ACTION Los Gatos Union School District by alicejenny

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									                                                  Los Gatos Union School District
                                                             17010 Roberts Road
                                                      Los Gatos, CA 95032-4510
                                                          Phone: (408) 335-2000
                                                             Fax: (408) 395-6481
                                                            www.lgusd.k12.ca.us

                                            J. Richard Whitmore, Superintendent




    December 9, 2008



    TO:        Board of Trustees

    FROM:      Cynthia Shieh

    RE:        2007-08 Financial Audit Report


    State law requires the district to conduct an annual audit with an independent audit firm each year
    to verify the accuracy of the financial reporting and to ensure sound fiscal management practice in
    the School District.

    C.G. Uhlenberg LLP performed the audit for fiscal year 2007-08, which ended June 30, 2008. In
    their opinion the financial statement is presented fairly in all material respects. Mr. Sheldon Chavan
    of C.G. Uhlenberg LLP will present the 2007-08 Financial Audit Report. The report is available for
    public viewing.




    ACTION: Recommend approval



    Attachment – Board Members




BOARD OF TRUSTEES     •Kathleen Bays   •Phil E. Couchee    •Chris Miller   •Karen S. Noé   •Tina Orsi-Hartigan
LOS GATOS UNION SCHOOL DISTRICT
     COUNTY OF SANTA CLARA
      LOS GATOS, CALIFORNIA

          AUDIT REPORT

            June 30, 2008




        C. G. UHLENBERG LLP
  333 TWIN DOLPHIN DRIVE, SUITE 230
       REDWOOD CITY, CA 94065
                                            LOS GATOS UNION SCHOOL DISTRICT
                                                  SANTA CLARA COUNTY

                                                           TABLE OF CONTENTS

                                                                                                                                         PAGE NO.
FINANCIAL SECTION:

Independent Auditor’s Report...............................................................................................                1-2

Management’s Discussion and Analysis...............................................................................                        3-9

Basic Financial Statements:

      Government-Wide Financial Statements:
         Statement of Net Assets ...........................................................................................                10
         Statement of Activities.............................................................................................               11

      Fund Financial Statements:
         Balance Sheet - Governmental Funds......................................................................                           12
         Reconciliation of the Governmental Funds Balance Sheet to the
           Statement of Net Assets........................................................................................                  13
         Statement of Revenues, Expenditures, and Changes
           in Fund Balances - Governmental Funds..............................................................                              14
         Reconciliation of Governmental Funds Statement of Revenues,
           Expenditures and Changes in Fund Balances to the Statement
           of Activities ..........................................................................................................         15
         Statement of Fiduciary Net Assets - Fiduciary Funds .............................................                                  16

Notes to the Basic Financial Statements ...............................................................................                   17 - 33

REQUIRED SUPPLEMENTARY INFORMATION:

Schedule of Revenue, Expenditures and Changes in Fund Balances -
  Budget and Actual (GAAP), General Fund .......................................................................                            34

SUPPLEMENTARY INFORMATION:

Nonmajor Funds:
   Combining Balance Sheet - Nonmajor Funds ................................................................                                35
   Combining Statement of Revenues, Expenditures and Changes in
    Fund Balances - Nonmajor Funds...............................................................................                           36

STATE AND FEDERAL AWARD COMPLIANCE SECTION:

Organization..........................................................................................................................      37

Schedule of Excess Sick Leave.............................................................................................                  38

Schedule of Average Daily Attendance ................................................................................                       39

Schedule of Instructional Time Offered................................................................................                      40
                                         LOS GATOS UNION SCHOOL DISTRICT
                                               SANTA CLARA COUNTY

                                                        TABLE OF CONTENTS

                                                                                                                                  PAGE NO.

Schedule of Financial Trends and Analysis ..........................................................................                 41

Schedule of Expenditures of Federal Awards.......................................................................                    42

Reconciliation of the Annual Financial Budget Report to the Audited
 Financial Statements..........................................................................................................      43

Notes to State and Federal Award Compliance Sections......................................................                         44 - 45

OTHER INDEPENDENT AUDITOR’S REPORTS:

Report on Internal Control Over Financial Reporting and Compliance
 Based on an Audit of Financial Statements Performed in Accordance
 with Government Auditing Standards ...............................................................................                46 - 47

Report on Compliance with Requirements Applicable to Each Major
 Program and Internal Control Over Compliance in Accordance with
 OMB Circular A-133 .........................................................................................................      48 - 49

Independent Auditors' Report on State Compliance .............................................................                     50 - 51

FINDINGS AND RECOMMENDATIONS:

Schedule of Findings and Questioned Costs.........................................................................                 52 - 55

Status of Prior Year Findings and Recommendations ..........................................................                       56 - 61
FINANCIAL
 SECTION
Management’s Discussion and Analysis
                               Los Gatos Union School District
                       MANAGEMENT’S DISCUSSION AND ANALYSIS
                   FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

This discussion and analysis of Los Gatos Union School District’s (the District’s) financial performance
provides an overall review of the District’s financial activities for the fiscal year ended June 30, 2008.
This review is a part of the audit of the District as a result of the legally required implementation of
Governmental Accounting Standards Board Statement No. 34 (GASB 34). The intent of this discussion
and analysis is to look at the District’s financial performance as a whole. Readers should also review the
notes to the basic financial statements and financial statements to enhance their understanding of the
District’s financial performance.

Financial Highlights

Key financial highlights for the fiscal year 2007-08 are as follows:

Total net assets decreased by $1,274,490, which represents a 6% decrease from June 30, 2007 to June 30,
2008.

        The District had $28,018,339 in general revenues, which is 87% of total revenues. Program
        specific revenues in the form of operating grants and contributions, and charges for services
        accounted for $4,045,164, or 13% of the total revenues of $32,063,503.

        The District had $33,337,993 in governmental expenses; $4,045,165 of these expenses was offset
        by program specific charges for services, grants or contributions. General revenues and special
        items of $28,018,339 were not sufficient to provide for these programs. Therefore, the difference
        is represented by a net decrease in assets of $1,274,490.

        The total governmental fund balances decreased by $2.4 million, which is an 11% decrease from
        June 30, 2007 to June 30, 2008.

Using the Annual Report

This annual report consists of a series of basic financial statements and notes to those statements. These
statements are organized so the reader can understand Los Gatos Union School District as a financial
whole, an entire operating entity. The statements provide an increasingly detailed look at specific
financial activities.

The Statement of Net Assets and Statement of Activities comprise the District-wide financial statements
and provide information about the activities of the entire District, presenting both an aggregate view of
the District’s finances and a longer-term view of those finances. Fund financial statements provide the
next level of detail. For governmental funds, these statements tell how services were financed in the
short-term as well as what remains for future spending. The fund financial statements also look at the
District’s most significant funds with all other non-major funds presented in total in one column. In the
case of Los Gatos Union School District, the General Fund is by far the most significant fund.

The basic financial statements also include notes that explain some of the information in the financial
statements and provide more detailed data.




                                                     3
                                Los Gatos Union School District
                        MANAGEMENT’S DISCUSSION AND ANALYSIS
                    FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

Overview of the Financial Statements
The full annual financial report is a product of three separate parts: the basic financial statements,
supplementary information, and this section, the Management Discussion and Analysis. These three
sections together provide a comprehensive financial overview of the District. The basic financials are
comprised of two kinds of statements that present financial information from different perspectives,
District-wide and funds.

        District-wide financial statements, which comprise the first two statements, provide both short-
        term and long-term information about the District’s overall financial position.

        Individual parts of the District, which are reported as fund financial statements, focus on
        reporting the District’s operations in more detail. These fund financial statements comprise the
        remaining statements.

        Notes to the financials, which are included in the financial statements, provide more detailed data
        and explain some of the information in the statements. The required supplementary information
        section provides further explanations and provides additional support for the financial statements.

District-Wide Financial Statements - Statement of Net Assets and the Statement of Activities

While this document contains the large number of funds used by the District to provide programs and
activities, the view of the District as a whole looks at all financial transactions and asks the question,
“How did we do financially during the fiscal year 2007-08?” The Statement of Net Assets and the
Statement of Activities answer this question. These statements include all assets and liabilities using the
accrual basis of accounting similar to the accounting practices used by most private-sector companies.
This basis of accounting takes into account all of the current year’s revenues and expenses, regardless of
when cash is received or paid.

These two statements report the District’s net assets and changes in those assets. This change in net
assets is important because it tells the reader that, for the District as a whole, the financial position of the
District has improved or diminished. The causes of this change may be the result of many factors, some
financial, and some not. Non-financial factors include the District’s property tax base, current property
tax laws in California restricting revenue growth, facility conditions, and required educational programs.

In the Statement of Net Assets and the Statement of Activities, the District reports governmental
activities. Governmental activities are the activities where most of the District’s programs and services
are reported including, but not limited to, instruction, support services, operation and maintenance of
plant, pupil transportation and extracurricular activities. The District does not engage in business
activities.

Reporting the District’s Most Significant Funds

Fund Financial Statements

The analysis of the District’s major funds begins on page 12. Fund financial reports provide detailed
information about the District’s major funds. The District uses many funds to account for a multitude of
financial transactions. These fund financial statements focus on each of the District’s most significant
funds. The District’s major governmental funds are the General Fund, Building Fund, the County School
Facility Fund, the Special Reserve Fund for Capital Outlay, and the Bond Interest and Redemption Fund.



                                                       4
                                 Los Gatos Union School District
                         MANAGEMENT’S DISCUSSION AND ANALYSIS
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

Governmental Funds

Most of the District’s activities are reported in governmental funds, which focus on how money flows
into and out of those funds and the balances left at year-end available for spending in the future periods.
These funds are reported using an accounting method called modified accrual accounting, which
measures cash and all other financial assets that can readily be converted to cash. The governmental fund
statements provide a detailed short-term view of the District’s general government operations and the
basic services it provides. Governmental fund information helps determine whether there are more or
fewer financial resources that can be spent in the future to finance educational programs. The relationship
(or differences) between governmental activities (reported in the Statement of Net Assets and the
Statement of Activities) and governmental funds is reconciled in the financial statements.

The District as a Whole

Recall that the Statement of Net Assets provides a perspective of the District as a whole. Table 1
provides a summary of the District’s net assets as of June 30, 2008 compared to June 30, 2007:

                                    Table 1 - Summary of Statement of Net Assets

                                                                                                  Percentage
                                                        2008            2007        Change         Change
   Assets
   Current and Other Assets                         $ 21,632,940 $ 25,306,661 $     (3,673,721)        -15%
   Capital Assets                                      87,269,378    87,132,978        136,400           0%
   Total Assets                                     $ 108,902,318 $ 112,439,639 $   (3,537,321)         -3%

   Liabilities
   Current Liabilities and Other                    $  2,346,210 $ 3,989,789 $      (1,643,579)        -41%
   Long-Term Liabilities                              87,591,389   88,210,642         (619,253)         -1%
   Total Liabilities                                $ 89,937,599 $ 92,200,431 $     (2,262,832)         -2%

   Net Assets
   Invested in Capital Assets, Net of Debt          $  6,033,480 $ 9,546,432 $      (3,512,952)        -37%
   Restricted                                         10,014,141    9,574,079          440,062           5%
   Unrestricted                                        2,917,098    1,118,697        1,798,401         161%
   Total Net Assets                                 $ 18,964,719 $ 20,239,208 $     (1,274,489)         -6%




                                                         5
                                Los Gatos Union School District
                        MANAGEMENT’S DISCUSSION AND ANALYSIS
                    FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

Table 2 shows the changes in net assets for the fiscal year 2007-08:

                                  Table 2 - Summary of Changes in Net Assets

                                                                                                  Percentage
                                                  2008              2007           Change          Change

Revenues
Program Revenues
  Charges for Services                       $        469,654 $       547,866   $ (78,212.0000)         -14%
  Operating Grants and Contributions                3,575,510       8,112,494       (4,536,984)         -56%
General Revenues:
  Property Taxes                                  25,208,458       23,196,845       2,011,613            9%
  Gr ants and Entitlements - Unrestricted          1,417,518        1,603,587        (186,069)         -12%
  Other                                            1,392,363          585,624         806,739          138%
Total Revenues                                    32,063,503       34,046,416      (1,982,913)          -6%

Program Expenses
Instruction                                       19,238,241       16,870,831       2,367,410           14%
Instruction-related services                       2,686,467        2,707,776         (21,309)          -1%
Pupil services                                     1,630,672        1,537,397          93,275             6%
General administr ation                            2,273,262        1,971,473         301,789           15%
Plant services                                     3,851,915        4,693,791        (841,876)         -18%
Ancillary                                                -             94,712         (94,712)        -100%
Interest and Fiscal Charges                        3,547,184        3,719,366        (172,182)          -5%
Other outgo                                          110,252              -           110,252           -
Total Expenses                                    33,337,993       31,595,346       1,742,647             6%
Increase/(Decrease) in Net Assets                 (1,274,490)       2,451,070      (3,725,560)        -152%

Governmental Activities

Property taxes made up 78% of revenues for governmental activities for the District for the fiscal year
2007-08 and increased by 9% from prior year because the assessed value increased by a similar amount.

