from the Bond Interest and Redemption Fund. Payments on the
     compensation benefits, retiree benefits and compensated absences are made from the
     Fund for which the related employee worked. Payments on the Teacher Retirement
     Incentive are made from the General Fund.

6.   RESTRICTED NET ASSETS

     Restricted net assets consisted of the following at June 30, 2010:
                                                                              Governmental
                                                                                Activities
     Restricted for revolving cash                                            $       50,677
     Restricted for stores inventory                                                 724,137
     Restricted for prepaid expenditures                                           2,190,022
     Restricted for unspent categorical                                           12,966,130
     Restricted for capital projects                                              15,561,456
     Restricted for debt service                                                   7,436,243
     Restricted for special revenues                                              12,257,749
     Restricted for self-insurance                                                14,504,209
                                                                              $ 65,690,623

7.   EMPLOYEE RETIREMENT SYSTEMS

     Qualified employees are covered under multiple-employer defined benefit pension plans
     maintained by agencies of the State of California. Certificated employees are members
     of the State Teachers' Retirement System (STRS), and classified employees are
     members of the California Public Employees' Retirement System (CalPERS).

     Plan Description and Provisions

     California Public Employees' Retirement System (CalPERS)

     Plan Description

     The District contributes to the School Employer Pool under the California Public
     Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public
     employee retirement system defined benefit pension plan administered by CalPERS.
     The plan provides retirement and disability benefits, annual cost-of-living adjustments,
     and death benefits to plan members and beneficiaries. Benefit provisions are
     established by state statutes, as legislatively amended, within the Public Employees'
     Retirement Law. CalPERS issues a separate comprehensive annual financial report
     that includes financial statements and required supplementary information. Copies of
     the CalPERS annual financial report may be obtained from the CalPERS Executive
     Office, 400 P Street, Sacramento, California 95814.
                                            40
                               MODESTO CITY SCHOOLS

                        NOTES TO BASIC FINANCIAL STATEMENTS
                                     (Continued)

7.   EMPLOYEE RETIREMENT SYSTEMS (Continued)

     Plan Description and Provisions (Continued)

     California Public Employees' Retirement System (CalPERS) (Continued)

     Funding Policy

     Active plan members are required to contribute 7% of their salary, and the District is
     required to contribute an actuarially determined rate. The actuarial methods and
     assumptions used for determining the rate are those adopted by the CalPERS Board of
     Administration. The required employer contribution rate for fiscal year 2009-2010 was
     9.709% of annual payroll. The contribution requirements of the plan members are
     established by state statute. The District's contributions to CalPERS for the fiscal years
     ending June 30, 2008, 2009 and 2010 were $4,246,989, $4,242,896 and $4,267,031,
     respectively, and equal 100% of the required contributions for each year.

     State Teachers' Retirement System (STRS)

     Plan Description

     The District contributes to the State Teachers' Retirement System (STRS), a cost-
     sharing multiple-employer public employee retirement system defined benefit pension
     plan administered by STRS. The plan provides retirement, disability and survivor
     benefits to beneficiaries. Benefit provisions are established by state statutes, as
     legislatively amended, within the State Teachers' Retirement Law. STRS issues a
     separate comprehensive annual financial report that includes financial statements and
     required supplementary information. Copies of the STRS annual financial report may be
     obtained from the STRS Executive Office, 100 Waterfront Place, West Sacramento,
     California 95605.

     Funding Policy

     Active plan members are required to contribute 8% of their salary. The required
     employer contribution rate for fiscal year 2009-2010 was 8.25% of annual payroll. The
     contribution requirements of the plan members are established by state statute. The
     District's contributions to STRS for the fiscal years ending June 30, 2008, 2009 and
     2010 were $15,161,603, $12,334,741 and $11,625,508, respectively, and equal 100% of
     the required contributions for each year.

8.   RETIREE BENEFITS

     In addition to the pension benefits described in Note 7, the District provides retiree
     health care benefits in accordance with District policy to all retired employees who
     choose to continue District sponsored health care coverage. Benefits related to this
     agreement were terminated effective to all retirees after June 30, 2006 except those
     who retired prior to June 30, 2006. The District contributes $48.00 per month for each
     such retiree. During 2009-10, 548 retirees participated at a total cost of $315,936. The
     liability at June 30, 2010 of $2,677,291 is based on the monthly benefit per participants,
     multiplied by the number of months eligible to receive based on actuarial estimated
     lives, and is recorded in long-term liabilities.
                                                41
                                MODESTO CITY SCHOOLS

                       NOTES TO BASIC FINANCIAL STATEMENTS
                                    (Continued)

9.    JOINT POWERS AGREEMENTS

      The District is a member with other school districts in two Joint Powers Authorities,
      Schools Infrastructure Financing Agency (SIFA) and Salida Area Public Facilities
      Financing Agency (SAPFFA).

      The following is a summary of condensed financial information of SIFA as of June 30,
      2009, and SAPFFA as of June 30, 2009 (the most recent information available):

                                                                   SIFA            SAPFFA

      Total assets                                           $ 18,039,210      $   7,504,665
      Total liabilities                                      $ 39,988,880      $ 34,766,154
      Total revenue                                          $   4,381,279     $   3,057,118
      Total expenses                                         $   6,124,639     $   3,741,553
      Change in net assets                                   $ (1,743,360)     $    (684,435)
      Net assets                                             $ (21,949,670)    $ (27,261,489)

      The relationship between Modesto City Schools and each Joint Powers Authority is such
      that the Joint Powers Authorities are not component units of the District for financial
      reporting purposes.

