JUNE 30, 2016 - MCOE [PDF]

MERCED COUNTY OFFICE OF EDUCATION ANNUAL FINANCIAL REPORT JUNE 30, 2016

MERCED COUNTY OFFICE OF EDUCATION TABLE OF CONTENTS JUNE 30, 2016 FINANCIAL SECTION Independent Auditor's Report Management's Discussion and Analysis Basic Financial Statements Government-Wide Financial Statements Statement of Net Position Statement of Activities Fund Financial Statements Governmental Funds - Balance Sheet Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balances Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities Fiduciary Funds - Statement of Net Position Fiduciary Funds - Statement of Changes in Net Position Discretely Presented Component Unit – Virginia Smith Charitable Trust Statement of Financial Position Statement of Activities Statement of Cash Flows Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule Special Education Pass-Through Fund - Budgetary Comparison Schedule Child Development Fund - Budgetary Comparison Schedule Schedule of Other Postemployment Benefits (OPEB) Funding Progress Schedule of County Office of Education's Proportionate Share of the Net Pension Liability Schedule of County Office of Education Contributions Notes to Required Supplementary Information SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards Local Education Agency Organization Structure Schedule of Average Daily Attendance Reconciliation of Annual Financial and Budget Report With Audited Financial Statements Schedule of Financial Trends and Analysis Schedule of Charter Schools Combining Statements - Non-Major Governmental Funds Combining Balance Sheet Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Note to Supplementary Information INDEPENDENT AUDITOR'S REPORTS Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Report on Compliance for Each Major Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Report on State Compliance

2 5 15 16 17 18 19 20 21 22 23 24 25 26 64 65 66 67 68 69 70 72 74 75 76 77 78 79 80 81

83 85 87

MERCED COUNTY OFFICE OF EDUCATION TABLE OF CONTENTS JUNE 30, 2016 SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditor's Results Financial Statement Findings Federal Awards Findings and Questioned Costs State Awards Findings and Questioned Costs Summary Schedule of Prior Audit Findings

91 92 93 94 95

FINANCIAL SECTION

1

Vavrinek, Trine, Day & Co., LLP

VA L U E T H E D I F F E R E N C E

Certified Public Accountants

INDEPENDENT AUDITOR'S REPORT

Governing Board Merced County Office of Education Merced, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the Merced County Office of Education (MCOE) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise MCOE's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, issued by the California Education Audit Appeals Panel as regulations. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to MCOE's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of MCOE's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

2 6051 N. Fresno Street, Suite 101 Fresno, CA 93710 Tel: 559.248.0871

www.vtdcpa.com Fax: 559.248.0875

Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the Merced County Office of Education, as of June 30, 2016, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 5 through 14, budgetary comparison schedules on pages 64 through 66, schedule of other postemployment benefits funding progress on page 67, schedule of MCOE's proportionate share of net pension liability on page 68, and the schedule of district contributions on page 69, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Merced County Office of Education's basic financial statements. The accompanying supplementary information such as the combining and individual non-major fund financial statements and Schedule of Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and the other supplementary information as listed on the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the accompanying supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole.

3

Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2016, on our consideration of the Merced County Office of Education's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Merced County Office of Education's internal control over financial reporting and compliance.

Fresno, California December 15, 2016

4

Merced County Office of Education Steven E. Gomes, Ed.D., Superintendent Equal Opportunity Employer

MANAGEMENT'S DISCUSSION AND ANALYSIS This section of the Merced County Office of Education's (MCOE) annual financial report presents our discussion and analysis of MCOE's financial performance during the fiscal year that ended on June 30, 2016. Please read it in conjunction with MCOE's financial statements immediately following this section. Comparative information will be presented between the fiscal years ending June 30, 2015 and June 30, 2016. The Merced County Office of Education (MCOE) provides services to districts within Merced County, operates education programs for special populations of students and manages programs with education related objectives. Services provided to districts include administrative, fiscal, personnel, technology, media, educational television, curriculum, professional development, leadership training, beginning teacher support and assessment, Tier II professional services credential, psychological, occupational training, mental health, foster youth services, California student opportunity and access program, outdoor school, and governmental relations. Educational programs operated for special populations of students are three-county regional Migrant (Merced, Stanislaus, and Madera), Special Education, Regional Occupational Program, Valley Community School, Juvenile Court School, Workforce Investment Act Youth Programs, Merced Scholars Charter School, and Head Start/Early Head Start. Programs related to educational objectives include child care subsidy programs (for CalWORKS recipients and other financially eligible families), a multitude of child care and workforce support services, a six-county regional California Preschool Instructional Network and the Race To The Top – Early Learning Challenge grant. Other education-related grant programs support business-education partnerships and the work of the Family Resource Council. MCOE operates an after school program in collaboration with Merced County school districts. MCOE has a main administrative complex which houses the Superintendent, Human Resources, and other various program administrative offices as well as a media center and print shop. MCOE has an ancillary administrative complex which houses Head Start administrative offices, information technology, and a warehouse. In addition, MCOE maintains five smaller off-site administrative offices and has over 200 school sites housing employee workstations. The Superintendent provides general administrative and executive functions for the organization and employs over 1,400 staff. MCOE has a $102.6 million annual operating expenditure budget. This includes a General Fund budget of $75.2 million, a Child Development Fund budget of $26.2 million, a Charter School Fund budget of $1.1 million, and an Adult Education Fund budget of $0.2 million.

5

632 West 13th Street



Merced, California 95341



(209) 381-6600



www.mcoe.org

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 OVERVIEW OF THE FINANCIAL STATEMENTS The Financial Statements The financial statements presented herein include all of the activities of the Merced County Office of Education and its component units using the integrated approach prescribed by GASB Statement Number 34. The Government-Wide Financial Statements present the financial picture of MCOE from the economic resources measurement focus using the accrual basis of accounting. MCOE statements present only governmental activities, as MCOE has no business-type activities. These statements include all assets of MCOE (including infrastructure) as well as all liabilities (including long-term obligations). Additionally, certain eliminations have been made as prescribed by the GASB Statement for interfund activity for payables and receivables. The Fund Financial Statements include statements for each of the two types of activities: governmental and fiduciary. MCOE has no business-type funds. The Governmental Activities statements are prepared using the current financial resources measurement focus and modified accrual basis of accounting. The Fiduciary Activities are prepared using the economic resources measurement focus and the accrual basis of accounting. Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach. The primary unit of government is the Merced County Office of Education. REPORTING MCOE AS A WHOLE The Statement of Net Position and the Statement of Activities and Changes in Net Position The Statement of Net Position and the Statement of Activities and Changes in Net Position report financial information about MCOE as a whole and about its activities. These statements include all assets and liabilities of MCOE using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report MCOE's net position and changes in them. Net position is the difference between assets and deferred outflows of resources, and liabilities and deferred inflows of resources, which is one way to measure MCOE's financial health, or financial position. Over time, increases or decreases in MCOE's net position will serve as a useful indicator of whether the financial position of MCOE is improving or deteriorating. Other factors to consider are changes in MCOE's property tax base and the condition of MCOE's facilities.