Direct instruction expenses comprised 58% of total District expenses. The Statement of Activities shows
the cost of program services and the charges for services and grants offsetting those services. Instruction
expenses increased by 14%, plant services decreased by 18%, and interest and fiscal charges increased by
5% because the allocation method used in the current fiscal year.




                                                      6
   REQUIRED
SUPPLEMENTARY
 INFORMATION
                                 Los Gatos Union School District
                         MANAGEMENT’S DISCUSSION AND ANALYSIS
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

Table 3 shows the total cost of services and the net cost of services, and identifies the cost of these
services supported by revenues.

                                       Table 3 - Net Cost of Services

                                          Total Cost of        Net Cost of    Total Cost of    Net Cost of
                                          Services 2008       Services 2008   Services 2007   Services 2007

 Instruction                          $      19,238,241   $      16,318,416   $ 16,870,831    $    9,480,878
 Instruction-related services                 2,686,467           2,378,870      2,707,776         2,261,371
 Pupil services                               1,630,672             945,538      1,537,397           903,791
 General administration                       2,273,262           2,249,140      1,971,473         1,945,906
 Plant services                               3,851,915           3,743,502      4,693,791         4,529,050
 Ancillary services                                 -                   -           94,712            94,712
 Interest, fiscal charges and other           3,657,436           3,657,363      3,719,366         3,719,278
 Total Net Cost of Services           $      33,337,993   $      29,292,829   $ 31,595,346    $   22,934,986

Instruction expenses include activities directly dealing with the teaching of pupils and the interaction
between teacher and pupil.

Pupil Services and Instruction-Related Services expenses include the activities involved with assisting
staff with the content and process of teaching to pupils.

General Administration expenses include the costs for the Board of Trustees, administration, fiscal and
business services and other expenses associated with administrative and financial supervision of the
District.

Plant Services expenses include the operation and maintenance of plant activities which involve keeping
the school grounds, buildings, and equipment in an effective working condition.

Ancillary Services expenses include the operation of non-instructional services including the preparation,
delivery, and servicing of lunches, snacks, and other incidental meals.

Interest and Fiscal charges involve the transactions associated with the payment of interest and other debt
related charges of the District.




                                                      7
                                  Los Gatos Union School District
                          MANAGEMENT’S DISCUSSION AND ANALYSIS
                      FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

The District’s Funds
The District’s governmental funds report a combined fund balance of $20,200,963, which is a decrease of
11% from last year’s total of $22,608,759. The decrease can be attributed to the spending of bond fund
monies for construction and modernization projects taking place at school sites.

Table 4 provides an analysis of the district’s fund balances and the total change in fund balances from the
prior year.

                                          Table 4 - Summary of Fund Balances

                                                                                                             Percentage
                                                               2008            2007           Change          Change

  General                                              $    3,786,529 $         4,079,927 $     (293,398)          -7%
  Cafeteria Fund                                               62,028              66,920         (4,892)          -7%
  Deferred Maintenance Fund                                   174,464             128,477         45,987           36%
  Special Reserve - Postemployment                          1,321,419           1,066,276        255,143           24%
  Building                                                  6,301,563           9,129,410     (2,827,847)         -31%
  Capital Facilities                                          183,074              51,464        131,610          256%
  County Schools Facilities                                       142             289,282       (289,140)        -100%
  Special Reserve - Capital Projects                        5,451,672           5,220,775        230,897            4%
  Bond Interest & Redemption                                2,920,072           2,576,228        343,844            0%
      Total Fund Balances                              $   20,200,963 $        22,608,759 $   (2,407,796)         -11%


At the end of the fiscal year 2007-2008, the District had $109,159,819 invested in land, buildings,
furniture and equipment, and vehicles. Table 5 shows June 30, 2008 balances compared to June 30, 2007:

                               Table 5 - Summary of Capital Assets Net of Depreciation


                                                                                                            Percentage
                                                  2008               2007              Change                Change
Land                                           $    241,224       $    241,224     $           -                       0%
Construction in Progress                            310,287         28,479,935         (28,169,648)                  -99%
Buildings and Improvements                       86,479,599         58,129,180          28,350,419                    49%
Equipment                                           238,268            282,639             (44,371)                  -16%
    Total Capital Assets - Net                 $ 87,269,378       $ 87,132,978     $       136,400                     0%

Net capital assets increased by $136,400 during the fiscal year 2007-08 due to the completion on
construction at Blossom Hill.




                                                           8
                               Los Gatos Union School District
                       MANAGEMENT’S DISCUSSION AND ANALYSIS
                   FOR THE FISCAL YEAR ENDED JUNE 30, 2008 (Unaudited)

Long Term Debt

Table 6 reports the balance and changes of long-term liabilities during the fiscal year 2007-08.

                                      Table 6 - Summary of Long-Term Debt

                                                                                              Percentage
                                                   2008            2007          Change        Change

        General Obligation Bonds               $   86,950,000 $   87,550,000 $    (600,000)          -1%
        Compensated Absences                           56,952         54,579         2,373            4%
           Total Long-term Debt                $   87,006,952 $   87,604,579 $    (597,627)          -1%


Contacting the District’s Financial Management

This financial report is designed to provide our citizens, taxpayers, parents, investors, and creditors with a
general overview of the district’s finances and to show the district’s accountability for the money it
receives. If you have questions regarding this report or need additional financial information, contact
Cynthia Shieh, Director of Fiscal Services/CFO, Los Gatos Union School District, 17010 Roberts Road,
Los Gatos, CA 95032.




                                                      9
Basic Financial Statements
                                  LOS GATOS UNION SCHOOL DISTRICT
                                      STATEMENT OF NET ASSETS
                                            JUNE 30, 2008

                                                                                                         Governmental
                                                                                                          Activities
Assets
Current assets:
 Cash and investments                                                                                $      20,288,262
 Accounts receivable                                                                                           806,197
 Due from grantor government                                                                                    32,998
 Stores inventories                                                                                              3,078
 Prepaid expenses                                                                                               13,550
   Total current assets                                                                                     21,144,085
Noncurrent assets:
 Unamortized bond issuance costs and discounts                                                                 488,855
 Land                                                                                                          241,224
 Construction in progress                                                                                      310,287
 Building and improvements                                                                                 107,997,613
 Equipment                                                                                                     610,695
 Less accumulated depreciation                                                                             (21,890,441)
   Total noncurrent assets                                                                                  87,758,233
Total Assets                                                                                         $     108,902,318

Liabilities

Current liabilities:
 Accounts payable                                                                                    $         792,968
 Due to grantor government                                                                                      15,016
 Deferred revenue                                                                                              135,138
 Accrued interest                                                                                            1,403,088
   Total current liabilities                                                                                 2,346,210
Long-term liabilities:
 Due within one year:
   General obligation bonds payable                                                                            550,000
      Total due within one year                                                                                550,000
 Due after one year:
   General obligation bonds payable                                                                         86,400,000
   Compensated absences payable                                                                                 56,952
   Unamortized bond premium                                                                                    584,437
      Total due after one year                                                                              87,041,389
        Total long-term liabilities                                                                         87,591,389
Total Liabilities                                                                                    $      89,937,599

Net Assets

Invested in capital assets, net of related debt                                                      $       6,033,480
Restricted for:
  Capital projects                                                                                           5,634,746
  Debt service                                                                                               2,920,072
  Legally restricted for deferred maintenance                                                                   87,232
  Educational Program                                                                                        1,685,043
    Total restricted net assets                                                                             10,327,093
Unrestricted                                                                                                 2,604,146
Total Net Assets                                                                                     $      18,964,719

                     The notes to the financial statements are an integral part of this statement.

                                                          10
                                             LOS GATOS UNION SCHOOL DISTRICT
                                                 STATEMENT OF ACTIVITIES
                                           FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                                    Program Revenues                     Net (Expense)
                                                                                       Operating      Capital            Revenue and
                                                                        Charges for    Grants and    Grants and           Changes in
                                                       Expenses          Services     Contributions Contributions         Net Assets
Governmental activities:
  Instruction                                       $ 19,238,241        $        -       $ 2,919,825      $      -   $      (16,318,416)
  Instruction-related services:
    Supervision of instruction                             687,238               -           259,695             -             (427,543)
    Instruction library, media, and technology             325,684               -            32,944             -             (292,740)
    School site administration                           1,673,545               -            14,958             -           (1,658,587)
  Pupil services:
    Home-to-school transportation                           22,991              -             (2,462)            -              (25,453)
    Food services                                          531,235          469,654           54,575             -               (7,006)
    All other pupil services                             1,076,446              -            163,367             -             (913,079)
  General administration:
    Centralized data processing                          291,916                -                -               -             (291,916)
    All other general administration                   1,981,346                -             24,122             -           (1,957,224)
  Plant services                                       3,851,915                -            108,413             -           (3,743,502)
  Interest on long-term debt                           3,547,184                -                -               -           (3,547,184)
  Other outgo                                            110,252                -                  73            -             (110,179)
Total governmental activities                       $ 33,337,993        $   469,654      $ 3,575,510      $      -   $      (29,292,829)

General revenues and special items:
 Taxes and subventions:
   Taxes levied for general purposes                                                                                        16,414,595
    Taxes levied for debt service                                                                                             4,859,384
    Taxes levied for other specific purposes                                                                                  3,934,479
  Federal and state aid not restricted to specific purposes                                                                   1,417,518
  Interest and investment earnings                                                                                              905,061
  Interagency revenues                                                                                                           61,385
  Miscellaneous                                                                                                                 425,917

Total general revenues and special items                                                                                    28,018,339

Change in net assets                                                                                                         (1,274,490)

Net assets beginning                                                                                                        20,239,209

Net assets ending                                                                                                    $      18,964,719




                                 The notes to the financial statements are an integral part of this statement.

                                                                      11
                                              LOS GATOS UNION SCHOOL DISTRICT
                                                      BALANCE SHEET
                                                   GOVERNMENTAL FUNDS
                                                        JUNE 30, 2008

                                                                                   Special          Bond
                                                                                Reserve Fund     Interest and       Other        Total
                                                   General         Building      for Capital     Redemption      Governmental Governmental
                                                    Fund            Fund           Outlay           Fund            Funds        Funds
Assets
Cash and investments                           $ 4,000,040     $ 6,216,664      $ 5,406,686      $ 2,912,356     $ 1,752,516     $ 20,288,262
Accounts receivable                                592,810         136,194           44,986            7,716          24,491          806,197
Due from grantor government                         32,998             -                -                -               -             32,998
Due from other funds                                 6,891             -                -                -               -              6,891
Stores inventories                                     -               -                -                -             3,078            3,078
Prepaid expenditures                                13,550             -                -                -               -             13,550

Total Assets                                   $ 4,646,289     $ 6,352,858      $ 5,451,672      $ 2,920,072     $ 1,780,085     $ 21,150,976

Liabilities and Fund Balances
Liabilities:
  Accounts payable                             $    709,606    $      51,295    $         -      $         -     $     32,067    $     792,968
  Due to grantor government                          15,016              -                -                -              -             15,016
  Due to other funds                                    -                -                -                -            6,891            6,891
  Deferred revenue                                  135,138              -                -                -              -            135,138

Total Liabilities                                   859,760           51,295              -                -           38,958          950,013

Fund balances:
  Reserved for:
   Revolving fund                                      2,800               -              -                -              -               2,800
   Stores inventories                                    -                 -              -                -            3,078             3,078
   Prepaid expenditures                               13,550               -              -                -              -              13,550
   Debt service                                          -                 -              -          2,920,072            -           2,920,072
   Legally restricted balance                      1,685,043               -              -                -              -           1,685,043
  Unreserved:
   Designated for economic uncertainties           1,813,511             -                -                -               -          1,813,511
   Other designations                                  1,268             -                -                -               -              1,268
   Undesignated                                      270,357       6,301,563        5,451,672              -         1,738,049       13,761,641

Total Fund Balances                                3,786,529       6,301,563        5,451,672        2,920,072       1,741,127       20,200,963

Total Liabilities and Fund Balances            $ 4,646,289     $ 6,352,858      $ 5,451,672      $ 2,920,072     $ 1,780,085     $ 21,150,976




                                 The notes to the financial statements are an integral part of this statement.