10.   RISK MANAGEMENT

      The District is exposed to various risks of loss related to torts; theft of, damage to, and
      destruction of assets; errors and omissions; injuries to employees; and natural disasters.
      The Self-Insurance Fund in Modesto City Schools provides workers' compensation
      insurance for Modesto City Schools, Stanislaus Union School District and Sylvan Union
      School District. Under this program, the Self-Insurance Fund provides coverage
      through a Workers' Compensation Insurance Indemnity Fund. Modesto City Schools
      receives user charges based upon each respective District's covered payroll. Coverage
      is provided for workers' compensation with $350,000 per occurrence being self-funded.
      Costs above the first $350,000 are covered by an excess insurance policy of up to
      $25,000,000. Settled claims have not exceeded this commercial coverage in any of the
      past three fiscal years.

      The District received property/casualty loss and general liability insurance coverage
      under the Self-Insurance Fund. A $5,000,000 insurance policy is in effect with a
      deductible per occurrence of up to $150,000. Costs above the first $5,000,000 are
      covered by an excess insurance policy of up to $45,000,000 through Schools Excess
      Liability Fund (SELF). Settled claims have not exceeded this coverage in any of the
      past three fiscal years.

      The District's classified and management employees received dental insurance
      coverage through December 31, 2007, under the Self-Insurance Fund. The maximum
      dental benefit is $1,500 per year per participant. Beginning January 1, 2008, District
      employees received dental coverage under a fully insured plan. The maximum dental
      benefit remains at $1,500 per year per participant.



                                              42
                                 MODESTO CITY SCHOOLS

                       NOTES TO BASIC FINANCIAL STATEMENTS
                                    (Continued)

10.   RISK MANAGEMENT (Continued)

      All funds of the District participate in the program and made payments to the Self-
      Insurance Fund based on the actuarial estimates of the amounts needed to pay prior-
      year and current-year claims. The claims liability of $7,542,000 ($7,392,000 for workers'
      compensation and $150,000 for property/liability) reported in the fund at June 30, 2010
      is based on the requirements of Government Accounting Standards Board Statement
      No. 10, which requires that a liability for claims be reported if information prior to the
      issuance of the financial statements indicates that is is probable that a liability has been
      incurred at the date of the financial statements and the amount of the loss can be
      reasonably estimated.

      Changes in the Fund's claims liability amount in 2009-10 were:

                                     Unpaid Claims                                  Unpaid Claims
                                       and Claim                                      and Claim
                                      Adjustment                                     Adjustment
                                       Expenses         Incurred                      Expenses
                                         July 1          Claims        Payments        June 30

      2009/2010                       $ 7,282,000 $ 2,926,866 $ (2,666,866) $ 7,542,000
      2008/2009                       $ 7,043,000 $ 2,535,486 $ (2,296,486) $ 7,282,000
      2007/2008                       $ 7,347,000 $ 2,695,099 $ (2,999,099) $ 7,043,000

11.   COMMITMENTS AND CONTINGENCIES

      The District is committed to providing annual contributions to Modesto Teachers'
      Association (MTA), California School Employees Association (CSEA), and MCS
      Managers, resulting from bargaining unit negotiated agreements. During 2009-10, the
      contributions paid were $648,198 to MTA, $139,000 to CSEA, and $108,837 to the MCS
      Managers. Per the negotiated agreement, the contributions to MTA and CSEA are set
      fixed amounts. The contribution to MCS Managers is .05 of gross salaries. The
      contract agreements establishing these contributions does not indicate any specific use
      for these funds and can be used for any purpose to the benefit of their membership.

      The District is subject to legal proceedings and claims which arise in the ordinary course
      of business. In the opinion of management, the amount of ultimate liability with respect
      to these actions will not materially affect the financial position or results of operations of
      the District.

      The District has received federal and state funds for specific purposes that are subject
      to review and audit by the grantor agencies. Although such audits could result in
      expenditure disallowances under terms of the grants, it is management's opinion that
      any required reimbursements or future revenue offsets subsequently determined will not
      have a material effect on the District's financial position.

12.   SUBSEQUENT EVENTS

      The District has reviewed all events occurring from June 30, 2010 through
      December 13, 2010, the date the financial statements were issued. No subsequent
      events occurred requiring accrual or disclosure.
                                              43
REQUIRED SUPPLEMENTARY INFORMATION
                                          MODESTO CITY SCHOOLS

                                               GENERAL FUND

                                     BUDGETARY COMPARISON SCHEDULE

                                       For the Year Ended June 30, 2010


                                                     Budget                                            Variance
                                                                                                       Favorable
                                          Original             Final              Actual             (Unfavorable)

Revenues:
 Revenue limit sources:
   State apportionment                $   120,692,087     $   114,468,470     $   114,788,552    $         320,082
   Local sources                           38,640,126          41,582,042          41,112,737             (469,305)

     Total revenue limit                  159,332,213         156,050,512         155,901,289             (149,223)

 Federal sources                           28,351,579          36,010,512          24,879,472           (11,131,040)
 Other state sources                       46,392,096          47,377,481          48,838,153             1,460,672
 Other local sources                        6,115,117           7,318,992           6,916,527              (402,465)

     Total revenues                       240,191,005         246,757,497         236,535,441           (10,222,056)