6

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 The difference between revenue and expense is MCOE's operating result. MCOE's responsibility is to provide services to our students, Merced county school districts and other populations, and not to generate profit as commercial entities do. Hence one must consider other factors when evaluating the overall health of MCOE. The quality of the education and services we provide and the safety and condition of our schools would likely be an important component in this evaluation. In the Statement of Net Position and the Statement of Activities and Changes in Net Position, we display MCOE activities as follows: Governmental Activities - MCOE reports all of its services in this category. This includes the education of students with special needs or at risk youth in kindergarten through grade twelve. Services include the education of ROP students, Migrant education activities, Head Start programs and alternate payment programs for child care providers. MCOE also provides a variety of business and instructional services to Merced County School Districts and funds an on-going effort to improve and maintain MCOE buildings and sites. Property taxes, state income taxes, user fees, interest income, federal, state and local grants finance these activities. REPORTING MCOE'S MOST SIGNIFICANT FUNDS Fund Financial Statements The fund financial statements provide detailed information about the most significant funds - not MCOE as a whole. Some funds are required by State law and by bond covenants. However, management establishes other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money that it receives from the U.S. Department of Education. Governmental Funds - MCOE's basic services are reported in governmental funds. The governmental statements focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. 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 MCOE'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 near future to finance MCOE's programs. The differences in results in the governmental fund financial statements compared to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. MCOE AS TRUSTEE Reporting MCOE's Fiduciary Responsibilities MCOE is the trustee, or fiduciary, for funds held on behalf of others, like our funds for retiree benefits and associated student body activities. MCOE's fiduciary activities are reported in the Statements of Fiduciary Net Position and in the Statement of Changes in Fiduciary Net Position. We exclude these activities from MCOE's other financial statements because MCOE cannot use these assets to finance its operations. MCOE is responsible for ensuring that the assets reported in these funds are used for their intended purposes.

7

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 FINANCIAL HIGHLIGHTS OF THE PAST YEAR MCOE's stated financial worth has increased over last fiscal year. Total net position at the end of FY 2016 is $48.7 million. This is an increase of $3.7 million from the year ending June 30, 2015. The increase is mostly due to increased state funding. $2.7 million in capital assets were added to the inventory this year. The ending balance of the General Fund increased by nearly than $4.7 million from last year. MCOE has only a small amount of outstanding long-term obligations other than pensions. In FY 2003-2004, MCOE obtained a Qualified Zone Academy Bond (QZAB) of $1 million which will be totally defeased (prefinanced) with an initial deposit of $554,464 and the interest earnings on the deposit. In FY 2005-2006, the office was awarded a second QZAB of $2 million. This QZAB is being paid off over a period of 15 years. FINANCIAL ANALYSIS OF MCOE AS A WHOLE Net Position MCOE's net position was $48.7 million for the fiscal year ended June 30, 2016, and $45.0 million for the fiscal year ended June 30, 2015. This is an increase of $3.7 million. Of this amount, $16.5 million was restricted. Restricted net position is reported separately to show legal constraints from debt covenants and enabling legislation that limit MCOE's ability to use net position for day-to-day operations. Our analysis below focuses on the net position (Table 1) and change in net position (Table 2) of MCOE's governmental activities for the past two fiscal years.

8

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Table 1 Net Position (Amounts in millions) FY 2015-16 Assets Current and other assets Capital assets Total Assets Deferred Outflows of Resources Liabilities Current liabilities Long-term obligations Aggregate net pension liability Total Liabilities Deferred Inflows of Resources Net Position Net investment in capital assets Restricted Unrestricted Total Net Position

$

Governmental Activities FY 2014-15

55.0 68.4 123.4 13.5

$

$

52.4 69.2 121.6 4.3

Difference $

2.6 (0.8) 1.8 9.2

12.8 2.4 57.0 72.2 16.0

14.0 2.2 48.9 65.1 15.8

(1.2) 0.2 8.1 7.1 0.2

66.4 16.5 (34.2) 48.7

67.2 15.7 (37.9) 45.0

(0.8) 0.8 3.7 3.7

$

$

The $48.7 million in net position of governmental activities represents the accumulated results of all past years' operations. Unrestricted net position – the part of net position that can be used to finance day-to-day operations without constraints established by debt covenants, enabling legislation, or other legal requirements – increased by 9.76 percent ($(34.2) million compared to $(37.9) million). Changes in Net Position The results of the past two year's operations for MCOE as a whole are reported in the Statement of Activities. Table 2 takes the information from this Statement, and rearranges it slightly so you can see our total revenues and expenses on a functional basis for the past two years.