                                                                      12
                               LOS GATOS UNION SCHOOL DISTRICT
                          RECONCILIATION OF THE GOVERNMENTAL FUNDS
                         BALANCE SHEET TO THE STATEMENT OF NET ASSETS
                                          JUNE 30, 2008

Total fund balances - governmental funds                                                                $ 20,200,963

   Amounts reported for governmental activities are not financial resources and therefore are
     not reported as assets in governmental funds. The cost of the assets is $109,159,819
     and the accumulated depreciation is $21,890,441                                                      87,269,378

   To recognize accrued interest at year end.                                                             (1,403,088)

   In governmental funds, debt issue costs and discounts 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. Unamortized debt issuance costs have been included in the statement of assets
      as follows:                                                                                            488,855

   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 year-end consists of:

         General obligation bonds                      $ 86,950,000
         Unamortized bond premium                           584,437
         Compensated absences                                56,952                                      (87,591,389)

Total net assets - governmental activities                                                              $ 18,964,719




                       The notes to the financial statements are an integral part of this statement.

                                                            13
                                                LOS GATOS UNION SCHOOL DISTRICT
                                       STATEMENT OF REVENUES, EXPENDITURES AND CHANGES
                                            IN FUND BALANCES - GOVERNMENTAL FUNDS
                                             FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                                              Special         Bond
                                                                                           Reserve Fund    Interest and       Other        Total
                                                          General            Building       for Capital    Redemption      Governmental Governmental
                                                           Fund               Fund            Outlay          Fund            Funds        Funds
Revenues:
  Revenue limit sources                               $ 16,309,647       $         -       $        -      $         -     $        -      $ 16,309,647
  Federal                                                  633,561                 -                -                -           50,551         684,112
  Other state                                            2,341,567                 -                -             25,951        103,524       2,471,042
  Other local                                            6,322,287             370,670          262,127        4,866,111        777,510      12,598,705

Total revenues                                            25,607,062           370,670          262,127        4,892,062        931,585     32,063,506

Expenditures:
  Instruction                                             17,006,797                -                -                 -             -      17,006,797
  Instruction-related services:
      Supervision of instruction                             687,238                -                -                 -             -         687,238
      Instruction library, media, and technology             325,684                -                -                 -             -         325,684
      School site administration                           1,673,545                -                -                 -             -       1,673,545
  Pupil services:
      Home-to-school transportation                           22,991                -                -                 -            -           22,991
      Food services                                              -                  -                -                 -        531,235        531,235
      All other pupil services                             1,076,446                -                -                 -            -        1,076,446
  General administration:
      Centralized data processing                            291,916                                                                           291,916
      All other general administration                     1,751,905               -                -                  -            -        1,751,905
  Plant services                                           2,622,374           440,057           31,230                -        312,201      3,405,862
  Facility acquisition and construction                       26,862         2,758,460              -                  -        253,891      3,039,213
  Transfer between agencies                                  110,252               -                -                  -            -          110,252
  Debt service:
      Principal                                                     -               -                -           600,000             -         600,000
      Interest, fees and issuance costs                             -               -                -         3,948,217             -       3,948,217

Total expenditures                                        25,596,010         3,198,517           31,230        4,548,217       1,097,327    34,471,301

Excess (deficiency) of revenues
  over (under) expenditures                                   11,052         (2,827,847)        230,897         343,845        (165,742)     (2,407,795)

Other financing sources (uses):
   Operating transfers in                                      6,840                -                -                 -        311,290        318,130
   Operating transfers out                                  (311,290)               -                -                 -         (6,840)      (318,130)

Total other financing sources (uses)                        (304,450)               -                -                 -        304,450             -

Changes in fund balances                                    (293,398)        (2,827,847)        230,897         343,845         138,708      (2,407,795)

Fund balances beginning                                    4,079,927         9,129,410         5,220,775       2,576,227       1,602,419    22,608,758

Fund balances ending                                  $    3,786,529     $ 6,301,563       $ 5,451,672     $ 2,920,072     $ 1,741,127     $ 20,200,963




                                       The notes to the financial statements are an integral part of this statement.

                                                                             14
                                   LOS GATOS UNION SCHOOL DISTRICT
                     RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF
                        REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES
                     OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ACTIVITIES
                               FOR THE FISCAL YEAR ENDED JUNE 30, 2008

Total net change in fund balances - governmental funds                                                       $   (2,407,795)

Capital outlays are reported in governmental funds as expenditures. However, in the
  statement of activities , the cost of those assets is allocated over their estimated useful
  lives as depreciation expense. This is the amount by which additions to capital outlay
  of $3,039,213 exceeds depreciation expense of $2,902,813 in the period.                                          136,400

The governmental funds report bond proceeds as an other financing source, while
  repayment of bond principal is reported as an expenditure. Also, governmental funds
  report the effect of issuance costs and premiums when debt is first issued, whereas
  these amounts are deferred and amortized in the statement of activities. Interest is
  recognized as an expenditure in the governmental funds when it is due. The net effect
  of these differences in the treatment of general obligation bonds and related items is
  as follows:

      Repayment of bond principal                                                     $         (600,000)          600,000

Issuance costs, discounts and premiums related to bond issuance is recorded as other financing
   sources and uses in the fund financial statements but is recorded as assets or liabilities
   and amortized over the life of the bond in the statement of net assets:

      Amortization of bond premium                                                    $           23,375
      Amortization of bond issuance costs and discounts                                          (19,554)            3,821

In the statement of activities, compensated absences are measured by the amount earned
   during the year. In governmental funds, however, expenditures for those items are
   measured by the amount of financial resources used (essentially the amounts paid).
   This year amounts earned exceeded the amount used by $4,125.                                                      (4,125)

Interest on long-term debt in the statement of activities differs from the amount reported
   in the governmental funds because interest is recognized as an expenditure in the funds
   when it is due and thus requires the use of current financial resources. In the statement
   of activities, however, interest expense is recognized as the interest accrues, regardless
   of when it is due.                                                                                              397,209

Changes in net assets of governmental activities                                                             $   (1,274,490)




                             The notes to the financial statements are an integral part of this statement.

                                                                  15
                                LOS GATOS UNION SCHOOL DISTRICT
                               STATEMENT OF FIDUCIARY NET ASSETS
                                        FIDUCIARY FUNDS
                                           JUNE 30, 2008

                                                                                                        Student
                                                                                                         Body
                                                                                                        Agency
                                                                                                         Fund
Assets:

   Cash on hand and in banks                                                                        $     20,546

Total Assets                                                                                        $     20,546

Liabilities and Net Assets:

   Accounts payable                                                                                 $     20,546

Total Liabilities and Net Assets                                                                    $     20,546




                    The notes to the financial statements are an integral part of this statement.

                                                         16
                         LOS GATOS UNION SCHOOL DISTRICT
                      NOTES TO THE BASIC FINANCIAL STATEMENTS
                       FOR THE FISCAL YEAR ENDED JUNE 30, 2008

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

A. Accounting Principles

   The Los Gatos Union School District (the “District”) accounts for its financial transactions in
   accordance with the policies and procedures of the Department of Education’s California School
   Accounting Manual. The accounting policies of the District conform to generally accepted
   accounting principles as prescribed by the Governmental Accounting Standards Board (“GASB”) and
   the American Institute of Certified Public Accountants (“AICPA”).

B. Reporting Entity

   The District was organized in 1865 under the laws of the State of California. The governing authority
   consists of five elected officials who, together, constitute the Board of Trustees. The District
   provides educational services to grades kindergarten through eighth and operates four elementary
   schools and one middle school. The District’s combined financial statements include the accounts of
   all its operations.

   Component Units:

   The District evaluated whether any other entity should be included in these financial statements. The
   basic, but not the only, criterion for including a governmental department, agency, institution,
   commission, public authority, or other governmental organization in a governmental unit’s reporting
   entity for financial reports is the ability of the governmental unit’s elected officials to exercise
   oversight responsibility over such agencies. Oversight responsibility implies that one governmental
   unit is dependent on another and that the dependent unit should be reported as part of the other.
   Oversight responsibility is derived from the governmental unit’s power and includes, but is not
   limited to:

     •   Financial interdependency
     •   Selection of governing authority
     •   Designation of management
     •   Ability to significantly influence operations
     •   Accountability for fiscal matters

   Accordingly, for the year ended June 30, 2008, the District does not have any component units and is
   not a component unit of any other reporting entity.

C. Basis of Presentation

   Government-wide Financial Statements:

   The government-wide financial statements (i.e., the statement of net assets and the statement of
   changes in net assets) report information on all of the nonfiduciary activities of the District.

   The government-wide statements are prepared using the economic resources measurement focus.
   This is the same approach used in the preparation of the proprietary fund and fiduciary fund financial
   statements but differs from the manner in which governmental fund financial statements are prepared.
   Governmental fund financial statements, therefore, include reconciliation with brief explanations to




                                                    17
                         LOS GATOS UNION SCHOOL DISTRICT
                      NOTES TO THE BASIC FINANCIAL STATEMENTS
                       FOR THE FISCAL YEAR ENDED JUNE 30, 2008

   better identify the relationship between the government wide statements and the statements for the
   governmental funds.

   The government-wide statement of activities presents a comparison between direct expenses and
   program revenues for each function or program of the District’s governmental activities. Direct
   expenses are those that are specifically associated with a service, program, or department and are
   therefore clearly identifiable to a particular function. The District does not allocate indirect expenses
   to functions in the statement of activities. Program revenues include charges paid by the recipients of
   goods or services offered by a program, as well as grants and contributions that are restricted to
   meeting the operational or capital requirements of a particular program. Revenues that are not
   classified as program revenues are presented as general revenues of the District, with certain
   exceptions. The comparison of direct expenses with program revenues identifies the extent to which
   each governmental function is self-financing or draws from the general revenues of the District.

   Fund Financial Statements:

   Fund financial statements report detailed information about the District. The focus of governmental
   fund financial statements is on major funds rather than reporting funds by type. Each major
   governmental fund is presented in a separate column, and all Nonmajor funds are aggregated into one
   column. Fiduciary funds are reported by fund type.

   The accounting and financial treatment applied to a fund is determined by its measurement focus. All
   governmental funds are accounted for using a flow of current financial resources measurement focus.
   With this measurement focus, only current assets and current liabilities are generally included on the
   balance sheet. The Statement of Revenues, Expenditures, and Changes in Fund Balances for these
   funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures
   and other financing uses) in net current assets.

   Fiduciary funds are reported using the economic resources measurement focus.

D. Basis of Accounting

   Basis of accounting refers to when revenues and expenditures are recognized in the accounts and
   reported in the financial statements. Government-wide financial statements are prepared using the
   accrual basis of accounting. Governmental funds use the modified accrual basis of accounting.
   Fiduciary funds use the accrual basis of accounting.

   Revenues – Exchange and Non-exchange Transactions:

   Revenue resulting from exchange transactions, in which each party gives and receives essentially
   equal value, is recorded under the accrual basis when the exchange takes place. On a modified
   accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become
   available. “Available” means the resources will be collected within the current fiscal year or are
   expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year.
   For the District, “available” means collectible within the current period or within 60 days after year-
   end.

   Non-exchange transactions, in which the District receives value without directly giving equal value in
   return, include property taxes, grants, and entitlements. Under the accrual basis, revenue from




                                                    18
                          LOS GATOS UNION SCHOOL DISTRICT
                       NOTES TO THE BASIC FINANCIAL STATEMENTS
                        FOR THE FISCAL YEAR ENDED JUNE 30, 2008

   property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants
   and entitlements is recognized in the fiscal year in which all eligibility requirements have been
   satisfied. Eligibility requirements include timing requirements, which specify the year when the
   resources are to be used or the fiscal year when use is first permitted; matching requirements, in
   which the District must provide local resources to be used for a specific purpose; and expenditure
   requirements, in which the resources are provided to the District on a reimbursement basis. Under the
   modified accrual basis, revenue from non-exchange transactions must also be available before it can
   be recognized.

   Deferred Revenue:

   Deferred revenue arises when assets are received before revenue recognition criteria have been
   satisfied. Grants and entitlements received before eligibility requirements are met are recorded as
   deferred revenue. On governmental fund financial statements, receivables associated with non-
   exchange transactions that will not be collected within the availability period have also been recorded
   as deferred revenue.

   Expenses/Expenditures:

   On the accrual basis of accounting, expenses are recognized at the time a liability is incurred. On the
   modified accrual basis of accounting, expenditures are generally recognized in the accounting period
   in which the related fund liability is incurred, as under the accrual basis of accounting. However,
   under the modified accrual basis of accounting, debt service expenditures, as well as expenditures
   related to compensated absences and claims and judgments, are recorded only when payment is due.
   Allocations of cost, such as depreciation and amortization, are not recognized in the governmental
   funds. When both restricted and unrestricted resources are available for use, it is the District’s policy
   to use restricted resources first, than unrestricted resources as they are needed.