Expenditures:
 Certificated salaries                    135,710,800         145,252,692         139,564,623            5,688,069
 Classified salaries                       39,038,317          41,754,365          39,535,310            2,219,055
 Employee benefits                         34,763,771          34,623,912          32,625,264            1,998,648
 Books and supplies                         9,850,666          12,599,732           8,663,119            3,936,613
 Contract services and operating
   expenditures                            25,851,499          27,955,465          19,097,341            8,858,124
 Capital outlay                             2,179,045             530,214             256,607              273,607
 Other outgo                                4,866,857           5,651,735           4,684,015              967,720
 Debt service:
   Principal retirement                     1,356,412           1,356,414           1,281,878               74,536
   Interest                                   212,421             212,422             212,870                 (448)

     Total expenditures                   253,829,788         269,936,951         245,921,027           24,015,924

     Deficiency of revenues
      under expenditures                   (13,638,783)       (23,179,454)         (9,385,586)          13,793,868

Other financing sources (uses):
 Operating transfers in                        617,545            817,545           1,535,344              717,799
 Operating transfers out                      (352,833)        (1,423,111)         (1,421,389)               1,722

     Total other financing sources
      (uses)                                  264,712            (605,566)           113,955               719,521

     Net change in fund balance            (13,374,071)       (23,785,020)         (9,271,631)          14,513,389

Fund balance, July 1, 2009                 59,912,753          59,912,753          59,912,753

Fund balance, June 30, 2010           $    46,538,682     $    36,127,733     $    50,641,122    $      14,513,389




                                     The accompanying notes are an integral
                                       part of these financial statements.

                                                        44
SUPPLEMENTARY INFORMATION
                                                                                                                 MODESTO CITY SCHOOLS

                                                                                                               COMBINING BALANCE SHEET

                                                                                                                  ALL NON-MAJOR FUNDS

                                                                                                                         June 30, 2010


                                                                                                                                               Special                                                                 Special
                                        Charter                                                                                             Reserve Fund                                                              Reserve             Bond
                                        Schools                                                                               Pupil           for Other                           County                             for Capital         Interest
                                        Special             Adult         Child                            Deferred       Transportation    Than Capital                          School            Capital            Outlay               and
                                        Revenue           Education    Development       Cafeteria        Maintenance       Equipment          Outlay           Building         Facilities        Facilities         Projects         Redemption
                                         Fund               Fund          Fund            Fund               Fund             Fund              Fund             Fund              Fund              Fund               Fund               Fund           Total

              ASSETS

Cash and investments:
   Cash in County Treasury          $       (1,397)   $      208,697   $   606,677   $    6,324,481   $      4,555,473    $      146,451   $    1,113,982                    $     3,715,122   $     3,027,440   $     9,083,963   $     7,436,243   $   36,217,132
   Revolving cash fund                                                                          677                                                                                                                                                             677
   Cash with Fiscal Agent                                                                                                                                   $    6,771,919                                               204,171                          6,976,090
Accounts receivable                                          197,593       361,536        1,417,919                                                                                      305             3,234           573,423                          2,554,010
Due from other funds                       14,063                               27               87                                                                                  936,121                                                                950,298
Inventory                                                                                   266,602                                                                                                                                                         266,602
Prepaid expenditures                                                                         30,386                                                                                                                                                          30,386

       Total assets                 $      12,666     $      406,290   $   968,240   $    8,040,152   $      4,555,473    $      146,451   $    1,113,982   $    6,771,919   $     4,651,548   $     3,030,674   $     9,861,557   $     7,436,243   $   46,995,195

         LIABILITIES AND
         FUND BALANCES

Liabilities:
   Accounts payable                 $      12,666     $       15,988   $   356,395   $      262,521   $          5,240                                                       $       834,928                     $        10,143                     $    1,497,881
   Deferred revenue                                                        551,702          130,210                                                                                                                                                         681,912
   Due to other funds                                        221,554        59,125        1,015,539             56,901                                                                15,901   $        15,815           901,365                          2,286,200

       Total liabilities                   12,666            237,542       967,222        1,408,270             62,141                                                               850,829            15,815           911,508                          4,465,993

Fund balances                                                168,748         1,018        6,631,882          4,493,332    $      146,451   $    1,113,982   $    6,771,919         3,800,719         3,014,859         8,950,049   $     7,436,243       42,529,202

       Total liabilities and fund
         balances                   $      12,666     $      406,290   $   968,240   $    8,040,152   $      4,555,473    $      146,451   $    1,113,982   $    6,771,919   $     4,651,548   $     3,030,674   $     9,861,557   $     7,436,243   $   46,995,195




                                                                                                            The accompanying notes are an integral
                                                                                                               part of these financial statements.


                                                                                                                              45
                                                                                                                            MODESTO CITY SCHOOLS

                                                                                       COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGE IN FUND BALANCES

                                                                                                                             ALL NON-MAJOR FUNDS

                                                                                                                         For the Year Ended June 30, 2010


                                                                                                                                                          Special                                                                      Special
                                           Charter                                                                                                     Reserve Fund                                                                   Reserve              Bond
                                           Schools                                                                                       Pupil           for Other                              County                               for Capital          Interest
                                           Special              Adult           Child                                 Deferred       Transportation    Than Capital                             School             Capital             Outlay                and
                                           Revenue            Education      Development           Cafeteria         Maintenance       Equipment          Outlay             Building          Facilities         Facilities          Projects          Redemption
                                            Fund                Fund            Fund                Fund                Fund             Fund              Fund               Fund               Fund               Fund                Fund                Fund           Total

Revenues:
  Federal sources                                         $      114,504     $    3,915,843    $    8,925,939                                                                                                                                                         $   12,956,286
  Other state sources                                            516,063          6,587,193           761,098                                                                                                                    $           253    $       108,776        7,973,383
  Other local sources                                              6,285            150,002         2,848,184    $         51,591    $         1,327   $        18,730                     $        41,466    $       154,959          2,713,671          6,628,723       12,614,938