9

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Table 2 Changes in Net Position (Amounts in millions) FY 2015-16 Revenues Program revenues: Charges for services Operating grants and contributions Capital grants and contributions General revenues: Federal and State aid not restricted Property taxes Other general revenues Total Revenues Expenses Instruction related Student support services Administration Plant services Community services Other Total Expenses Change in Net Position

$

9.9 85.8 -

$

Governmental Activities FY 2014-15

$

8.7 80.4 2.0

Difference

$

1.2 5.4 (2.0)

13.7 11.0 3.8 124.2

13.4 10.0 3.4 117.9

0.3 1.0 0.4 6.3

52.6 17.2 8.8 5.4 11.2 25.3 120.5 3.7

52.9 17.1 7.2 5.3 8.9 23.9 115.3 2.6

(0.3) 0.1 1.6 0.1 2.3 1.4 5.2 1.1

$

$

Governmental Activities As reported in the Statement of Activities, the cost of all of our governmental activities this year was approximately $120.5 million as compared to $115.3 million in the prior year. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $11.0 million because the cost was paid by those who benefited from the programs ($9.9 million) or by government and other organizations who subsidized certain programs with grants and contributions ($85.8 million). We paid for the remaining "public benefit" portion of our governmental activities with $13.7 million in State and Federal unrestricted funds, and with other revenues like interest and general entitlements of $3.8 million. In Table 3, we have presented the cost and net cost (total cost less revenues generated by the activities) of each of MCOE's largest functions. As discussed above, net cost shows the amount that local taxpayers are required to pay for each of these functions

10

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Table 3 Net Cost of Governmental Activities (Amounts in millions)

Total Cost of Services $ 52.6 17.2 8.8 5.4 11.2 25.3 $ 120.5

Instruction related Student support services Administration Plant services Community services Other Total

Net Cost of Services $ 12.1 4.3 4.2 1.9 0.6 1.6 $ 24.7

FINANCIAL ANALYSIS OF MCOE'S FUNDS The financial performance of MCOE as a whole is reflected in its governmental funds. As MCOE completed this fiscal year, our governmental funds reported a balance of $40.5 million while the prior year reported a balance of $36.9 million. This was an increase of $3.6 million over the FY 2014-2015 ending fund balances. Our General Fund is our principal operating fund. The fund balance in the General Fund increased to approximately $35.7 million. This increase of nearly $4.7 million resulted primarily from increased State and Federal funding. Our special revenue fund balances increased by more than $0.2 million. The funds include a separate fund for the operation of our charter school, a fund for pass-through of special education funds, an Adult Education Fund, and a Child Development Fund. The overall increase can be attributed primarily to an increase in the Charter School Fund of more than $187,000 as State funding increased in the current year. Our County School Facilities Fund decreased approximately $1.2 million due to excess state funded construction funding returned to the state. General Fund Budgetary Highlights Over the course of the year MCOE revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was adopted on June 20, 2016. A schedule showing MCOE's original and final budget amounts compared with amounts actually paid and received is provided in our annual report. Revenue and Expenditure revisions were made to the 2015-2016 budget over the course of the year. Total revenue in the General Fund ended up about $1.3 million higher than what was budgeted and expenditures ended the year $5.5 million below what was budgeted, resulting in an actual increase to the fund of $4.7 million.

11

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2016, MCOE had $68.4 million (net of depreciation) in a broad range of capital assets, including land, buildings, and furniture and equipment. At June 30, 2015, net capital assets totaled $69.2 million. This amount represents a net decrease (including additions, deductions and depreciation) of $0.8 million from the prior year. Table 4 displays our capital assets. Table 4

Capital Assets at Year-end (Net of depreciation, in millions of dollars) Land Construction in process Buildings, sites, and improvements Equipment Total

FY 2015-16 $ 4.9 0.3 60.2 3.0 $ 68.4

Governmental Activities FY 2014-15 Difference $ 4.9 $ 2.5 (2.2) 59.2 1.0 2.6 0.4 $ 69.2 $ (0.8)

This year's additions include approximately $0.7 million for the Los Banos VCS parking lot and $1.3 million in vehicles and equipment. Approximately $2.3 million was moved out of construction in progress for the completion of the Stefani Elementary project. We present more detailed information about our capital assets in the Notes to Financial Statements. Long-Term Obligations At the end of FY 2015-2016, MCOE had $2.4 million in long-term obligations. Table 5 displays our long-term obligations. Table 5 Outstanding Debt at Year-end (Amounts in millions) Qualified Zone Academy Bonds Compensated absences Total

Governmental Activities FY 2015-16 FY 2014-15 Difference $ 1.9 $ 2.0 $ (0.1) 0.5 0.2 0.3 $ 2.4 $ 2.2 $ 0.2

MCOE's Certificates of Participation S&P rating at the time of its last issuance was "AAA".

12

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Net Pension Liability (NPL) The District implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27 as of June 30, 2015, which required the District to recognize its proportionate share of the unfunded pension obligation for CalSTRS and CalPERS. As of June 30, 2016, the District reported Deferred Outflows from pension activities of $13.5 million, Deferred Inflows from pension activities of $16.0 million, and a Net Pension Liability of $57.0 million. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS The Governor signed the State Budget, Senate Bill (SB) 826, and Assembly Bill (AB) 1602 (Education) with accompanying trailer bill SB 828 (School Finance) on June 27, 2016. The budget includes funding for education of $88.3 billion. Included is Proposition 98 (Prop. 98) funding of $71.9 billion for 2016-17, an increase of $3.5 billion over the 2015-16 Budget Act level. In the last five years, Prop. 98 funding has increased by $24.6 billion (52 percent). Below are some major funding and policy components of the 2016-17 State Budget reflected in AB 1602 and SB 828. Local Control Funding Formula –The State Budget provides $2.9 billion toward implementation of LCFF. The 2016-17 gap funding is 54.18 percent. This will bring the formula to 96 percent of full implementation. The Department of Finance (DOF) is still projecting full implementation of LCFF to occur in 2020-21. This is the fourth year of the Local Control Funding Formula (LCFF). The LCFF is intended to correct historical inequities and increase local flexibility. The LCFF provides a form of equalization for County Offices of Education (COEs). For the Merced County Office of Education (MCOE) the LCFF target funding amount is slightly more than 16 percent of our total budgeted revenue. The COE LCFF provides for two grants. The first is a county operations grant for COE operations and countywide services. The second is an alternative education grant for programs operated by the COE to provide direct instructional services to students for which the county has responsibility. The students identified in law for this funding include juvenile courts, probation referred, and mandatory expelled. LCFF is intended to provide a mechanism that is simple and transparent allowing Local Education Agencies (LEAs) maximum flexibility in allocating resources to meet local needs. LCFF for the MCOE replaces restricted and unrestricted Revenue Limit funding, restricted Court & Community School Revenue Limit funding and restricted funding received through many categorical programs. Transportation is a categorical program outside of the LCFF formula. The MCOE on behalf of the SELPA (Special Education Local Plan Area) receives approximately $1.2 million to transport special education children. This funding is an add-on to our LCFF and will not be increased by State COLA. Another aspect of the LCFF is the concept of Hold Harmless. LEAs are to receive minimum State funding of no less than the total received in the 12-13 fiscal year, as adjusted for changes in ADA and property taxes. MCOE is an LEA that falls under this Hold Harmless provision. MCOE’s projected LCFF target funding is less than our 2012-13 revenue limit and categorical funding base.