E. 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 or retained earnings, revenues, and
   expenditures or expenses, 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 major, nonmajor, and
   fiduciary funds as follows:

   Major Governmental Funds:

   The General Fund is the general operating fund of the District. It is used to account for all financial
   resources except those required to be accounted for in another fund.

   The Building Fund is used to account for the acquisition of major governmental capital facilities and
   buildings from the sale of bond proceeds.

   The Special Reserve Fund for Capital Projects exists primarily to account for resources from rentals
   and proceeds from the sale of real property accumulated for capital outlay.




                                                    19
                         LOS GATOS UNION SCHOOL DISTRICT
                      NOTES TO THE BASIC FINANCIAL STATEMENTS
                       FOR THE FISCAL YEAR ENDED JUNE 30, 2008

   The Bond Interest and Redemption Fund is maintained by the County Treasurer and is used to
   account for both the accumulation of resources from ad valorem tax levies and the interest and
   redemption of principal of the funding of general obligation bonds issued by the District.

   Nonmajor Governmental Funds:

   Special Revenue Funds are used to account for the proceeds of specific revenue sources that are
   legally restricted to expenditures for specific purposes. The District maintains three nonmajor special
   revenue funds:

   •   The Cafeteria Fund is used to account for revenues received and expenditures made to operate
       the District’s food service programs.

   •   The Deferred Maintenance Fund is used for the purpose of major repair or replacement of
       District property.

   •   The Special Reserve Postemployment Fund is used to account for post employment benefits

   Capital Projects Funds are used to account for the acquisition and construction of all major
   governmental general fixed assets. The District maintains two nonmajor capital projects funds:

   •   The Capital Facilities Fund is used to account for resources received from developer impact fees
       assessed under provisions of the California Environmental Quality Act (“CEQA”).

   •   The County School Facilities Fund was established to receive apportionments from the State
       Schools Facilities Fund authorized by the State Allocation Board for new school facility
       construction, modernization projects and facility hardship grants.

   Fiduciary Funds:

   Agency Funds are used to account for assets of others for which the District acts as an agent. The
   District maintains an agency fund for the student body accounts. The student body funds are used to
   account for the raising and expending of money to promote the general welfare, morale, and
   educational experience of the student body. The amounts reported for student body funds represent
   the combined totals of all schools within the District.

F. Budgets and Budgetary Accounting

   Annual budgets are adopted on a basis consistent with generally accepted accounting principles for all
   governmental funds. By State law, the District’s governing board must adopt a final budget no later
   than July 1. A public hearing must be conducted to receive comments prior to adoption. The
   District’s governing board satisfied these requirements.

   These budgets are revised by the District’s governing board and District superintendent during the
   year to give consideration to unanticipated income and expenditures. The original and final revised
   budgets for the General Fund are presented as Required Supplementary Information.




                                                   20
                           LOS GATOS UNION SCHOOL DISTRICT
                        NOTES TO THE BASIC FINANCIAL STATEMENTS
                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

    Formal budgetary integration was employed as a management control device during the year for all
    budgeted funds. The District employs budget control by minor object and by individual appropriation
    accounts. Expenditures cannot legally exceed appropriations by major object account.

G. 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 by June 30 of each fiscal year.

H. Assets, Liabilities, and Equity

    1. Cash and Investments

        Under GASB 31, the District must adjust the carrying value of its investments to reflect their fair
        market value at each fiscal year end, and it must include the effects of these adjustments in
        income for that fiscal year. As of June 30, 2008, the District has determined that the amounts of
        any such adjustments would not be material.

    2. Restricted Assets

        Assets become restricted when constraints are imposed by creditors, contributors, and grantors,
        laws of other governments or enabling legislation that change the availability of the asset.

    3. Stores Inventories and Prepaid Expenditures

        Inventories are recorded using the purchases method, in that inventory acquisitions are initially
        recorded as expenditures. Reported inventories are equally offset by a fund balance reserve,
        which indicates that these amounts are not “available for appropriation and expenditure” even
        though they are a component of net current assets.

        The District’s central warehouse inventory is valued at a moving average cost and consists of
        expendable supplies held for consumption. The District has the option of reporting expenditure
        in governmental funds for prepaid items either when purchased or during the benefiting period.
        The District has chosen to report the expenditure when purchased.

    4. Capital Assets

        Capital assets are those purchased or acquired with an original cost of $5,000 or more and are
        reported 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 outlays that
        significantly extend the useful life of an asset are capitalized. The costs of normal maintenance
        and repairs that do not add to the value of the assets or materially extend the asset’s lives are not
        capitalized, but are expensed as incurred.

        Depreciation on all capital assets is computed using a straight-line basis over the following
        estimated useful lives:




                                                     21
                     LOS GATOS UNION SCHOOL DISTRICT
                  NOTES TO THE BASIC FINANCIAL STATEMENTS
                   FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                              Estimated Useful
             Asset Class                         Examples                       Life in Years
    Land                                                                             NA
    Land improvements             Paving, flagpoles, retaining walls              10 to 20
    Building and structures                                                       20 to 50
    Equipment                     Copiers, mixers, steamers, ovens,                2 to 15
                                  school buses, forklifts, lawn tractors

5. Compensated Absences

   All vacation pay plus related payroll tax is accrued when incurred in the government-wide
   financial statements. A liability for these amounts is reported in the governmental funds only if
   they have matured, for example, as a result of employee resignations and retirements.

   Accumulated sick leave benefits are not recognized as liabilities of the District. The District’s
   policy is to record sick leave as an operating expense 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. Credit for unused sick
   leave is applicable to all classified school members who retire after January 1, 1999. At
   retirement, each member will receive .004 year of service credit for each day of unused sick
   leave.

6. Long-Term Obligations

   In the government-wide financial statements, long-term debt and other long-term obligations are
   reported as liabilities in the Statement of Net Assets. Bond premiums and discounts as well as
   issuance costs are deferred and amortized over the life of the bonds using the effective-interest
   method. Bonds payable are reported net of applicable bond premium or discount. Bond issuance
   costs are reported as prepaid expenditures and amortized over the term of the related debt.

   In the fund financial statements, governmental funds recognize bond premiums and discounts as
   well as bond issuance costs, during the current period. The face amount of the debt issued,
   premiums, or discounts are reported as other financing sources/uses.

7. Fund Balance Reserves and Designations

   Reservations of the ending fund balance indicate the portions of fund balance not appropriable for
   expenditure or amounts legally segregated for a specific future use. The reserves for revolving
   fund, stores inventory, prepaid expenditures and legally restricted balances reflect the portions of
   fund balance represented by each respective account. These amounts are not available for
   appropriation and expenditure at the balance sheet date.

   Designations of the ending fund balance indicate tentative plans for financial resource utilization
   in a future period.

8. Net Assets

   Net asset represent the difference between assets and liabilities. Net assets invested in capital
   assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by



                                               22
                            LOS GATOS UNION SCHOOL DISTRICT
                         NOTES TO THE BASIC FINANCIAL STATEMENTS
                          FOR THE FISCAL YEAR ENDED JUNE 30, 2008

        the outstanding balances of any borrowings used for the acquisition, construction or improvement
        of those assets. Net assets are reported as restricted when there are limitations imposed on their
        use either through the enabling legislation adopted by the District or through external restrictions
        imposed by creditors, grantors, laws or regulations of other governments. The District applies
        restricted resources when an expense is incurred for purposes for which both restricted and
        unrestricted net assets are available.

     9. Property Taxes

        The county is responsible for assessing, collecting, and apportioning property taxes. Taxes are
        levied for each fiscal year on taxable real and personal property in the county. The levy is based
        on the assessed values as of the preceding March 1, which is also the lien date. Property taxes on
        the secured roll are due on November 1 and February 1, and taxes become delinquent after
        December 10 and April 10, respectively. Property taxes on the unsecured roll are due on the lien
        date (March 1), and become delinquent if unpaid by August 31.

        Secured property taxes are recorded as revenue when apportioned, in the fiscal year of the levy.
        The county apportions secured property tax revenue in accordance with the alternate method of
        distribution prescribed by Section 4705 of the California Revenue and Taxation Code. This
        alternate method provides for crediting each applicable fund with its total secured taxes upon
        completion of the secured tax roll - approximately October 1 of each year.

     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 District has
        joined together with other school districts in the County to form the Santa Clara County Schools
        Insurance Group (SCCSIG) public entity risk pools currently operating as common risk
        management and insurance programs. The District pays an annual premium for its property and
        casualty, workers’ compensation, unemployment and liability insurance coverage. The Joint
        Powers Agreements provide that SCCSIG will be self-sustaining through member premiums and
        will reinsure through commercial companies for claims in excess of self-insured levels.

I.   New Accounting Pronouncements

     1. Statement No. 50 Pension Disclosures—an amendment of GASB Statements No. 25 and No. 27

        This Statement more closely aligns the financial reporting requirements for pensions with those
        for other postemployment benefits (OPEB) and, in doing so, enhances information disclosed in
        notes to financial statements or presented as required supplementary information (RSI) by
        pension plans and by employers that provide pension benefits. The reporting changes required by
        this Statement amend applicable note disclosure and RSI requirements of Statements No. 25,
        Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined
        Contribution Plans, and No. 27, Accounting for Pensions by State and Local Governmental
        Employers, to conform with requirements of Statements No. 43, Financial Reporting for
        Postemployment Benefit Plans Other Than Pension Plans, and No. 45, Accounting and Financial
        Reporting by Employers for Postemployment Benefits Other Than Pensions.




                                                      23
                     LOS GATOS UNION SCHOOL DISTRICT
                  NOTES TO THE BASIC FINANCIAL STATEMENTS
                   FOR THE FISCAL YEAR ENDED JUNE 30, 2008

   In the initial year of implementation, defined benefit pension plans and sole and agent employers
   that use the aggregate actuarial cost method to determine the ARC are required to present
   elements of information in the schedule of funding progress using the entry age actuarial cost
   method as of the most recent actuarial valuation date. In subsequent years, plans and employers
   should add to that schedule information as of subsequent actuarial valuation dates until the
   requirements of Statements 25 and 27, as amended, with regard to the minimum number of years
   or actuarial valuations to be included have been met. This pronouncement has no financial
   impact on the School District.

2. Upcoming Accounting and Reporting Changes

   a. No. 45, Accounting and Reporting by Employers for Postemployment Benefits other than
      Pensions.

       The new pronouncement provides guidance for school districts in recognizing the cost of
       retiree health care. The new rules will cause district-wide financial statements to recognize
       the cost of providing retiree healthcare coverage over the working life of the employee, rather
       than at the time the health care premiums are paid. The new pronouncement is effective for
       the year ending June 30, 2009.

   b. No. 51, Accounting and Financial Reporting for Intangible Assets.

       The new standard characterizes an intangible asset as an asset that lacks physical substance, is
       nonfinancial in nature and has an initial useful life extending beyond a single reporting
       period. In general, the new rules will cause district-wide financial statements to include
       intangible assets as capital assets. This statement is effective for the year ending June 30,
       2010.




                                               24
                           LOS GATOS UNION SCHOOL DISTRICT
                        NOTES TO THE BASIC FINANCIAL STATEMENTS
                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

NOTE 2 - CASH AND INVESTMENTS

Summary of Deposits
A summary of cash and investments as of June 30, 2008 is as follows:

                                                           Carrying                Fair           Investment
     Deposits:                                             Amount                 Value             Rating
           Cash in county treasury                    $      20,039,494      $    20,095,988         AA
           Cash in revolving fund                                 2,800                 2,800        N/A
           Cash on-hand and in banks                              8,000                 8,000        N/A
               Subtotal                                      20,059,489           20,106,788
     Investments:
           Money market funds                                    228,773              228,773      Not rated
               Total cash and investments             $       20,288,262     $     20,335,561

Cash in banks and revolving funds
Cash balances in banks and revolving funds are insured up to $100,000 by the Federal Deposit Insurance
Corporation ("FDIC"). These accounts are held within various financial institutions. As of June 30, 2008,
the bank balance of the District’s accounts with banks was $10,800, which was fully insured by FDIC.

Cash in County Treasury
The District is considered to be an involuntary participant in an external investment pool as the District is
required to deposit all receipts and collections of monies with their County Treasurer (Education Code
Section 41001). The fair value of the District’s investment in the pool is reported in the accounting
financial statement at amounts based upon the District’s pro-rata share of the fair value provided by then
County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance
available for withdrawal is based on the accounting records maintained by the County Treasurer, which is
recorded on the amortized cost basis.