       Total revenues                                            636,852         10,653,038        12,535,221              51,591              1,327            18,730                              41,466            154,959          2,713,924          6,737,499       33,544,607

Expenditures:
  Certificated salaries                                          288,545          2,917,287                                                                                                                                                                                3,205,832
  Classified salaries                  $            632          116,400          2,341,129         4,099,662                                                                                      137,556                                                                 6,695,379
  Employee benefits                                  59           80,557          1,546,239         1,415,209                                                                                       30,646                                                                 3,072,710
  Books and supplies                              1,474          103,061            647,577         3,958,446            102,990                                                                 3,279,606              3,904               3,500                          8,100,558
  Contract services and
    operating expenditures                    11,898              13,586          2,123,918           231,272            467,508                                         $      306,381            74,770                 241             11,713                           3,241,287
  Capital outlay                                                                    679,468           643,755            615,135                                                               22,632,275              11,983            460,880                          25,043,496
  Other outgo                                                                                                                                                                   341,700                                                                                      341,700
  Debt service:
    Principal retirement                                                                              523,389                                                                                                         603,651            355,856          4,481,512        5,964,408
    Interest                                                                                           60,469                                                                                                          60,328             88,972          1,838,488        2,048,257

       Total expenditures                     14,063             602,149         10,255,618        10,932,202           1,185,633                                               648,081        26,154,853             680,107            920,921          6,320,000       57,713,627

       (Deficiency) excess of
         revenues (under) over
         expenditures                         (14,063)            34,703           397,420          1,603,019          (1,134,042)             1,327            18,730         (648,081)       (26,113,387)          (525,148)         1,793,003            417,499       (24,169,020)

Other financing sources (uses):
  Operating transfers in                      14,063                                  2,949                             1,056,045             68,355          247,837                            9,866,023                                32,140                           11,287,412
  Operating transfers out                                        (221,554)         (403,508)         (659,018)                                               (247,432)       (9,000,000)                               (3,832)          (866,023)                         (11,401,367)
  Proceeds from issuance of debt                                                                                                                                             16,420,000                                                                                    16,420,000

       Total other financing sources
         (uses)                               14,063             (221,554)         (400,559)         (659,018)          1,056,045             68,355              405         7,420,000          9,866,023             (3,832)          (833,883)                         16,306,045

       Net change in fund balances                               (186,851)           (3,139)          944,001             (77,997)            69,682            19,135        6,771,919        (16,247,364)          (528,980)           959,120            417,499        (7,862,975)

Fund balances, July 1, 2009                                      355,599              4,157         5,687,881           4,571,329             76,769        1,094,847                          20,048,083           3,543,839          7,990,929          7,018,744       50,392,177

Fund balances, June 30, 2010           $      -           $      168,748     $        1,018    $    6,631,882    $      4,493,332    $     146,451     $    1,113,982    $    6,771,919    $     3,800,719    $     3,014,859    $     8,950,049    $     7,436,243   $   42,529,202




                                                                                                                       The accompanying notes are an integral
                                                                                                                          part of these financial statements.


                                                                                                                                         46
                                  MODESTO CITY SCHOOLS

              COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES

                                        AGENCY FUNDS

                               For the Year Ended June 30, 2010

                                        Balance                                         Balance
                                         July 1,                                        June 30,
                                          2009          Additions     Deductions          2010

Associated Student Body

Beyer High School

Assets:
   Cash on hand and in banks        $     202,559   $       484,914   $   476,904   $     210,569
   Stores inventory                         6,291             2,760         2,014           7,037

         Total assets               $     208,850   $       487,674   $   478,918   $     217,606

Liabilities:
   Due to student groups            $     208,850   $       487,674   $   478,918   $     217,606

Davis High School

Assets:
   Cash on hand and in banks        $     351,484   $       520,951   $   466,275   $     406,160
   Stores inventory                         4,759             2,193                         6,952

         Total assets               $     356,243   $       523,144   $   466,275   $     413,112

Liabilities:
   Due to student groups            $     356,243   $       523,144   $   466,275   $     413,112

Downey High School

Assets:
   Cash on hand and in banks        $     367,836   $       541,686   $   558,293   $     351,229
   Stores inventory                         2,682                                           2,682

         Total assets               $     370,518   $       541,686   $   558,293   $     353,911

Liabilities:
   Due to student groups            $     370,518   $       541,686   $   558,293   $     353,911

Johansen High School

Assets:
   Cash on hand and in banks        $     176,404   $       597,881   $   566,170   $     208,115
   Stores inventory                        15,114             1,472                        16,586

         Total assets               $     191,518   $       599,353   $   566,170   $     224,701

Liabilities:
   Due to student groups            $     191,518   $       599,353   $   566,170   $     224,701

                                          (Continued)

                                              47
                                   MODESTO CITY SCHOOLS

              COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES

                                        AGENCY FUNDS
                                           (Continued)
                                For the Year Ended June 30, 2010

                                          Balance                                           Balance
                                           July 1,                                          June 30,
                                            2009          Additions     Deductions            2010

Associated Student Body (Continued)

James Enoch High School

Assets:
   Cash on hand and in banks          $     164,728   $       669,439   $    642,200    $     191,967
   Stores inventory                          32,853                           15,964           16,889

         Total assets                 $     197,581   $       669,439   $    658,164    $     208,856