13

MERCED COUNTY OFFICE OF EDUCATION MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016 Local Control Accountability Plan (LCAP) - The MCOE is preparing to meet with stakeholders to develop the MCOE’s 2017-18 LCAP and review the progress of the 2016-17 plan. The requirement for LEA’s to develop and adopt an LCAP that aligns with their budget became effective in 2014-15. LCAPs are required to describe LEA goals addressing the 8 State priorities (10 for COEs). A new LCAP template was adopted in November 2016 by the State Board of Education (SBE). The new template is a 3-year rolling plan. In addition, the SBE approved the LCAP rubrics and partially implemented specific accountability measures tying to State priorities. College Readiness Block Grant - $200 million in one-time Prop. 98 General Fund dollars for grants to school districts and charter schools serving high school students. The funds can be spent over the next three years and are for LEAs to provide additional services supporting access and successful transition to higher education. Teacher Workforce – $35 million combination of one-time Prop. 98 and non-Prop. 98 General Fund dollars to fund several programs aimed at recruiting additional teachers and streamlining teacher preparation programs. Multi-tiered Systems of Support - $20 million one-time Prop. 98 General Fund dollars to allow LEAs to provide services that assist and encourage multi-tiered systems of supports. These services support academic, behavioral, social, and emotional needs. Mandates backlog – The 2016-17 State Budget included $1.3 billion in one-time discretionary funding to provide LEAs with additional resources to invest in deferred maintenance, professional development, teacher induction for beginning teachers, and instructional materials and technology and the implementation of new educational standards. Early Childhood Education - The State Budget provides $7.8 million in additional funding for full-day Preschool. In addition, child care provider reimbursement rate ceilings have increased to reflect a corresponding increase in the cost of providing care related to changes in the state minimum wage. Federal Revenue - The outlook of federal funding levels for 2016-17 is known but future years are still uncertain. MCOE has made conservative federal funding reductions in 16-17. We are also planning flat funding in subsequent budget years. MCOE is committed to ensuring every student a success. We are using one-time funds on the best one-time purchases to support our programs and students. At the present time we have a balanced budget and the day to day operations of our organization are serving the needs of today’s students. CONTACTING MCOE'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors with a general overview of MCOE's finances and to show MCOE's accountability for the money it receives. If you have questions about this report or need any additional financial information, contact Janet Riley, Assistant Superintendent, Business Services, at Merced County Office of Education, 632 W. 13th Street, Merced CA, 95341, or e-mail at: [email protected].

14

MERCED COUNTY OFFICE OF EDUCATION STATEMENT OF NET POSITION JUNE 30, 2016 Governmental Activities ASSETS Deposits and investments Receivables Prepaid expenses Stores inventories Net OPEB Plan Asset Nondepreciable capital assets Capital assets being depreciated Accumulated depreciation Total Assets

$

DEFERRED OUTFLOWS OF RESOURCES Deferred outflows of resources related to pensions

38,196,759 15,026,967 87,096 49,604 1,675,250 5,174,902 97,035,827 (33,845,409) 123,400,996

13,487,941

LIABILITIES Accounts payable Unearned revenue Long-term obligations: Current portion of long-term obligations other than pensions Noncurrent portion of long-term obligations other than pensions Total Long-Term Obligations Aggregate net pension liability Total Liabilities

12,149,239 661,923

105,140 2,298,211 2,403,351 56,954,070 72,168,583

DEFERRED INFLOWS OF RESOURCES Deferred inflows of resources related to pensions

16,017,059

NET POSITION Net investment in capital assets Restricted for: Capital projects Educational programs Unrestricted Total Net Position

66,416,720

$

The accompanying notes are an integral part of these financial statements. 15

3,716,522 12,730,998 (34,160,945) 48,703,295

MERCED COUNTY OFFICE OF EDUCATION STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016

Functions/Programs Governmental Activities: Instruction Instruction-related activities: Supervision of instruction Instructional library, media, and technology School site administration Pupil services: Home-to-school transportation Food services All other pupil services Administration: Data processing All other administration Plant services Ancillary services Community services Enterprise services Other outgo Total Governmental Activities

Expenses $ 35,337,801

Program Revenues Charges for Operating Capital Services and Grants and Grants and Sales Contributions Contributions $

1,925,253

$ 26,177,279

$

9,033,494

452,260

6,830,337

-

657,213 7,613,410

106,799 301,295

209,181 4,530,603

-

4,932,983 1,235,842 11,051,408

1,812,931 55,454 939,112

27,774 1,123,545 8,997,288

-

2,693,965 6,126,181 375,170 4,249,444 5,399,909 419,609 3,082,205 1,954 11,167,923 1,011,158 9,580,710 287,076 31,988 62,653 24,964,699 2,484,681 20,958,182 $ 120,503,858 $ 9,915,710 $ 85,829,201 $ General revenues and subventions: Property taxes, levied for general purposes Taxes levied for other specific purposes Federal and State aid not restricted to specific purposes Interest and investment earnings Interagency revenues Miscellaneous Subtotal, General Revenues Change in Net Position Net Position - Beginning Net Position - Ending

The accompanying notes are an integral part of these financial statements. 16

33,941

33,941

Net (Expenses) Revenues and Changes in Net Position Governmental Activities $

(7,201,328) (1,750,897) (341,233) (2,781,512) (3,092,278) (56,843) (1,115,008) (2,693,965) (1,501,567) (1,898,095) (1,954) (576,055) (192,435) (1,521,836) (24,725,006)

$

10,680,757 271,451 13,676,325 242,581 741,244 2,805,609 28,417,967 3,692,961 45,010,334 48,703,295

16

MERCED COUNTY OFFICE OF EDUCATION GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2016

General Fund ASSETS Deposits and investments Receivables Due from other funds Prepaid expenditures Stores inventories Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable Due to other funds Unearned revenue Total Liabilities Fund Balances: Nonspendable Restricted Assigned Unassigned Total Fund Balances Total Liabilities and Fund Balances