Policies and Practices
The District is authorized under California Government Code to make direct investments in local agency
bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury
notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper;
certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or
reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by
diversified management companies, certificates of participation, obligations with first priority security;
and collateralized mortgage obligations.

Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are described
below:

    Interest Rate Risk
    Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of
    an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its
    fair value to changes in market interest rates. The District manages its exposure to interest rate risk by
    investing in the County Treasury. The District maintains an investment with the Santa Clara County
    Investment Pool with a fair value of approximately $20,095,988 and an amortized book value of
    $20,039,494. The average weighted maturity for this pool is 413 days.




                                                      25
                           LOS GATOS UNION SCHOOL DISTRICT
                        NOTES TO THE BASIC FINANCIAL STATEMENTS
                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

    Credit Risk
    Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the
    investment. This is measured by the assignment of a rating by a nationally recognized statistical rating
    organization. The investment with the Santa Clara County Investment Pool is rated at least A by
    Moody’s Investor Service.

    Custodial Credit Risk – Deposits
    Custodial credit risk is the risk that in the event of a bank failure, the District’s deposits may not be
    returned to it. The District does not have a policy for custodial credit risk for deposits. However, the
    California Government code requires that a financial institution secure deposits made by State or local
    governmental units by pledging securities in an undivided collateral pool held by a depository
    regulated under State law (unless so waived by the governmental unit). The market value of the
    pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited
    by the public agencies. California law also allows financial institutions to secure public deposits by
    pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits
    and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105
    percent of the secured deposits. As of June 30, 2008, none balance of the District’s bank balance was
    exposed to any custodial credit risk.

    Concentration of Credit Risk
    The investment policy of the District contains no limitations on the amount that can be invested in
    any one issuer beyond the amount stipulated by the California Government code. District investments
    that are greater than 5 percent of total investments are in either an external investment pool or mutual
    funds and are therefore exempt.

NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE

Accounts receivable consisted of the following as of June 30, 2008:

                                                                 Special
                                                                Reserve for          Bond
                                                                 Capital          Interest and      Other
                               General      Building              Outlay          Redemption      Government
                                Fund         Fund                 Fund               Fund           Funds        Total
Federal Government:
 Categorical aid programs     $ 160,470     $          -    $                 -   $           -   $    9,226   $ 169,696

State Government:
  Categorical aid programs        97,723               -                      -               -           88      97,811
  Lottery                        122,450               -                      -               -            -     122,450

Local sources                    164,877        81,546                   78                                -     246,501
Interest                          47,290        54,648               44,908               7,716       15,177     169,739

   Total                     $ 592,810      $ 136,194       $        44,986           $   7,716   $   24,491    $ 806,197




                                                           26
                            LOS GATOS UNION SCHOOL DISTRICT
                         NOTES TO THE BASIC FINANCIAL STATEMENTS
                          FOR THE FISCAL YEAR ENDED JUNE 30, 2008

NOTE 4 - INTERFUND TRANSACTIONS

Interfund transactions are reported as loans, services provided, reimbursements, or transfers. Loans are
reported as interfund receivables and payables, as appropriate, and are subject to elimination upon
consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues
and expenditures/expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate
benefiting fund, and reduces its related cost as a reimbursement. All other interfund transactions are
treated as transfers. Transfers among governmental funds are netted as part of the reconciliation to the
government-wide financial statements.

A. Interfund Receivables/Payables (Due From/Due To)

   Interfund receivables and payables consisted of $6,891 due to general fund from capital facilities fund
   as of June 30, 2008.

B. 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 year ended June 30, 2008 were as
   follows:

       •   $200,000 was transferred from the general fund to the special reserve post employment fund
           to fund post employment benefits long-term obligation per GASB 45.
       •   $111,290 was transferred from the general fund to the deferred maintenance fund to meet
           state match requirements.
       •   $6,840 was transferred from the capital facilities fund to the general fund to meet 3%
           developer fee contribution requirements.




                                                   27
                          LOS GATOS UNION SCHOOL DISTRICT
                       NOTES TO THE BASIC FINANCIAL STATEMENTS
                        FOR THE FISCAL YEAR ENDED JUNE 30, 2008

NOTE 5 - CAPITAL ASSETS AND DEPRECIATION

Capital assets consisted of the following as of June 30, 2008:

                                                 Balance                                         Balance
                                               July 1, 2007          Additions      Deletions June 30, 2008
Land - not depreciable                         $ 241,224         $          -     $        -   $ 241,224
Construction in progress - not depreciable      28,479,935            3,018,562     31,188,210     310,287
Buildings and improvements                      76,809,403           31,188,210            -   107,997,613
Equipment                                          590,044               20,651            -       610,695
Total capital assets                           106,120,606           34,227,423     31,188,210 109,159,819

Less accumulated depreciation for:
        Buildings and improvements              18,680,223            2,837,791            -       21,518,014
        Equipment                                  307,405               65,022            -          372,427
        Total accumulated depreciation          18,987,628            2,902,813            -       21,890,441

Total capital assets - net depreciation        $ 87,132,978      $ 31,324,610     $ 31,188,210    $ 87,269,378



Depreciation expense was charged to governmental activities as follows:

                  Governmental activities:
                     Instruction                                                  $   2,227,319
                     All other general administration                                   229,441
                     Plant services                                                     446,053
                           Total depreciation expense                             $   2,902,813




                                                    28
                          LOS GATOS UNION SCHOOL DISTRICT
                       NOTES TO THE BASIC FINANCIAL STATEMENTS
                        FOR THE FISCAL YEAR ENDED JUNE 30, 2008

NOTE 6 - GENERAL OBLIGATION BONDS

Through elections, the District received authorization to issue general obligation bonds that requires the
county to levy annual ad valorem taxes for the payment of interest and principal on the bonds. Bond
proceeds are used to build additional classrooms and to perform repairs and renovations.

The outstanding General Obligation Bond debt consisted of the following as of June 30, 2008:

        Issue     Maturity      Interest            Original        Outstanding                  Outstanding
        Date       Date           Rate               Issue         June 30, 2007   Redeemed     June 30, 2008

     11/1/2001    8/1/2026   3.125-5.75% $           35,000,000    $ 32,650,000    $ 400,000   $    32,250,000
     12/18/2003   8/1/2030   3.00-4.25%              25,000,000      24,200,000      100,000        24,100,000
     11/29/2005   8/1/2032   3.00-5.125%             18,000,000      17,700,000      100,000        17,600,000
     5/10/2007    8/1/2032       4%                  13,000,000      13,000,000          -          13,000,000

       Total general obligation bonds                              $ 87,550,000    $ 600,000   $    86,950,000

The annual debt service requirements of the General Obligation Bonds consisted of the following as of
June 30, 2008:

      Year Ending June 30,              Principal                  Interest                    Total

     2009                      $              550,000          $        4,085,536    $              4,635,536
     2010                                     955,000                   4,058,115                   5,013,115
     2011                                   1,195,000                   4,017,472                   5,212,472
     2012                                   1,460,000                   3,955,497                   5,415,497
     2013-2017                             11,875,000                  18,413,911                  30,288,911
     2018-2022                             16,785,000                  15,164,525                  31,949,525
     2023-2027                             21,170,000                  10,719,715                  31,889,715
     2028-2032                             26,795,000                   5,233,759                  32,028,759
     2033-2037                              6,165,000                     189,563                   6,354,563

         Total                 $           86,950,000          $       65,838,093    $         152,788,093




                                                         29
                           LOS GATOS UNION SCHOOL DISTRICT
                        NOTES TO THE BASIC FINANCIAL STATEMENTS
                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

NOTE 7 - LONG-TERM DEBT - SCHEDULE OF CHANGES

The following is a schedule of changes in long-term debt for the year ended June 30, 2008:

                                    Balance                                        Balance    Due Within
                                  July 1, 2006       Additions     Deletions    June 30, 2007 One Year

    General obligation bonds    $ 87,550,000     $            -    $ 600,000    $ 86,950,000 $ 550,000
    Unamortized premium              607,815                          23,378      584,437.00    23,378
    Compensated absences              52,827                 4,125       -            56,952       -

       Total                    $ 88,210,642     $           4,125 $ 623,378    $ 87,591,389 $ 573,378

Payments for the general obligation bonds are made by the bond interest and redemption fund from local
revenues. The accrued vacation is paid by the individual fund(s) for which each employee worked.

NOTE 8 - NET ASSETS AND FUND BALANCES

GASB Statement 34 adds the concept of Net Assets, which is measured on the full accrual basis, to the
concept of Fund Balance, which is measured on the modified accrual basis.

Net Assets - Net Assets is the excess of all the School District’s assets over all its liabilities, regardless of
each fund. Net Assets are divided into three captions under GASB Statement 34. These captions apply
only to Net Assets, which is determined only at the Government-wide level, and are described below:

    Invested in Capital Assets, net of related debt describes the portion of Net Assets which is represented
    by the current net book value of the School District’s capital assets, less the outstanding balance of any
    debt issued to finance these assets.

    Restricted describes the portion of Net Assets which is restricted as to use by the terms and conditions
    of agreements with outside parties, governmental regulations, laws, or other restrictions which the
    School District cannot unilaterally alter. These principally include debt service requirements and
    redevelopment funds restricted to low and moderate income purposes.

        Capital Projects restrictions will be used for the acquisition and construction of capital facilities.

        Debt Service restrictions reflect the cash balances in the debt service funds that are restricted for
        debt service payments by debt covenants.

        Deferred Maintenance restrictions reflect state apportionments and the School District’s
        contributions for deferred maintenance purposes.

        Educational Program restrictions reflect the amounts to be expended for federal and state funded
        educational programs.

    Unrestricted describes the portion of Net Assets which is not restricted to use.




                                                        30
                         LOS GATOS UNION SCHOOL DISTRICT
                      NOTES TO THE BASIC FINANCIAL STATEMENTS
                       FOR THE FISCAL YEAR ENDED JUNE 30, 2008

Reservations of Fund Balances - Fund balance consists of reserved and unreserved amounts. Reserved
fund balance represents that portion of fund balance or retained earnings that has been appropriated for
expenditure or is legally segregated for a specific future use. As of June 30, 2008, portions of fund
balance had been reserved because of the following:

   Debt Service reserves reflect the cash balances in the debt service funds that are restricted for debt
   service payments.

    Legally Restricted Balances reflect reserved amounts to be expended for federal and state funded
    educational programs.

NOTE 9 - JOINT VENTURES (JOINT POWERS AGREEMENTS)

The District participates in a joint venture under a joint powers agreement (“JPA”) with the Santa Clara
County School District Insurance Group (“SCCSIG”). The relationship between the District and the JPA
is such that the JPA is not a component unit of the District for financial reporting purposes.

The SCCSIG arranges and provides workers’ compensation, property and liability insurance for its
members. The JPA is governed by a board consisting of a representative from each member district. The
board controls the operations of the JPA, including selection of management and approval of operating
budgets, independent of any influence by the member districts beyond their representation on the board.
Each member district pays a premium commensurate with the level of coverage requested and shares
surpluses and deficits proportionate to its participation in the JPA.

The following is a summary of SCCSIG’s audited financial information as of and for the fiscal year ended
June 30, 2007:

                                Total Assets                    $    15,566,038
                                Total Liabilities                     8,471,711
                                Total Equity                          7,094,327
                                Total Operating Revenues             35,824,697
                                Total Operating Expenses             33,066,541

NOTE 10 - COMMITMENTS AND CONTINGENCIES

A. State and Federal Allowances, Awards, and Grants

   The District has received state and federal funds for specific purposes that are subject to review and
   audit by the grantor agencies. If the review or audit discloses exceptions, the District may incur a
   liability to grantor agencies.

NOTE 11 - EMPLOYEE RETIREMENT SYSTEMS

Qualified employees are covered under multiple-employer defined benefit pension plans maintained by
agencies of the State of California. Classified employees are members of the Public Employees’
Retirement System (“PERS”) and certificated employees are members of the State Teachers’ Retirement
System (“STRS”).




                                                  31
                          LOS GATOS UNION SCHOOL DISTRICT
                       NOTES TO THE BASIC FINANCIAL STATEMENTS
                        FOR THE FISCAL YEAR ENDED JUNE 30, 2008

PERS

Plan Description

The District contributes to the School Employer Pool, a cost-sharing multiple-employer public employee
retirement system defined benefit pension plan administered by the California Public Employees’
Retirement System (“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 Laws.
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.

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 District’s required employer
contribution rate for fiscal year 2007-08 was 9.306% 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 ended June 30, 2008, 2007, and 2006 were $304,960, $282,844, and $254,574 respectively, and
equal 100% of the required contributions for each year.

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 STRS,
7667 Folsom Boulevard, Sacramento, California 95826.