Liabilities:
   Due to student groups              $     197,581   $       669,439   $    658,164    $     208,856

Modesto High School

Assets:
   Cash on hand and in banks          $   1,225,432   $     1,725,862   $   1,787,435   $   1,163,859
   Stores inventory                          18,514            18,673          18,514          18,673

         Total assets                 $   1,243,946   $     1,744,535   $   1,805,949   $   1,182,532

Liabilities:
   Due to student groups              $   1,243,946   $     1,744,535   $   1,805,949   $   1,182,532

Unorganized Associated
     Student Body

Assets:
   Cash on hand and in banks          $     532,260   $       580,391   $    578,020    $     534,631
   Stores inventory

         Total assets                 $     532,260   $       580,391   $    578,020    $     534,631

Liabilities:
   Due to student groups              $     532,260   $       580,391   $    578,020    $     534,631

Total Associated Student Body

Assets:
   Cash on hand and in banks          $   3,020,703   $     5,121,124   $   5,075,297   $   3,066,530
   Stores inventory                          80,213            25,098          36,492          68,819

         Total assets                 $   3,100,916   $     5,146,222   $   5,111,789   $   3,135,349

Liabilities:
   Due to student groups              $   3,100,916   $     5,146,222   $   5,111,789   $   3,135,349
                                            (Continued)

                                                48
                                  MODESTO CITY SCHOOLS

              COMBINING STATEMENT OF CHANGES IN ASSETS AND LIABILITIES

                                      AGENCY FUNDS
                                         (Continued)
                              For the Year Ended June 30, 2010

                                        Balance                                          Balance
                                         July 1,                                         June 30,
                                          2009       Additions        Deductions           2010

Warrant/Pass Through Fund

Assets:
   Cash in County Treasury           $167,894,807   $                 $167,894,807   $

Liabilities:
   Due to Other Agencies             $167,894,807   $      -          $167,894,807   $       -




                             The accompanying notes are an integral
                               part of these financial statements.

                                              49
                                 MODESTO CITY SCHOOLS

                                      ORGANIZATION

                                       June 30, 2010


       Modesto City School District and Modesto High School District were established in 1871.
They are now comprised of two districts, elementary and high school, governed by a common
seven-member Board of Education. Modesto City School District covers an area of
approximately 30 square miles. Modesto City School District operates 23 elementary schools
and 4 junior high schools. Modesto High School District covers an area of approximately 280
square miles. Modesto High School District operates 6 high schools and an alternative
education school. There were no changes in the District's boundaries in the current year.

       The Board of Education of Modesto City Schools is composed of seven members
elected at large. The Board manages and controls the affairs of the District.


                                    GOVERNING BOARD

       Name                                Office                           Term Expires

Kimberly Gerber Spina                     President                            2011
Sue Zwahlen                             Vice President                         2013
Nancy Cline                                Member                              2013
Steven Grenbeaux                           Member                              2011
Gary A. Lopez                              Member                              2011
Cindy Marks                                Member                              2013
Ruben A. Villalobos                        Member                              2013


                                     ADMINISTRATION

                                       Arturo M. Flores
                                       Superintendent

                                   Chris G. Flesuras, Jr.
                          Deputy Superintendent, Human Resources

                                     Patricia Portwood
                  Associated Superintendent, Educational Services, Pre K-6

                                       Craig Rydquist
              Associated Superintendent, Educational and Administrative Services

                                        Randy Fillpot
                    Associated Superintendent, Educational Services, 7-12

                                         Julie Chapin
                                 Director, Business Services

                                       Dennis Snelling
                                 Director, Business Services


                                             50
                              MODESTO CITY SCHOOLS

                     SCHEDULE OF AVERAGE DAILY ATTENDANCE

                           For the Year Ended June 30, 2010


                                                              Second
                                                              Period     Annual
                                                              Report     Report

Elementary:
   Kindergarten                                                  1,597      1,600
   First through Third                                           4,980      4,981
   Fourth through Eighth                                         7,417      7,384
   Special Education                                               517        521
   Opportunity School                                                6          8
   Home and Hospital                                                 3          4

                                                                14,520     14,498

Secondary:
  Regular Classes                                               12,539     12,402
  Special Education                                                765        758
  Continuation Education                                           508        500
  Opportunity School                                                44         47
  Home and Hospital                                                 14         17

                   Total                                        28,390     28,222




                              See accompanying notes to
                              supplementary information.

                                         51
                           MODESTO CITY SCHOOLS

                    SCHEDULE OF INSTRUCTIONAL TIME

                      For the Year Ended June 30, 2010



                1986-87                                  Number
                Minutes       1982-83        2009-10     of Days
                Require-       Actual         Actual    Traditional
  Grade Level    ment         Minutes        Minutes     Calendar        Status

Kindergarten     36,000        35,400         36,000        180       In Compliance

Grade 1          50,400        47,036         50,472        180       In Compliance

Grade 2          50,400        47,036         50,472        180       In Compliance

Grade 3          50,400        47,036         50,472        180       In Compliance

Grade 4          54,000        50,854         54,054        180       In Compliance

Grade 5          54,000        50,854         54,054        180       In Compliance

Grade 6          54,000        50,854         54,054        180       In Compliance

Grade 7          54,000        50,854         59,736        180       In Compliance

Grade 8          54,000        50,854         59,736        180       In Compliance

Grade 9          64,800        56,505         66,512        180       In Compliance

Grade 10         64,800        56,505         66,512        180       In Compliance

Grade 11         64,800        56,505         66,512        180       In Compliance

Grade 12         64,800        56,505         66,512        180       In Compliance




                           See accompanying notes to
                           supplementary information.