$

$

$

Special Education Pass-Through Fund

32,495,150 8,475,243 2,680,737 84,698 49,604 43,785,432

$

7,748,102 80,041 212,401 8,040,544

$

$

160,052 11,645,542 8,969,474 14,969,820 35,744,888 $

43,785,432

698,288 2,455,983 3,154,271

$

3,154,271 3,154,271

$

$

$

The accompanying notes are an integral part of these financial statements. 17

Child Development Fund

3,154,271

263,741 4,025,053 37,701 2,398 4,328,893

1,235,845 2,511,351 449,522 4,196,718 2,398 129,777 132,175

$

4,328,893

Non-Major Governmental Funds $

$

$

Total Governmental Funds

4,739,580 70,688 42,340 4,852,608

$

11,021 169,386 180,407

$

$

4,672,201 4,672,201 $

4,852,608

38,196,759 15,026,967 2,760,778 87,096 49,604 56,121,204

12,149,239 2,760,778 661,923 15,571,940 162,450 16,447,520 8,969,474 14,969,820 40,549,264

$

56,121,204

17

MERCED COUNTY OFFICE OF EDUCATION RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2016 Total Fund Balance - Governmental Funds Amounts Reported for Governmental Activities in the Statement of Net Position are Different Because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is Accumulated depreciation is Net Capital Assets In governmental funds, OPEB costs are recognized when employer contributions are made. In the statement of net position, OPEB contributions that cumulatively exceed the current the OPEB obligation are recognized as a Net OPEB Plan Asset. Expenditures relating to contributions made to pension plans were recognized on the modified accrual basis, but are not recognized on the accrual basis. The net change in proportionate share of net pension liability as of the measurement date is not recognized as an expenditure under the modified accrual basis, but is recognized on the accrual basis over the expected remaining service life of members receiving pension benefits. The difference between projected and actual earnings on pension plan investments are not recognized on the modified accrual basis, but are recognized on the accrual basis as an adjustment to pension expense. The differences between expected and actual experience in the measurement of the total pension liability are not recognized on the modified accrual basis, but are recognized on the accrual basis over the expected average remaining service life of members receiving pension benefits. The changes of assumptions is not recognized as an expenditure under the modified accrual basis, but is recognized on the accrual basis over the expected average remaining service life of members receiving pension benefits. Net pension liability is not due and payable in the current period, and is not reported as a liability in the funds. Long-term obligations, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Qualified zone academy bonds Compensated absences Total Long-Term Obligations Total Net Position - Governmental Activities

The accompanying notes are an integral part of these financial statements. 18

$

40,549,264

$ 102,210,729 (33,845,409) 68,365,320

1,675,250

4,684,098

(3,425,718)

(3,211,693)

1,284,020

(1,859,825) (56,954,070)

1,948,600 454,751 $

(2,403,351) 48,703,295

MERCED COUNTY OFFICE OF EDUCATION GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2016

General Fund REVENUES Local Control Funding Formula $ Federal sources Other State sources Other local sources Total Revenues EXPENDITURES Current Instruction Instruction-related activities: Supervision of instruction Instructional library, media and technology School site administration Pupil services: Home-to-school transportation Food services All other pupil services Administration: Data processing All other administration Plant services Facility acquisition and construction Ancillary services Community services Other outgo Enterprise services Debt service Principal Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Sources (Uses) Transfers in Transfers out Net Financing Sources (Uses) NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending $

20,416,282 13,174,754 24,126,774 15,938,913 73,656,723

Special Education Pass-Through Fund $

$

16,500,784 5,716,783 3,953,766 26,171,333

28,132,261

-

5,259,114

7,990,007 583,076 4,766,980

-

1,054,673 2,601,738

4,332,219 275,556 8,913,197

-

952,965 2,277,694

2,575,751 4,030,609 3,592,290 2,535,780 1,974 501,873 292,157 286,504

23,466,408 -

1,758,344 1,457,513 124,901 10,724,691 -

105,140 68,915,374 4,741,349

23,466,408 -

26,211,633 (40,300)

-

(40,300) 172,475 132,175

(65,000) (65,000) 4,676,349 31,068,539 35,744,888

$

The accompanying notes are an integral part of these financial statements. 19

7,942,957 15,523,451 23,466,408

Child Development Fund

$

Non-Major Governmental Funds $

$

930,610 181,980 18,969 1,131,559

Total Governmental Funds $

21,346,892 37,618,495 45,548,988 19,911,648 124,426,023

523,364

33,914,739

129,108 121,012

9,173,788 583,076 7,489,730

13,646

4,332,219 1,228,521 11,204,537

62,781 59,264 74,225 1,206,134 -

2,575,751 5,851,734 5,109,067 2,734,906 1,974 11,226,564 24,964,699 286,504

2,189,534 (1,057,975)

105,140 120,782,949 3,643,074

65,000 65,000 (992,975) 5,665,176 4,672,201

$

65,000 (65,000) 3,643,074 36,906,190 40,549,264

19

MERCED COUNTY OFFICE OF EDUCATION RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016 Total Net Change in Fund Balances - Governmental Funds Amounts Reported for Governmental Activities in the Statement of Activities are Different Because:

$

Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures; however, for governmental activities, those costs are shown in the Statement of Net Position and allocated over their estimated useful lives as annual depreciation expenses in the Statement of Activities. This is the amount by which depreciation exceeds capital outlays in the period. Capital outlays $ 2,731,256 Depreciation expense (3,538,936) Net Expense Adjustment Loss on disposal of capital assets is reported in the government-wide Statement of Net Position, but is not recorded in the governmental funds.

(807,680) (68,398)

In the Statement of Activities, certain operating expenses - compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). Vacation earned was more than the amounts paid by $290,964.