Funding Policy

Active plan members are required to contribute 8% 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 STRS Teachers’ Retirement Board. The required employer contribution
rate for fiscal year 2007-08 was 8.26% 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, 2007, and 2006, were $1,265,951, $1,181,063, and $1,086,981 respectively, and equal
100% of the required contributions for each year.

NOTE 12 - POSTEMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS

The District provides postretirement health care benefits to all employees who retire from the District on
or after attaining age 55, until age 65, with at least 10 years of service. On June 30, 2008, 32 employees




                                                   32
                         LOS GATOS UNION SCHOOL DISTRICT
                      NOTES TO THE BASIC FINANCIAL STATEMENTS
                       FOR THE FISCAL YEAR ENDED JUNE 30, 2008

met these eligibility requirements. The District contributes 100% of the amount of the premiums on a
pay-as-you-go basis (as premiums are incurred). During the year ended June 30, 2008, expenditures of
$398,235 were recognized for post retirement benefits.




                                                33
                                           LOS GATOS UNION SCHOOL DISTRICT
                                   SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES
                                      IN FUND BALANCE - BUDGET AND ACTUAL (GAAP)
                                                     GENERAL FUND
                                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                                                                Variance with
                                                                 Budgeted Amounts                               Final Budget
                                                                                                 Actual          Positive -
                                                              Original           Final        (GAAP Basis)       (Negative)
Revenues:
  Revenue limit sources                                   $ 16,341,018      $ 16,240,307      $   16,309,647    $     69,340
  Federal                                                      695,433           680,462             633,561         (46,901)
  Other state                                                2,493,503         2,416,136           2,341,567         (74,569)
  Other local                                                5,570,189         6,217,815           6,322,287         104,472

Total revenues                                                25,100,143        25,554,720        25,607,062          52,342

Expenditures:
  Certificated salaries                                       13,241,821        13,449,934        13,805,062        (355,128)
  Classified salaries                                          3,306,095         3,384,005         3,485,911        (101,906)
  Employee benefits                                            4,455,168         4,496,050         4,507,601         (11,551)
  Books and supplies                                           1,470,863         1,742,224         1,144,896         597,328
  Services and other operating expenditures                    2,163,533         2,675,953         2,515,423         160,530
  Capital outlay                                                     -              66,948            26,865          40,083
  Other outgo                                                        -              78,610           110,252         (31,642)

Total expenditures                                            24,637,480        25,893,724        25,596,010         297,714

Excess (deficiency) of revenues
  over (under) expenditures                                      462,663          (339,004)          11,052          350,056

Other financing sources (uses):
   Operating transfers in                                          8,550             8,550             6,840          (1,710)
   Operating transfers out                                      (200,000)         (311,290)         (311,290)            -

Total other financing sources (uses)                            (191,450)         (302,740)         (304,450)         (1,710)

Changes in fund balance                                   $      271,213    $     (641,744)         (293,398)   $    348,346

Fund balance beginning                                                                             4,079,927

Fund balance ending                                                                           $    3,786,529




                                                         34
SUPPLEMENTARY
 INFORMATION
                                        LOS GATOS UNION SCHOOL DISTRICT
                                           COMBINING BALANCE SHEET
                                               NONMAJOR FUNDS
                                                  JUNE 30, 2008

                                                                                                          Capital
                                               Special Revenue Funds                                   Projects Fund
                                                                   Special             County
                                                    Deferred     Reserve Post-         Schools              Capital
                                      Cafeteria Maintenance      Employment            Facilities          Facilities
                                       Fund           Fund           Fund                Fund                Fund           Totals
Assets
Cash in county treasury               $ 59,375    $   172,950      $   1,310,051              -        $      210,140   $ 1,752,516
Accounts receivable                      9,736          1,514             11,368              193               1,680        24,491
Stores inventories                       3,078            -                  -                -                   -           3,078

Total Assets                          $ 72,189    $   174,464      $   1,321,419   $          193      $      211,820   $ 1,780,085

Liabilities and Fund Balances

Liabilities:
   Accounts payable                   $ 10,161    $       -        $         -     $          -        $       21,906   $     32,067
   Due to other funds                      -              -                  -                    51            6,840          6,891

Total Liabilities                       10,161            -                  -                    51           28,746         38,958

Fund balances:
  Reserved for stores inventories        3,078            -                  -                -                   -             3,078
  Undesignated fund balance             58,950        174,464          1,321,419              142             183,074       1,738,049

Total Fund Balances                     62,028        174,464          1,321,419              142             183,074       1,741,127

Total Liabilities and Fund Balances   $ 72,189    $   174,464      $   1,321,419   $          193      $      211,820   $ 1,780,085




                                                              35
STATE AND FEDERAL
AWARD COMPLIANCE
     SECTION
                             LOS GATOS UNION SCHOOL DISTRICT
                                     ORGANIZATION
                                       JUNE 30, 2008

The Los Gatos Union School District was established in 1865 in Santa Clara County. There were no
changes in boundaries during the current year. The District is comprised of four elementary schools and
one middle school.


                                          Governing Board
                                                                                    Term
              Name                               Office                            Expires
          Kathleen Bays                         President                           2010
        Karen Sanders Noe                         Clerk                             2008
           Chris Miller                         Member                              2008
        Tina Orsi-Hartigan                      Member                              2010
         Phil E. Couchee                        Member                              2010


                                           Administration

                                     Dr. Suzanne Boxer-Gassman
                                           Superintendent

                                            Cynthia Shieh
                                   Director of Fiscal Services/CFO




                                                  37
                                      LOS GATOS UNION SCHOOL DISTRICT
                             COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND
                                          CHANGES IN FUND BALANCES
                                               NONMAJOR FUNDS
                                    FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                                                         Capital
                                                          Special Revenue Funds                      Projects Fund
                                                                              Special         County
                                                              Deferred      Reserve Post-     Schools            Capital
                                              Cafeteria      Maintenance    Employment        Facilities       Facilities
                                               Fund             Fund            Fund            Fund              Fund            Totals
Revenues:
  Federal                                 $     50,551       $       -      $          -      $        -      $       -      $     50,551
  Other state                                    2,150           101,374               -               -              -           103,524
  Other local                                  473,642             3,802            55,144           6,561        238,361         777,510

Total revenues                                 526,343           105,176            55,144           6,561        238,361         931,585

Expenditures:
  Pupil services:
     Food services                             531,235               -                 -              -               -           531,235
  Plant services                                   -               2,306               -          279,301          30,594         312,201
  Facility acquisition and construction            -             168,173               -           16,400          69,318         253,891

                                               531,235           170,479               -          295,701          99,912        1,097,327

Excess (deficiency) of revenues
  over (under) expenditures                      (4,892)         (65,303)           55,144        (289,140)       138,449        (165,742)

Other financing sources (uses):
   Operating transfers in                           -            111,290           200,000             -              -           311,290
   Operating transfers out                          -                -                 -               -           (6,840)         (6,840)

Total other financing sources (uses)                -            111,290           200,000             -           (6,840)        304,450

Changes in fund balances                         (4,892)          45,987           255,144        (289,140)       131,609         138,708

Fund balances beginning                          66,920          128,477          1,066,275       289,282          51,465        1,602,419

Fund balances ending                      $      62,028      $   174,464    $     1,321,419   $       142     $   183,074    $ 1,741,127




                                                                     36
                            LOS GATOS UNION SCHOOL DISTRICT
                             SCHEDULE OF EXCESS SICK LEAVE
                                      JUNE 30, 2008

Education Audit Appeals Panel Section 19833.5 (a)(3) or (a)(3)(b) Disclosure

Los Gatos Union School District does not provide more than 12 sick leave days in a school year to any
CalSTRS member.




                                                   38
                                LOS GATOS UNION SCHOOL DISTRICT
                             SCHEDULE OF AVERAGE DAILY ATTENDANCE
                              FOR THE FISCAL YEAR ENDED JUNE 30, 2008



                                                                  Second
                                                                  Period      Annual
                                                                  Report      Report
Elementary:
  Kindergarten                                                          288       290
  Grades one through three                                              853       857
  Grades four through six                                               833       834
  Grades seven and eight                                                598       599
  Special education                                                      58        57

  Elementary Totals                                                 2,630       2,637

County Supplement - Special Education                                   21        21

  ADA Totals                                                        2,651       2,658

                                                                 Hours of
  Summer School                                                 Attendance

  Elementary                                                        4,143




                                                39
                                   LOS GATOS UNION SCHOOL DISTRICT
                                   SCHEDULE OF INSTRUCTIONAL TIME
                                 FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                                 Number        Number
                                             1986-87                             of Days       of Days
                           1982-83           Minutes            2007-08         Traditional   Multitrack
Grade Level             Actual Minutes     Requirements      Actual Minutes      Calendar     Calendar          Status

Kindergarten                    29,370            36,000             36,000           180            -      In compliance

Grades 1                        44,723            50,400             51,575           180            -      In compliance

Grades 2                        44,723            50,400             51,575           180            -      In compliance

Grades 3                        44,723            50,400             51,575           180            -      In compliance

Grades 4                        52,510            54,000             54,080           180            -      In compliance

Grades 5                        52,510            54,000             54,080           180            -      In compliance

Grades 6                        52,510            54,000             54,852           180            -      In compliance

Grades 7                        52,510            54,000             55,284           180            -      In compliance

Grades 8                        52,510            54,000             55,284           180            -      In compliance


Districts must maintain their instructional minutes at either the 1982-83 actual minutes or the 1986-87 requirement,
whichever is greater, as required by Educational Code Section 46201.




                                                            40
                                           LOS GATOS UNION SCHOOL DISTRICT
                                       SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS
                                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                           (Budget 1)
                                                                             2009             2008              2007                 2006

General Fund

Revenues and other financial sources                                   $ 26,090,518      $ 25,613,902      $ 25,302,323         $ 23,096,103

Expenditures                                                               25,923,416        25,596,010        24,025,118           22,024,115
Other uses and transfers (out)                                                311,290           311,290           200,000              654,000

Total outgo                                                                26,234,706        25,907,300        24,225,118           22,678,115

Change in fund balance                                                 $      (144,188) $      (293,398) $      1,077,205       $     417,988

Ending fund balance                                                    $     3,642,341   $    3,786,529    $    4,079,927       $     417,988

Available reserves 2                                                   $     3,642,341   $    2,083,868    $    2,667,140       $    2,307,063

Designated for economic uncertainty                                    $           -     $    1,813,511    $           -        $    1,587,275

Undesignated fund balance 3                                            $     3,642,341   $      270,357    $    2,667,140       $     719,788

Available reserves as a percentage
 of total outgo                                                                 13.88%            8.04%            11.01%              10.17%

Total long-term debt                                                   $ 87,041,389      $ 87,591,389      $ 75,304,579         $ 57,663,827

Average daily attendance at P-2                                                  2,692            2,651             2,522                2,529

Average daily attendance has increased by 129 over the past fiscal year. The district anticipates ADA will increase by 41.

The fund balance in the general fund has increased by $3,368,541 over the past three years. For a district this size, the state
recommends available reserves of at least 3% of total general fund expenditures, transfers out, other uses (total outgo).

The district experienced operating income in two of the past three years. Total long-term debt has increased by $29,940,252
during the past three years.

1
    Budget numbers are based on the first adopted budget of the fiscal year 2008/09.

2
    Available reserves consist of all undesignated fund balances and all funds designated for economic uncertainty within the
     general fund, special reserve fund (other than capital outlay projects), or within any Article XIII-B trust funds.

3
    Undesignated fund balance consists of unrestricted fund balance net reservations for prepaid expenditures and revolving
     cash balances, and net legally restricted fund balances. The undesignated fund balance and available reserves may differ
     from budgeted amounts due to internal restrictions considered by the District but not required for reporting purposes;
     such as parcel taxes.