                                        52
                                      MODESTO CITY SCHOOLS

                      SCHEDULE OF EXPENDITURE OF FEDERAL AWARDS

                                  For the Year Ended June 30, 2010


                                                                          Pass-
                                                                        Through
   Federal                                                                Entity         Federal
   Catalog                Federal Grantor/Pass-Through                 Identifying       Expend-
   Number                Grantor/Program or Cluster Title                Number           itures

U.S. Department of Education- Passed through California Department
  of Education

                Special Education Cluster:
    84.027       Special Education IDEA: Basic Local Assistance
                  Entitlement, Part B, Section 611                       13379       $      29,594
    84.027       Special Education IDEA: Basic Local Entitlement
                  Assistance Entitlement, Part B, Section 611            13379            5,748,430
    84.173       Special Education Preschool Grant                       13682              128,020
    84.391       Special Education ARRA IDEA: Part B, Sec 611
                 Basic Local Assistance                                  10117            3,575,143
    84.391       Special Education ARRA IDEA: Private School ISP         10115               11,712
    84.392       Special Education ARRA IDEA: Part B,
                 Preschool Grants                                        13431             176,583
   84.173A       Special Education IDEA: Preschool Staff Development     13430               1,074
    84.391       Special Education ARRA, IDEA: Preschool Local
                 Entitlement                                             13430             178,198
   84.027A       Special Education: Preschool Local Entitlement          13430             192,862

                     Total Special Education Cluster                                     10,041,616

                Title I Cluster:
    84.389        ARRA: Title I                                          13978            5,788,594
    84.010        NCLB Title I Basic Grants Low Income & Neglected
                    Part A                                               14508            4,089,498
    84.010        NCLB: Title I, Part A, Program Improvement LEA
                    Corrective Action, Minor Performance Problems        14329             403,028

                     Total Title I Cluster                                               10,281,120

    84.002      Adult Education: Adult Secondary Education               13978              11,438
   84.002A      Adult Education: Adult Basic Education & ESL             14508              61,218
   84.002A      Adult Education: English Literacy and Civics
                  Education Local Grant                                  14109               22,401
    84.369      NCLB: Title IV, CSIS Local Grants                        13797              307,493
    84.394      ARRA: State Fiscal Stabilization Fund                    14838            6,454,441
    84.186      Title IV: Safe & Drug Free School                        14581              158,933
    84.181      Special Education IDEA: Early Intervention Grants,
                  Part C                                                 23761              91,745
    84.367      NCLB: Title II, Part A, Improving Teacher Quality
                  Local Grants                                           14341            2,091,153
    84.367      NCLB, Title II, Part A, Administrator Training           14344               12,456
    84.318      NCLB: Title II, Part D Enhancing Education Through
                  Technology (EETT)                                      14368              98,635
    84.365      NCLB: Title III, Limited English Proficiency (LEP)
                  Student Program                                        10084             714,235
                                               (Continued)

                                                 53
                                     MODESTO CITY SCHOOLS

                      SCHEDULE OF EXPENDITURE OF FEDERAL AWARDS
                                        (Continued)
                             For the Year Ended June 30, 2010


                                                                            Pass-
                                                                          Through
   Federal                                                                  Entity         Federal
   Catalog                Federal Grantor/Pass-Through                   Identifying       Expend-
   Number                Grantor/Program or Cluster Title                  Number           itures

U.S. Department of Education- Passed through California Department
  of Education (Continued)

    84.186       NCLB: Title IV, Part A, Safe & Drug Free Schools
                  and Communities                                          14347       $     108,731
    84.048       Vocational Programs: Voc & Applied Tech
                  Secondary IC, Section 131 (Carl Perkins Act)             13924             484,098
    84.082       Vocational Programs: Adult Sec 132 (Carl Perkins Act)     14893              19,447

                      Total U.S. Department of Education                                   30,959,160

U.S. Department of Agriculture- Passed through California Department
  of Education

    10.555       Child Nutrition: School Program (NSL Sec 4)               13391            8,603,641
    10.558       Child Nutrition: Summer Food Program                      13004              322,298

                      Total U.S. Department of Agriculture                                  8,925,939

U.S. Department of Health and Human Services- Passed through
  California Department of Education

    93.600       Head Start                                                10016            3,630,602
    93.596       Child Development: Federal Childcare                      13609              288,181
    93.778       Medi-Cal Billing Option (DHS)                             10013              191,730

                      Total U.S. Department of Health and
                       Human Services                                                       4,110,513

                      Total Federal Programs                                           $   43,995,612




                                      See accompanying notes to
                                      supplementary information.

                                                  54
                                MODESTO CITY SCHOOLS

             RECONCILIATION OF UNAUDITED ACTUAL FINANCIAL REPORT
                     WITH AUDITED FINANCIAL STATEMENTS

                             For the Year Ended June 30, 2010


There were no adjustments made to any funds of the District.




                                 See accompanying notes to
                                 supplementary information.