(290,964)

In the governmental funds, pension costs are based on employer contributions made to pension plans during the year. However, in the Statement of Activities, pension expense is the net effect of all changes in the deferred outflows, deferred inflows and net pension liability during the year. Postemployment benefits other than pensions (OPEB): In governmental funds, OPEB costs are recognized when employer contributions are made. In the Statement of Activities, OPEB costs are recognized on the accrual basis. This year, the difference between OPEB costs and actual employer contributions was: Payment of principal on long-term obligations is an expenditure in the governmental funds, but it reduces long-term obligations in the Statement of Net Position and does not affect the Statement of Activities: Qualified zone academy bonds Change in Net Position of Governmental Activities

The accompanying notes are an integral part of these financial statements. 20

3,643,074

959,953

151,836

$

105,140 3,692,961

MERCED COUNTY OFFICE OF EDUCATION FIDUCIARY FUNDS STATEMENT OF NET POSITION JUNE 30, 2016 Retiree Benefits Trust ASSETS Deposits and investments Total Assets LIABILITIES Due to student groups - ROP Due to student groups - Schelby School Due to student groups - Green Meadows Other current liabilities - Payroll Revolving Total Liabilities NET POSITION Reserved for retiree benefits Total Net Position

$ $

738,357 738,357

$ $

6,173,649 6,173,649

$

-

$

15,972 41,895 35 6,115,747 6,173,649

$

The accompanying notes are an integral part of these financial statements. 21

Agency Funds

738,357 738,357

$

MERCED COUNTY OFFICE OF EDUCATION FIDUCIARY FUNDS STATEMENT OF CHANGES IN NET POSITION FOR THE YEAR ENDED JUNE 30, 2016 Retiree Benefits Trust ADDITIONS Contributions

$ Total Additions

DEDUCTIONS Distributions Administrative fees Investment loss Total Deductions

864,977 864,977

999,808 842 4,557 1,005,207

Change in Net Position Net Position - Beginning Net Position - Ending

$

The accompanying notes are an integral part of these financial statements. 22

(140,230) 878,587 738,357

MERCED COUNTY OFFICE OF EDUCATION DISCRETELY PRESENTED COMPONENT UNIT – VIRGINIA SMITH CHARITABLE TRUST STATEMENT OF FINANCIAL POSITION JUNE 30, 2016 ASSETS Current Assets: Cash and cash equivalents Investments Accounts receivable Total Current Assets Endowment Investments: Investments Increase in fair value of investments Total Endowment Investments Equity investment in University Community Land Company Total Assets LIABILITIES AND NET ASSETS Current Liabilities: Accounts payable and accrued liabilities Due to Merced County Office of Education Total Current Liabilities Net Assets: Unrestricted net assets Total Unrestricted Net Assets Permanently restricted net assets Total Net Assets Total Liabilities and Net Assets

$

$

$

$

The accompanying notes are an integral part of these financial statements. 23

247,705 1,269,991 49,212 1,566,908 2,000,000 1,486,052 3,486,052 (383,452) 4,669,508

4,576 799 5,375 1,178,081 1,178,081 3,486,052 4,664,133 4,669,508

MERCED COUNTY OFFICE OF EDUCATION DISCRETELY PRESENTED COMPONENT UNIT – VIRGINIA SMITH CHARITABLE TRUST STATEMENT OF ACTIVITIES JUNE 30, 2016

PUBLIC SUPPORT, REVENUES, AND RECLASSIFICATIONS Interest, dividends and investments income Rent Transfer of investment earnings available for distribution Total public support, revenues, and reclassifications EXPENSES AND LOSSES Program - Scholarships: Scholarships Supporting Activities: Meetings Legal and professional consultations Miscellaneous Total program expenses Administration: Merced County Office of Education (MCOE) Total administration expenses Total expenses Unrealized loss on investments Change in Net Assets Net assets as of beginning of year Net assets as of ending of year

Unrestricted

Permanently Restricted

$

$

31 100,000 49,000 149,031

$

28,010 100,000 128,010

80,833

-

80,833

8,190 59,622 755 149,400

-

8,190 59,622 755 149,400

47,714 47,714 197,114 (11,988) (60,071) 1,238,152 $ 1,178,081

The accompanying notes are an integral part of these financial statements. 24

27,979 (49,000) (21,021)

Total

(157,830) (178,851) 3,664,903 $ 3,486,052

47,714 47,714 197,114 (169,818) (238,922) 4,903,055 $ 4,664,133

MERCED COUNTY OFFICE OF EDUCATION DISCRETELY PRESENTED COMPONENT UNIT – VIRGINIA SMITH CHARITABLE TRUST STATEMENT OF CASH FLOWS JUNE 30, 2016 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Accounts payable and accrued liabilities Net Cash Used by Operating Activities

$

(238,922)

(910) (239,832)

CASH FLOWS FROM INVESTING ACTIVITIES Investments Endowment investment University Community Land Company, LLC investment Net Cash Provided by Investing Activities

201,133 178,851 9,125 389,109

Net increase in cash and cash equivalents Cash and cash equivalents as of beginning of year Cash and cash equivalents as of ending of year

149,277 98,428 247,705

$

The accompanying notes are an integral part of these financial statements. 25

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity The Merced County Office of Education (MCOE) provides service to districts within Merced County and operates education programs for special populations of students. Services provided to districts include administrative, fiscal, personnel, data processing, media, curriculum, staff training, psychological, occupational training, and governmental relations. Educational programs operated for special populations of students are three-county regional Migrant (Merced, Stanislaus, and Madera), Special Education, Regional Occupational Program, Title VII Bilingual/Bicultural, Community School, Juvenile Court School, Job Training Partnership Act, and Outdoor School. The Merced County Office of Education maintains an administrative office complex, library/media center, teachers' center, print shop, and warehouse/stores and has 200 school sites that are employee workstations. Component Units Component units are legally separate organizations for which MCOE is financially accountable. Component units may also include organizations that are fiscally dependent on MCOE in that MCOE approves their budget, and other activities. For financial reporting purposes, the component units have a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus are required to be included in the financial statements of MCOE. The Virginia Smith Charitable Trust component unit, discussed below, although a legally separate tax-exempt entity, is required to be reported in the financial statements using the discrete presentation method because the governing board of the component unit is essentially the same as the governing board of MCOE and because it does not provide services exclusively, or almost exclusively, to MCOE. The Merced Scholars Charter School component unit, although a legally separate entity, is reported in the financial statements using the blended presentation method as if it was part of MCOE's operations because the governing board of the component unit is essentially the same as the governing board of MCOE and the operational responsibility for the School rests with MCOE. Virginia Smith Charitable Trust MCOE and the Virginia Smith Charitable Trust (the Trust) have a financial and operational relationship, which meets the reporting entity definition criteria of GASB Statement 14, "The Financial Reporting Entity," for inclusion of the trust as a discretely presented component unit of MCOE. A separate Annual Financial Report is prepared for the Trust and can be reviewed at Merced County Office of Education located at 632 W. 13th Street, Merced CA, 95341. Charter School MCOE has approved a charter for Merced Scholars Charter School pursuant to Education Code Section 47605. The Merced Scholars Charter School is operated by MCOE, and its financial activities are presented in the Charter School Fund. The County receives revenue on behalf of the Merced Scholars Charter School and it's activity is accounted for in the Charter School Special Revenue Fund.