                                                                      41
                               LOS GATOS UNION SCHOOL DISTRICT
                          SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
                             FOR THE FISCAL YEAR ENDED JUNE 30, 2008


                                                                       FEDERAL
                                                                       CATALOG     PROGRAM
PROGRAM NAME                                                           NUMBER    EXPENDITURE

U.S. DEPARTMENT OF EDUCATION
   IDEA Basic Local Assistance                                          84.027   $    377,665
   IDEA Preschool Local Entitlement                                     84.027         27,101
   IDEA Preschool Staff Development                                     84.173         13,993
   IDEA Preschool Grants                                                84.173            287
      Title I: Basic School Support (1)                                 84.010        176,257
                                          (1)                           84.367
      Title II: Part A, Teacher Quality                                                66,690
                                                                 (1)    84.318
      Title II: Part D, Enhancing Education Through Technology                          2,492
      Title IV: Part A, Drug-Free Schools                               84.186          9,185
      Title V: Part A, Innovative Education Strategies                 84.298A          7,004

      TOTAL U. S. DEPARTMENT OF EDUCATION                                             680,674

U.S. DEPARTMENT OF AGRICULTURE
   Child Nutrition                                                                     31,101
   Breakfast Program                                                                      256

      TOTAL U.S. DEPARTMENT OF AGRICULTURE                                             31,357

      TOTAL FEDERAL PROGRAMS                                                     $    712,031


(1)
      Tested as major program




                                                       42
                                 LOS GATOS UNION SCHOOL DISTRICT
                       RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT
                               TO THE AUDITED FINANCIAL STATEMENTS
                               FOR THE FISCAL YEAR ENDED JUNE 30, 2008

                                                                               Special        Bond
                                                                            Reserve Fund   Interest and      Other
                                               General          Building     for Capital   Redemption     Governmental
                                                Fund             Fund          Outlay         Fund           Funds
June 30, 2008 Annual Financial and Budget
   Report Fund Balances                      $ 3,786,529      $ 6,301,563   $ 5,451,672 $ 2,920,072       $ 1,741,127

Adjustments and Reclassifications:                   -                -             -               -             -

June 30, 2008 Audited Financial Statements
   Fund Balances                             $ 3,786,529      $ 6,301,563   $ 5,451,672 $ 2,920,072       $ 1,741,127




                                                         43
                     LOS GATOS UNION SCHOOL DISTRICT
          NOTES TO STATE AND FEDERAL AWARD COMPLIANCE SECTIONS
                   FOR THE FISCAL YEAR ENDED JUNE 30, 2008

1.   PURPOSE OF SCHEDULES

     A.   Schedule of Excess Sick Leave

          This schedule provides information on whether the District grants excess sick leave,
          as that term is defined in subdivision (c) of Education Code Section 22170.5, to
          employees who are members of the California State Teachers Retirement System.

     B.   Schedule of Average Daily Attendance

          Average daily attendance is a measurement of the number of pupils attending classes of 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.

     C.   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 California Education Code Sections 46201 through 46206.

     D.   Schedule of Financial Trends and Analysis

          This schedule discloses the District’s financial trends by displaying past years’ data along
          with current year budget information. These financial trend disclosures are used to evaluate
          the District’s ability to continue as a going concern for a reasonable period of time.

     E.   Schedule of Expenditures of Federal and State Awards

          OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations
          requires a disclosure of the financial activities of all federally funded programs. This
          schedule was prepared to comply with OMB Circular A-133 and State requirements.

     F.   Reconciliation of Annual Financial and Budget Report With Audited Financial Statements

          This schedule provides the information necessary to reconcile the fund balances of all funds
          as reported in the annual financial and budget report to the audited financial statements.

2.   RESULTS OF RECONCILIATIONS OF EXPENDITURES PER SCHEDULE OF GRANT
     ACTIVITY WITH THE DISTRICT’S ACCOUNTING SYSTEMS

     There were no material unreconciled differences between the District’s records and the schedule of
     federal grant activity as shown on the Schedule of Expenditures of Federal and State Awards.




                                                 44
                      LOS GATOS UNION SCHOOL DISTRICT
           NOTES TO STATE AND FEDERAL AWARD COMPLIANCE SECTIONS
                    FOR THE FISCAL YEAR ENDED JUNE 30, 2008

3.   BASIS OF PRESENTATION – SCHEDULE OF EXPENDITURES OF FEDERAL
     AWARDS

     The accompanying schedule of expenditures of federal awards includes the federal grant activity of
     Los Gatos Union School District and is presented on the modified accrual basis of accounting. The
     information in this schedule is presented in accordance with the requirements of OMB Circular A-
     133. Therefore, some amounts presented in this schedule may differ from amounts presented in, or
     used in the preparation of, the basic financial statements.

4.   EARLY RETIREMENT INCENTIVE PROGRAM

     The District has not adopted an early retirement incentive program, pursuant to California
     Education Code Sections 22714 and 44929, whereby the service credit to eligible employees is
     increased to two years.




                                                 45
OTHER INDEPENDENT
AUDITOR’S REPORTS
  FINDINGS AND
RECOMMENDATIONS
                            LOS GATOS UNION SCHOOL DISTRICT
                       SCHEDULE OF FINDINGS AND QUESTIONED COSTS
                         FOR THE FISCAL YEAR ENDED JUNE 30, 2008

Section I - Summary of Auditor’s Results

   Financial Statements
       Type of auditors report issued:                        Unqualified
       Internal control over financial reporting:
           Material weakness (es) identified?                       Yes           X    No
           Significant deficiencies identified not
                considered to be material weaknesses?           X Yes                  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 deficiencies identified not
               considered to be material weaknesses?            X   Yes                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 OMB Circular
           A-133, Section .510(a)                               X   Yes                No

       Identification of major programs:

                     CFDA Numbers                             Name of Federal Program

                         84.010                               Title I: Basic School Support
                         84.367                               Title II: Part A, Teacher Quality

       Dollar threshold used to distinguish between
          Type A and Type B programs:                         $300,000
       Auditee qualified as low-risk auditee?                   X Yes                  No

   State Awards
       Internal control over state programs:
           Material weakness (es) identified?                       Yes           X    No
           Significant deficiencies identified not
                considered to be material weaknesses?               Yes           X    None reported
       Type of auditor’s report issued on compliance
           for state programs:                                Unqualified




                                                (Continued)

                                                        52
                         LOS GATOS UNION SCHOOL DISTRICT
                    CURRENT YEAR FINDINGS AND RECOMMENDATIONS
                          FOR THE YEAR ENDED JUNE 30, 2008

Section II – Financial Statement Findings

08 – 1 / 30000

Significant Deficiency - Associated Student Body Accounts (ASB)

CONDITION:
During the testing of the ASB bank account, we indentified the following issues:
   1. We noted the beginning balance general ledger balance did not tie to the ending balance of prior
        year’s audit report. We were told that a separate Quicken file is used for every fiscal year and that
        the beginning balance was not reconciled when the new file was created. As a result, a reversed
        check from prior year was not recognized in the new Quicken files. The District was unable to
        provide us with supporting documents that tied to the reconciling difference.
   2. In accordance with the Constitution of RJ Fisher’s ASB, Article V, Section C, all requests for
        expenditures of student funds require the signature of the ASB Treasurer or ASB President and
        Activities Director. However, 4 out of 44 check request forms reviewed, for the period April
        2008 to June 2008, did not have the required signature approving the payment to be processed.

CRITERIA:
   1. For bank reconciliations to be a useful controls tool, the beginning balance of the current period
      must always tie to ending balance of the prior period and any reconciling items must be supported.
      Preparing a useful bank reconciliation, investigating any discrepancies and communicating the
      results of the reconciliation to all responsible individuals on a monthly basis, provides the District
      with a means to control the ASB accounts, hold custodians accountable, reduce the incentive for
      fraudulent activity, and reduce the likelihood for error.
   2. Written policies or procedures should be used as guidelines for ASB to perform their daily
      operations and the policies and procedures should align with the spirit of the ASB Constitution
      and/or the School District’s Internal Control Policies. The designed segregation of duties should
      be maintained and implemented throughout the year.

CAUSE OF CONDITION:
  1. The district did not reconcile the beginning balance of the current period to ending balance of the
     prior period during the bank reconciliation procedure.
  2. The ASB does not have a written procedure for its daily operations.

EFFECT OF CONDITION:
   1. The bank reconciliation becomes unreliable and without any compensating controls exposes the
      District and the student body accounts to loss from theft or error.
   2. Unauthorized disbursements were made through the ASB accounts.

RECOMMENDATION:
   1. We recommend that District management develop a monthly bank reconciliation procedure that
      includes investigating any discrepancies and communicating the results of the reconciliation to all
      responsible individuals. Support for all adjustments and reconciling items should be maintained
      on file to prove the validity of the bank reconciliation.
   2. We recommend the district develop written procedures for all its ASB’s daily operations. The
      procedures should align with the spirit of the ASB Constitution and/or the School District Internal
      Control Policies. We also recommend that management perform random and unannounced
      verification of disbursements twice a year to ensure compliance with policy.
                                                (Concluded)

                                                     53
                         LOS GATOS UNION SCHOOL DISTRICT
                    CURRENT YEAR FINDINGS AND RECOMMENDATIONS
                          FOR THE YEAR ENDED JUNE 30, 2008

DISTRICT RESPONSE:

The Fiscal Crisis & Management Assistance Team (FCMAT) established and published the Associated
Student Body Accounting Manual & Desk Reference for the educational agencies in California. The
manual covers all of the areas that occur in handling ASB funds as well as sample forms and procedures.
It can be used as the basis for a comprehensive board policy or the governing board can adopt a policy
that requires the school site staff to adhere to the guidance in the manual. The manual has been well
received in the educational field as well as the Los Gatos Union School District.

The business office staff is following the ASB guide on the bank reconciliation for FY 07/08. By the end
of December 2008, the business office staff will reconcile the account. Going forward, the bank account
will be reconciled on a monthly basis and will be signed off by the Director of Fiscal Services/CFO on a
monthly basis.

The Director of Fiscal Services/CFO will perform random and unannounced verification of disbursements
twice a year to ensure compliance with the ASB guide effective immediately.

08 – 2 / 30000

Significant Deficiency - Human Resources Documentation

CONDITION:
During the audit, we inspected documents and inquired about personnel files in human resources for
regular certificated and classified employees and identified the following items:
    1. 5 out of 29 random samples were paid above their eligible column. This was due to a variance in
        the proof of university units between the official transcripts or grade cards versus the actual rate
        paid. This is a violation of the District’s contract with the teacher association, Article 13.
    2. The personnel action forms were unclear and/or misleading which made it difficult to verify
        salary adjustments.
    3. Human Resources did not retain the original copy of the amended and signed personnel action
        form.
    4. 1 out of 29 random samples did not have an updated TB test on file.
    5. 3 out of 29 random samples did not have the I-9 forms signed by authorized personnel; it was
        signed only after we informed Human Resources of the incomplete documentation. It is required
        by USCIS to perform legal working status verification.
    6. During our testing excessive sick leave, we noted that one high level administrative/management
        contract was not in the personnel file.

CRITERIA:
   1. The District’s Contract with the teacher association, Article 13, requires that teachers are paid per
      scale based on their credentials.
   2. The personnel action form is used by the District to track and support salary adjustments and
      should be complete and kept on record.
   3. Tuberculosis Tests are required to be updated for all School Districts by the Department of
      Education for the safety of students.
   4. The verification of employment status is required by Unites States Citizenship and Immigration
      Services (USCIS).
   5. Hiring contracts are a legal document that should be kept in Human Resources Department.

                                               (Concluded)

                                                    54
                         LOS GATOS UNION SCHOOL DISTRICT
                    CURRENT YEAR FINDINGS AND RECOMMENDATIONS
                          FOR THE YEAR ENDED JUNE 30, 2008

CAUSE OF CONDITION:
The Human Resources department did not have enough personnel to implement systematic control over
hiring practices.

EFFECT OF CONDITION:
This lack of internal control in human resource creates an opportunity for the following:
    1. Grievances alleged by the teacher associations or its unit member(s)
    2. Potential material misstatements in the District financial statements
    3. Violation of hiring requirements of the USCIS.
    4. Over or under payment of payroll

RECOMMENDATION:
We recommend that the District commit additional personnel to assist management with the
implementation of HR controls. Special attention should be given to the controls over exceptions
identified in this report.

DISTRICT RESPONSE:
In the current fiscal environment it is not possible to hire additional staff for the Human Resources
department. We are planning to do a workload analysis of the clerical employees in the District Office to
see if the existing staff can provide more assistance to HR.

Copies of the personnel action forms are now retained in the personnel folder. Expiration of TB tests will
be monitored on-line. I-9 forms are completed during the hiring interview.

Section III - Federal Award Findings and Questioned Costs

08 – 3 / 30000 & 50000

Federal Awards – Non-compliance / Significant Deficiency

Period of Availability of Federal Funds – Title I, Part A Funds

CONDITION: The district is not in compliance with March 2007 OMB Circular A-133 Compliance
Supplement Part 3, Section H on Period of Availability of Federal Funds for its Title I, Grants to Local
Educational Agencies (LEAs) (Title I, Part A of ESEA).

CRITERIA: An LEA that receives $50,000 or more in Title I, Part A funds cannot carry over beyond the
initial 15 months of availability more than 15% of its Title I, Part A funds.

CAUSE OF CONDITION: Fiscal Year 2007-08 is the first year that the school district received Title I,
Part A of ESEA funds and the program administrator is not aware of the required compliance of Period of
Availability of Federal Funds of Title I, Part A of ESEA. In addition, the management has not reviewed
the district spending against its budget to ensure the school district is in compliance with Federal
requirements.