                                             55
                                        MODESTO CITY SCHOOLS

                              SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS

                                     For the Year Ended June 30, 2010


                                               (Budgeted)
                                                  2011              2010              2009              2008

General Fund

Revenues and other financing sources       $227,410,910      $238,070,785      $274,703,174      $283,599,921

Expenditures                                   239,492,772       245,921,027       263,728,003       279,112,888
Other uses and transfers out                     1,258,370         1,421,389           508,409         8,186,262

Total outgo                                    240,751,142       247,342,416       264,236,412       287,299,150

Changes in fund balance                    $ (13,340,232) $ (9,271,631) $ 10,466,762             $ (3,699,229)

Ending fund balance                        $ 37,300,890      $ 50,641,122      $ 59,912,753      $ 49,445,991

Available reserves                         $ 19,977,985      $ 28,002,498      $ 27,642,454      $ 22,316,937

Designated for economic
 uncertainties                             $     7,120,367   $     7,330,551   $     7,831,374   $     8,521,040

Undesignated fund balance                  $ 12,857,618      $ 20,671,947      $ 19,811,080      $ 13,795,897

Available reserves as percentages
 of total outgo                                  8.3%              11.3%             10.5%             7.8%

All Funds

Total long-term liabilities                $139,695,995      $149,059,218      $133,717,407      $137,861,444

Average daily attendance
 at P-2, excluding Adult and
 County Supplement                                 27,899            28,390            28,959            29,537


The General Fund fund balance has decreased by $2,504,098 over the past three years. The fiscal year
2010-2011 budget projects a decrease of $13,340,232. For a district this size, the State of California
recommends available reserves of at least 3 percent of total general fund expenditures, transfers out and
other uses (total outgo). The District met this requirement.

The District has incurred operating surpluses in one of the past three years, and anticipates incurring an
operating deficit during the fiscal year 2010-2011.

Total long-term liabilities have increased by $11,197,774 over the past two years, due primarily to the
issuance of $16,420,000 in Qualified School Construction Bonds in 2010, as shown in Note 5 to the
financial statements.

Average daily attendance (excluding Adult) has decreased by 1,147 over the past two years. A decrease
of 491 ADA is projected for fiscal year 2010-2011.

                                        See accompanying notes to
                                        supplementary information.

                                                     56
                                        MODESTO CITY SCHOOLS

                                  SCHEDULE OF CHARTER SCHOOLS

                                    For the Year Ended June 30, 2010


                                                                          Included in District
                                                                       Financial Statements, or
             Charter Schools Chartered by District                          Separate Report

There are currently no charter schools in the District.




                                         See accompanying notes to
                                         supplementary information.

                                                      57
                              MODESTO CITY SCHOOLS

                    NOTES TO SUPPLEMENTARY INFORMATION


1.   PURPOSE OF SCHEDULES

     A   -   Schedule of Average Daily Attendance

             Average daily attendance is a measurement of the number of pupils attending
             classes in the District. The purpose of attendance accounting from a fiscal
             standpoint is to provide the basis on which apportionments of state funds are
             made to school districts. This schedule provides information regarding the
             attendance of students at various grade levels and in different programs.

     B   -   Schedule of Instructional Time

             The District has received incentive funding for increasing instructional time as
             provided by the Incentives for Longer Instructional Day. This schedule
             presents information on the amount of instructional time offered by the District
             and whether the District complied with the provisions of Education Code
             Sections 46201 through 46206.

     C   -   Schedule of Expenditure of Federal Awards

             OMB Circular A-133 requires a disclosure of the financial activities of all
             federally funded programs. This schedule was prepared to comply with A-133
             requirements, and is prepared on the modified accrual basis of accounting.

             The following schedule provides a reconciliation between revenues reported on
             the Statement of Revenues, Expenditures and Change in Fund Balances and
             the related expenditures reported on the Schedule of Expenditure of Federal
             Awards. The reconciling amounts represent Federal funds that have been
             recorded as revenues that have not been expended by June 30, 2010.

                                                                  CFDA
                             Description                         Number          Amount

             Total Federal revenues, Statement of
              Revenues, Expenditures and Change
              in Fund Balances                                                $ 37,835,758

             Add: State Fiscal Stabilization Funds spent
                    from prior year awards                       84.394           6,454,441
             Less: Medi-Cal Billing Funds not spent              93.778            (294,587)

             Total Schedule of Expenditure of Federal
              Awards                                                          $ 43,995,612




                                              58
                              MODESTO CITY SCHOOLS

                    NOTES TO SUPPLEMENTARY INFORMATION
                                 (Continued)

1.   PURPOSE OF SCHEDULES (Continued)

     D   -   Reconciliation of Unaudited Actual Financial Report with Audited Financial
             Statements

             This schedule provides the information necessary to reconcile the Unaudited
             Actual Financial Report to the audited financial statements.

     E   -   Schedule of Financial Trends and Analysis

             This schedule provides trend information on the District's financial condition
             over the past three years and its anticipated condition for the 2010-2011 fiscal
             year, as required by the State Controller's Office.

     F   -   Schedule of Charter Schools

             This schedule provides information for the California Department of Education
             to monitor financial reporting by Charter Schools.

2.   EARLY RETIREMENT INCENTIVE PROGRAM

     Education Code Section 14502 requires certain disclosure in the financial statements of
     districts which adopt Early Retirement Incentive Programs pursuant to Education Code
     Sections 22714 and 44929. For the fiscal year ended June 30, 2010, the District did not
     adopt such a program.