26

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Basis of Presentation - Fund Accounting The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. MCOE's funds are grouped into two broad fund categories: governmental and fiduciary. Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are MCOE's major and non-major governmental funds: Major Governmental Funds General Fund The General Fund is the chief operating fund for all local education agencies. It is used to account for the ordinary operations of MCOE. All transactions except those accounted for in another fund are accounted for in this fund. Three funds currently defined as special revenue funds in the California State Accounting Manual (CSAM) do not meet the GASB Statement No. 54 special revenue fund definition. Specifically, Fund 17, Special Reserve NonCapital Fund and Fund 20, Special Reserve Postemployment Benefits Fund, are not substantially composed of restricted or committed revenue sources. While these funds are authorized by statute and will remain open for internal reporting purposes, these funds function effectively as extensions of the General Fund, and accordingly have been combined with the General Fund for presentation in these audited financial statements. Special Education Pass-Through Fund This fund is used by the Administrative Unit of a multi-district Special Education Local Plan Area (SELPA) to account for Special Education revenue passed through to other member districts. Child Development Fund The Child Development Fund is used to account separately for Federal, State, and local revenues to operate child development programs and is to be used only for expenditures for the operation of child development programs. Non-Major Governmental Funds Special Revenue Fund The Special Revenue fund is used to account for the proceeds from specific revenue sources (other than trusts, major capital projects, or debt service) that are restricted or committed to expenditures for specified purposes and that compose a substantial portion of the inflows of the fund. Additional resources that are restricted, committed, or assigned to the purpose of the fund may also be reported in the fund. Charter School Fund The Charter School Fund may be used by authorizing districts to account separately for the activities of district-operated charter schools that would otherwise be reported in the authorizing county office of education's General Fund.

27

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Adult Education Fund The Adult Education Fund is used to account separately for Federal, State, and local revenues for adult education programs and is to be expended for adult education purposes only. Capital Project Fund The Capital Project fund is used to account for financial resources that are restricted, committed, or assigned to the acquisition or construction of major capital facilities and other capital assets (other than those financed by proprietary funds and trust funds). County School Facilities Fund The County School Facilities Fund is established pursuant to Education Code Section 17070.43 to receive apportionments from the 1998 State School Facilities Fund (Proposition lA), the 2002 State School Facilities Fund (Proposition 47), the 2004 State School Facilities Fund (Proposition 55), or the 2006 State Schools Facilities Fund (Proposition 1D) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section 17070 et seq.). Fiduciary Funds Fiduciary funds are used to account for assets held in trustee or agent capacity for others that cannot be used to support MCOE's own programs. The fiduciary fund category is split into two classifications: retiree benefits trust fund and agency funds. The key distinction between trust and agency funds is that trust funds are subject to a trust agreement that affects the degree of management involvement and the length of time that the resources are held. The trust fund is used to account for the assets held by MCOE under a trust agreement for retiree benefits and is therefore, not available to support MCOE's own programs. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Such funds have no equity accounts since all assets are due to individuals or entities at some future time. MCOE's agency fund accounts for student body activities for ROP, MCOE's payroll clearing account, Shelby School ASB, and Camp Green Meadows. Basis of Accounting - Measurement Focus Government-Wide Financial Statements The government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. The government-wide statement of activities presents a comparison between expenses, both direct and indirect, of MCOE and for each governmental function, and exclude fiduciary activity. Direct expenses are those that are specifically associated with a service, program, or department and are therefore, clearly identifiable to a particular function. MCOE does not allocate indirect expenses to functions in the Statement of Activities, except for depreciation. Program revenues include charges paid by the recipients of the goods or services offered by the programs and 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. The comparison of program revenues and expenses identifies the extent to which each program is self-financing or draws from the general revenues of MCOE. Net position should be reported as restricted when constraints placed on net position are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net position restricted for other activities result from special revenue funds and the restrictions on their use.

28

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Fund Financial Statements Fund financial statements report detailed information about MCOE. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column. Governmental Funds All governmental funds are accounted for using the flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balances reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements, therefore, include reconciliations with brief explanations to better identify the relationship between the government-wide financial statements, prepared using the economic resources measurement focus and the accrual basis of accounting, and the governmental fund financial statements, prepared using the flow of current financial resources measurement focus and the modified accrual basis of accounting. Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are excluded from the government-wide financial statements because they do not represent resources of MCOE. Revenues – Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on 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 that 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. Generally, available is defined as collectible within 60 days. However to achieve comparability of reporting among California LEAs and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to state-aid apportionments, the California Department of Education has defined available for LEAs as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. Non-exchange transactions, in which MCOE receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Unearned Revenue Unearned revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by MCOE prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when MCOE has a legal claim to the resources, the liability for unearned revenue is removed from the balance sheet and revenue is recognized.

29

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Certain grants received before the eligibility requirements are met are recorded as unearned revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as unearned revenue. Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable, and typically paid within 60 days. Principal and interest on longterm obligations, which has not matured, are recognized when paid in the governmental funds as expenditures. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds but are recognized in the entity-wide statements. Cash and Cash Equivalents The County's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flows. Investments Investments held at June 30, 2016, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in county pools and SISC Investment Pool are determined by the program sponsor. Prepaid Expenditures Prepaid expenditures (expenses) represent amounts paid in advance of receiving goods or services. The County has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The County has chosen to report the expenditures when incurred. Stores Inventories Inventories consist of expendable food and supplies held for consumption. Inventories are stated at cost, on the first-in, first-out basis. The costs of inventory items are recorded as expenditures in the governmental type funds and expenses in the proprietary type funds when used. Capital Assets and Depreciation The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. General capital assets are long-lived assets of MCOE. MCOE maintains a capitalization threshold of $10,000 for equipment and $25,000 for facilities improvements. MCOE does not possess any infrastructure. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not.