EFFECT OF CONDITION: Fail to comply with the Period of Availability of Federal Funding may result
in refunding the excess carryover and reallocations of available funds to other districts.



                                               (Concluded)

                                                    55
                        LOS GATOS UNION SCHOOL DISTRICT
                   CURRENT YEAR FINDINGS AND RECOMMENDATIONS
                         FOR THE YEAR ENDED JUNE 30, 2008

RECOMMENDATION: We recommend the district to apply a waiver of the percentage limitation from
its SEA which may be granted once every three (3) years if the LEA’s request is reasonable and necessary.
In addition, we recommend the district to provide more training to Federal programs’ administrator and
management on Federal Compliance Requirements.

DISTRICT RESPONSE: The District will apply for the waiver. The waiver is part of the Consolidated
Application which will be available in mid-December 2008 and is due to California Department of
Education on January 31, 2009.

Section IV - State Award Findings and Questioned Costs

No findings noted.




                                              (Concluded)

                                                  56
                         LOS GATOS UNION SCHOOL DISTRICT
               STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS
                          FOR THE YEAR ENDED JUNE 30, 2008

Section II – Financial Statement Findings

07-01 / 20000 – CAPITAL ASSET INTERNAL CONTROLS

CONDITION: During the testing of Internal Controls for the fiscal year ended June 30, 2007, we noted
that the controls over purchasing, receiving, and disposition of Information Technology (IT) equipment
were ineffective. Through inquiry and document inspection, we identified the following deficiencies:
    6. Teacher or principal acknowledgement of equipment delivery to the classrooms was not done.
    7. The “Teacher Tech” inventory form was implemented to track the movement of equipment, but
         for the June 30, 2007 fiscal year teachers and principals failed to match the serial and tag numbers
         before sign off. In addition, IT had not signed off on pick up.
    8. During surplus property disposal or sales, we were not provided an “acknowledgement of receipt”
         signed by the buyer/collector.
    9. The District did not have clearly defined procedures for capital asset purchases, disposal and
         inventory.

REASON IMPROVEMENT NEEDED (Criteria): Since capital assets represent one of the largest
investments of the District, control and accountability are of significant concern. Generally accepted
accounting principles regarding internal controls, Education Code Section 35168, and federal funding
agencies require Districts to maintain records that properly account for capital assets. Capital asset
records serve as a management tool and have an important bearing on management decisions, such as
long-range acquisition and abandonment projections.

CAUSE OF CONDITION: For the fiscal year ended June 30, 2007, the District had not adequately
enforced a policy requiring authorization to purchase, receive, distribute or dispose of equipment by an
appropriate level of management.

EFFECT OF CONDITION: The lack of internal control over capital asset inventory created an
opportunity for misappropriation and a potential for material misstatements in the District financial
statements.

RECOMMENDATION: We recommend that the District draft policies requiring standard authorization
of purchases, receipts, and movement of equipment inventory, and that those policies require a copy of all
authorizations be provided to Finance. In addition, Finance should coordinate random counts of
inventory and/or audits of equipment inventory movement to ensure compliance with the District’s
policy. This policy should be made available to all district employees and training should be provided to
update employees with regards to the appropriate usage of the forms. The District should be sure to
address the conditions identified above in the policy.

Our audit field work, for the fiscal year ended June 30, 2007, was completed on August, 31, 2007. As a
result, we were unable to verify the implementation, enforcement and effectiveness of the new procedures.
The District was working with the Budget Advisory Committee during this improvement process.

DISTRICT RESPONSE: In the Business Practices Continuous Improvement Plan, prepared by the
Superintendent in response to FCMAT reported issued on July 26, 2007, multiple milestones have been
set to rectify these conditions. The School District has developed and implemented new policies
procedures approved by the Board on December 12, 2007.




                                                     57
                         LOS GATOS UNION SCHOOL DISTRICT
               STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS
                          FOR THE YEAR ENDED JUNE 30, 2008

CURRENT STATUS: During our field work for fiscal year 2007-08, we have verified that the School
District has implemented the above-mentioned policies in December 2007.

07-02 / 20000 – EQUIPMENT DISPOSITION

CONDITION: During the testing of Internal Controls for the fiscal year ended June 30, 2007, we noted
that controls over the disposition of equipment were ineffective. Through inquiry and document
inspection, we noted that there is insufficient information on the request for surplus submitted to the
board. The reason for disposal, original cost, purchase year and current value of the items submitted for
scrapping is not disclosed.

Moreover, the media used for bidding on surplus items did not have sufficient publicity to generate the
best deal for the district. We noted that the request for bids advertisement on 100 surplus computers was
limited to the school district’s website. As a result, only one bid, which happened to be from another
school district, was taken and accepted.

REASON IMPROVEMENT NEEDED: Education Code Section 17546 states only if the board
approves that the property is of insufficient value to defray the costs of arranging a sale, the property may
be donated to a charitable organization deemed appropriate by the board, or it may be disposed of in the
local public dump on order of any employee of the district empowered for that purpose by the board.
Also, Education Code Section 17455 states that there shall be no sale of surplus until notice has been
given by posting in at least three public places in the district for not less than two weeks, or by publication
for at least once a week for a period of not less than two weeks in a newspaper published in the district
and having a general circulation there.

CAUSE OF CONDITION: The request for surplus items submitted to the board did not have sufficient
detail to allow the Board to perform their fiduciary duties when evaluating the value of the surplus
property and providing the necessary instruction for surplus disposal.

In addition, it appears the Information Technology Department Manager was unaware of the Education
Code requirements in this area because the District did not have written procedures regarding the disposal
of property.

EFFECT OF CONDITION: The District was not in compliance with the Educational Code.

RECOMMENDATION: We recommend that the District update and draft policies to require standard
authorization of disposal by appropriate management and the board. The policy should require a clearly
stated reason for scrapping equipment on the surplus approval request and require an attachment with
original cost, purchase year and current value of the items disposed. The board should carefully evaluate
the items and its potential value and approve disposal or sales in accordance to the Educational Code.
This documentation, with the original board clerk’s signature, should be filed with finance in order to
update and maintain complete capital assets records.

Our audit field work, for the fiscal year ended June 30, 2007, was completed on August, 31, 2007. As a
result, we were unable to verify the implementation, enforcement and effectiveness of the new procedures.
The District was working with the Budget Advisory Committee during this improvement process.

DISTRICT RESPONSE: In the Business Practices Continuous Improvement Plan, prepared by the
Superintendent in response to the FCMAT reported issued on July 26, 2007, multiple milestones have



                                                      58
                        LOS GATOS UNION SCHOOL DISTRICT
              STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS
                         FOR THE YEAR ENDED JUNE 30, 2008

been set to rectify these conditions. The School District has developed and implemented new policies and
procedures approved by the Board on December 12, 2007.

CURRENT STATUS: There was no disposition of equipment included in the capital asset inventory of
items with costs of $5,000 ore more. These items are required to recorded as capital assets in the
government wide financial statements, whereas items purchased for less than $5,000 will be inventoried
separately but not recorded as an asset in the government wide financials. Based on our documentation of
internal control and inquiry with District employees, we believe our recommendation to this finding has
been implemented.

07-03 / 30000 – HUMAN RESOURCES

CONDITION: During our audit of the fiscal year ended June 30, 2007, we inspected personnel files in
human resources for regular certificated, classified and Special Ed. employees and noted that
documentation was not adequately maintained in the District’s filing system.

In addition, we noted that the units’ calculation for one of the certificated employees was incorrect
resulting in that employee being placed at a higher step and column salary than he or she should have
been.

Finally, we noted that a teacher was paid at a higher step than appeared to be applicable for that persons
teaching experience. There was no additional documentation on file supporting the approval of the
increased pay level. The Superintendent explained that the newly hired staff was paid at a higher step
because that person was employed as an instructor in the private industry for a number of years, which
should be considered equivalent teaching experience. Subsequent to our communication of this issue, the
District contacted the teacher’s previous employer in an effort to obtain written confirmation as proof of
experience. The previous employer had been contacted to verify work experience but written
documentation had not been received until requested by the auditors.

REASON IMPROVEMENT NEEDED: Maintaining control and accountability over Human Resources is
imperative, since salaries represent the largest expenditures of the District. Moreover, sound human
resource controls reduce the District’s exposure to lawsuits and other potential contingent liabilities.
Finally, human resource records serve as a management tool and have an important bearing on
management decisions, such as hiring and promotions.

CAUSE OF CONDITION: The Human Resources department did not have enough supervision and
systematic control over hiring practices and file maintenance.

EFFECT OF CONDITION: The monetary cost related to one overpaid employee was $17,620. Missing
documentation, or documentation that requires significant follow-up or explanation, creates an
opportunity for error and weakens the audit trail.

RECOMMENDATION: We recommend that the District develop a written human resources filing
policy so that all required supporting documentation can be easily located. We suggest that: 1) a
Personnel Action Form (PAF) be included in the employees file and signed HR manager and the Payroll
Technician, for any salary changes; 2) a credential units worksheet should be used to record any changes
in credential units; and 3) that Form I-9 should be maintained in every employee’s personnel file hired
after 1986. Finally, we recommend that a person independent of HR, such as Payroll, periodically




                                                   59
                         LOS GATOS UNION SCHOOL DISTRICT
               STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS
                          FOR THE YEAR ENDED JUNE 30, 2008

reviews and monitors the HR process for hiring, personnel changes and document maintenance to ensure
contractual compliance, authorization and consistency.

DISTRICT RESPONSE: The Superintendent will evaluate the need of an additional employee for the
human resources department for supporting services.

The Director of Personnel Services contacted the employee and that person repaid the $17,600 in
September of 2007. The error was due to inaccurate information provided by the employee and was not
detected because of turnover in Human Resources.

In regards to the documentation issues, an internal audit and reorganization of all personnel files is
underway to ensure information is current, accurate, and provides a clear record of compensation,
placement, authorized changes, and eligibility for advancement based on longevity and approved
professional growth. The Target for completion is January 15, 2008 if not sooner.

CURRENT STATUS: The Superintendent hired an external consultant to evaluate the need of additional
employee for the human resources department for supporting services but no addition headcount has been
added as of October 2008.

The Director of Personnel Services contacted the employee and she has repaid the $17,600 as of
September of 2008.

In regards to the documentation issues, an internal audit and reorganization of all personnel files is in
progress.

DISTRICT UPDATE: The Personnel Action Form has been revised and a copy signed by payroll and the
HR director is kept in the personnel file. The credential units worksheet is being revised. We will
periodically bring in an outside contractor with HR experience to evaluate the HR process to ensure
contractual compliance, authorization and consistency.

07-04 / 30000 – JOURNAL ENTRY POSTING

CONDITION: During our audit of the fiscal year ended June 30, 2007, we inspected and inquired about
journal entries noting that there was a lack in segregation of duties over the recording and approving of
journal entries. Journal entries could be verbally initiated by personnel without routing through the
Director of Finance and could be posted and approved by the same staff.

REASON IMPROVEMENT NEEDED: A lack of segregation and approval over the journal entry
posting creates and opportunity for fraudulent financial reporting and a greater likelihood that an error
will occur.

CAUSE OF CONDITION: Either the Finance department did not have the resources to sufficiently
review journal entries, or those resources were allocated to other short-handed departments for assistance.
It appears that the business services department does not have enough resources to retain appropriate
segregation of duties within itself as well as provide support to other departments.

EFFECT OF CONDITION: A lack of segregation and approval over the journal entry posting creates
and opportunity for fraudulent financial reporting and a greater likelihood that an error will occur.




                                                    60
                        LOS GATOS UNION SCHOOL DISTRICT
              STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS
                         FOR THE YEAR ENDED JUNE 30, 2008

RECOMMENDATION: Since journal entries are usually internally initiated, a person independent of
initiating and posting the journal entries should approve them in order to reduce the risk of material
misstatements in reporting. We also recommended the District develop policies to clarify the authority of
management and employees to initiate any journal entries.

DISTRICT RESPONSE: The segregation of duties over the recording and approving of journal entries
has occurred. The Director of fiscal services/CFO is reviewing and approving the entries prepared by the
Budget analyst. After the CFO signs off on the journals, the budget analyst releases it and the journal
entries are posted to the district financial system (QSS). The District believes this finding has been
corrected.

CURRENT STATUS: During our field work for fiscal year 2007-08, we have verified that Los Gatos
School District has implemented the above-mentioned policies in December 2007.

Section III - Federal Award Findings and Questioned Costs

There were no prior year findings or questioned costs.

Section IV - State Award Findings and Questioned Costs

There were no prior year findings or questioned costs.




                                                   61

								
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