                                           59
FINDINGS AND RECOMMENDATIONS
                                         MODESTO CITY SCHOOLS

                      SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS

                                         Year Ended June 30, 2010


                            SECTION I - SUMMARY OF AUDITOR'S RESULTS


FINANCIAL STATEMENTS

Type of auditor's report issued:                                     Unqualified

Internal control over financial reporting:
    Material weakness(es) identified?                                          Yes       X   No
    Significant deficiency(ies) identified not considered
       to be material weakness(es)?                                            Yes       X   None reported

Noncompliance material to financial statements
  noted?                                                                       Yes       X   No

FEDERAL AWARDS

Internal control over major programs:
    Material weakness(es) identified?                                          Yes       X   No
    Significant deficiency(ies) identified not considered
       to be material weakness(es)?                                            Yes       X   None reported

Type of auditor's report issued on compliance for
   major programs:                                                   Unqualified

Any audit findings disclosed that are required to be
  reported in accordance with Circular A-133,
  Section .510(a)?                                                             Yes       X   No

Identification of major programs:

                  CFDA Number(s)                            Name of Federal Program or Cluster

        10.555, 10.558                              National School Lunch Cluster
        84.367                                      NCLB: Title II Part A (Improving Teacher Quality
                                                     and Administrator Training)
        84.010, 84.389                              NCLB: Title I Cluster
        84.027, 84.173, 84.391, 84.173A,
        84.027A, 84.392                             Special Education Cluster
        84.394                                      ARRA: State Fiscal Stabilization Fund

Dollar threshold used to distinguish between Type A
   and Type B programs:                                              $       1,319,868

Auditee qualified as low-risk auditee?                                   X     Yes           No

STATE AWARDS

Internal control over state programs:
    Material weakness(es) identified?                                          Yes       X   No
    Significant deficiency(ies) identified not considered
       to be material weaknesses?                                              Yes       X   None reported

Type of auditor's report issued on compliance for
   state programs:                                                   Unqualified

                                                       67
                               MODESTO CITY SCHOOLS

                SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS
                                    (Continued)
                             Year Ended June 30, 2010

                     SECTION II - FINANCIAL STATEMENT FINDINGS


1.   INTERNAL CONTROL- ASSOCIATED STUDENT BODY (30000)

     Criteria

     Internal Control- Safeguarding of Assets

     Conditions

     At various school sites tested, common items were noted:
            Deposits were not made in a timely manner.
            Revenue producing activities are not formally approved by the Principal.
            Reconciliation reports indicating the district office posting the school's
             transactions were not being transmitted to the site in a timely manner.
            Detailed schedules of monies deposited with the ASB Secretary are not required
             to be turned in with the deposit.
            Copies of checks are not kept in the bookkeeper's records, therefore, evidence
             of checks being signed by two authorized signors could not be obtained.
            Pre-numbered receipts are not issued to depositors in the school office.
            Inventory counts are not performed for the student store.
            Daily record of sales for the student store is not maintained.

     Effect

     ASB Funds could potentially be misappropriated.

     Cause

     Adequate internal control procedure have not been implemented and enforced.

     Fiscal Impact

     Not applicable.

     Recommendation

     We recommend that the school district implement the following controls:
          Deposits should be made on a daily basis.
          All revenue producing activities should be approved by the Principal on a
           fundraiser form.
          Reports indicating items posted by the district office should be sent to the site in
           a timely manner.
          Detailed lists indicating the student's name and amount collected from that
           student should be submitted to ASB with the deposit.
          Maintain copies of checks disbursed for ASB's records.
          Issue pre-numbered receipts to any individual making a deposit.
          An inventory count of the student store should be performed on a monthly basis.
          The student store should track sales for the day in order to support deposits
           made to the school office.
                                           68
                              MODESTO CITY SCHOOLS

             SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS
                                 (Continued)
                          Year Ended June 30, 2010

                   SECTION II - FINANCIAL STATEMENT FINDINGS
                                    (Continued)

1.   INTERNAL CONTROL- ASSOCIATED STUDENT BODY (30000) (Continued)

     Corrective Action Plan

     The District provides training and on-site visits on the Associated Student Body
     Handbook, which outlines the issues noted by the auditors' recommendations, some at
     a greater level than what has been suggested. The District will provide additional
     training focused on preparing required documentation for compliance and continue to
     monitor timeliness of submission of reports.




                                         69
                                 MODESTO CITY SCHOOLS

               SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS
                                   (Continued)
                            Year Ended June 30, 2010

          SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS


No matters were reported in the current year.




                                                70
                                 MODESTO CITY SCHOOLS

               SCHEDULE OF AUDIT FINDINGS AND QUESTIONED COSTS
                                   (Continued)
                            Year Ended June 30, 2010

           SECTION IV - STATE AWARD FINDINGS AND QUESTIONED COSTS


No matters were reported in the current year.




                                                71
    STATUS OF PRIOR YEAR

FINDINGS AND RECOMMENDATIONS
                                      MODESTO CITY SCHOOLS

                  STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS

                                      Year Ended June 30, 2010

                                                                         District Explanation
         Finding/Recommendation                    Current Status        If Not Implemented

2009-1                                        Partially implemented.   See current year finding
                                                                       #1.
At various school sites tested, we noted
the following:
    When cash is received it is not
     counted in dual custody.
    Total receipts are not supported by
     detailed schedules defining the
     number of items receipted and the
     unit price per item included in the
     receipt.
    The receipt book could not be located
     during our cash receipts walkthrough.
    Sub-receipt books are not maintained
     by student clubs to issue upon the
     initial receipt of cash.
    Expenditures were not properly
     authorized         by    a     student
     representative.

We recommend the following:
  Cash should be counted in dual
   custody.
  Proper supporting documentation
   should accompany funds submitted
   for deposit.
  The receipt book should be filed to
   allow any District supervisor or faculty
   advisor access to the records to
   ensure that all cash receipts are
   recorded.
  Sub-receipt     books     should      be
   maintained by the ASB Bookkeeper
   and not the individual club advisors.
  Expenditures should be properly
   authorized by a student body
   representative.




                                                 72

				
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