30

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide statement of net assets. The valuation basis for capital assets is historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated. Depreciation of capital assets is computed and recorded by the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings, 20 to 50 years; improvements/infrastructure, 5 to 50 years; equipment, 2 to 15 years. Interfund Balances On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables." These amounts are eliminated in the governmental activities column of the Statement of Net Position. Compensated Absences Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide statement of net position. Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in MCOE's financial statements. However, 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. Credit for unused sick leave is applicable to all certificated employees and is determined by dividing the number of unused sick days by the number of base service days required to complete the last school year, if employed full-time. Accounts Payable and Long-Term Obligations Accounts payable and long-term obligations are reported in the government-wide financial statements. In general, governmental fund accounts payable that are paid in a timely manner and in full from current financial resources are reported as obligations of the funds. Deferred Outflows/Inflows of Resources In addition to assets, the Statement of Net Position also reports deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. MCOE reports deferred outflows of resources for pension related items. In addition to liabilities, the Statement of Net Position reports a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as revenue until then. MCOE reports deferred inflows of resources for pension related items.

31

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Pensions For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) plan for schools (Plans) and additions to/deductions from the Plans' fiduciary net position have been determined on the same basis as they are reported by CalSTRS and CalPERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Member contributions are recognized in the period in which they are earned. Investments are reported at fair value. Fund Balances - Governmental Funds As of June 30, 2016, fund balances of the governmental funds are classified as follows: Nonspendable - amounts that cannot be spent either because they are in nonspendable form or because they are legally or contractually required to be maintained intact. Restricted - amounts that can be spent only for specific purposes because of constitutional provisions or enabling legislation or because of constraints that are externally imposed by creditors, grantors, contributors, or the laws or regulations of other governments. Committed - amounts that can be used only for specific purposes determined by a formal action of the County Superintendent of Schools. The County Superintendent of Schools is the highest level of decision-making authority for MCOE. Commitments may be established, modified, or rescinded only through resolutions or other action as approved by the County Superintendent of Schools. The County Office of Education has no committed fund balances. Assigned - amounts that do not meet the criteria to be classified as restricted or committed but that are intended to be used for specific purposes. Under MCOE's adopted policy, only the assistant superintendent of business services (CBO) may assign amounts for specific purposes. Unassigned - all other spendable amounts. This category also provides the resources necessary to meet the California Department of Education's established minimum reserves for economic uncertainty. Spending Order Policy When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, MCOE considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, MCOE considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds, as needed, unless the County Superintendent of Schools has provided otherwise in its commitment or assignment actions.

32

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Minimum Fund Balance Policy The governing board adopted a minimum fund balance policy for the General Fund in order to protect the local educational agency against revenue shortfalls or unpredicted one-time expenditures. The policy requires a Reserve for Economic Uncertainties consisting of unassigned amounts equal to no less than 14 percent of General Fund expenditures and other financing uses. Net Position Net position represents the difference between assets and liabilities. Net position net of investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction, or improvement of those assets. Net position is reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by MCOE or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. MCOE first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position is available. The government-wide financial statements report $16,447,520 of restricted net position. Interfund Activity Transfers between governmental activities in the government-wide financial statements are reported in the same manner as general revenues. Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented in the financial statements. Interfund transfers are eliminated in the governmental columns of the Statement of Activities. Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 of each year. MCOE governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account.

33

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For budget purposes, on behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles. Property Tax Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Merced bills and collects the taxes on behalf of MCOE. Local property tax revenues are recorded when received. Change in Accounting Principles In February 2015, the GASB issued Statement No. 72, Fair Value Measurement and Application. This Statement addresses accounting and financial reporting issues related to fair value measurements. The definition of fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Statement provides guidance for determining a fair value measurement for financial reporting purposes. This Statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. MCOE has implemented the provisions of this Statement as of June 30, 2016. In June 2015, the GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68. The objective of this Statement is to improve the usefulness of information about pensions included in the general purpose external financial reports of state and local governments for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pensions that are not within the scope of Statement No. 68. It also amends certain provisions of Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68 for pension plans and pensions that are within their respective scopes. The provisions in this Statement effective as of June 30, 2016, include the provisions for assets accumulated for purposes of providing pensions through defined benefit plans and the amended provisions of Statements No. 67 and No. 68. MCOE has implemented these provisions as of June 30, 2016. The provisions in this Statement related to defined benefit pensions that are not within the scope of Statement No. 68 are effective for periods beginning after June 15, 2016.

34

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 In June 2015, the GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The objective of this Statement is to identify—in the context of the current governmental financial reporting environment—the hierarchy of generally accepted accounting principles (GAAP). The "GAAP hierarchy" consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This Statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and non-authoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. This Statement supersedes Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. MCOE has implemented the provisions of this Statement as of June 30, 2016. In December 2015, the GASB issued Statement No. 79, Certain External Investment Pools and Pool Participants. This Statement addresses accounting and financial reporting for certain external investment pools and pool participants. Specifically, it establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes. An external investment pool qualifies for that reporting if it meets all of the applicable criteria established in this Statement. The specific criteria address (1) how the external investment pool transacts with participants; (2) requirements for portfolio maturity, quality, diversification, and liquidity; and (3) calculation and requirements of a shadow price. Significant noncompliance prevents the external investment pool from measuring all of its investments at amortized cost for financial reporting purposes. Professional judgment is required to determine if instances of noncompliance with the criteria established by this Statement during the reporting period, individually or in the aggregate, were significant. If an external investment pool does not meet the criteria established by this Statement, that pool should apply the provisions in paragraph 16 of Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, as amended. If an external investment pool meets the criteria in this Statement and measures all of its investments at amortized cost, the pool's participants also should measure their investments in that external investment pool at amortized cost for financial reporting purposes. If an external investment pool does not meet the criteria in this Statement, the pool's participants should measure their investments in that pool at fair value, as provided in paragraph 11 of Statement No. 31, as amended. This Statement establishes additional note disclosure requirements for qualifying external investment pools that measure all of their investments at amortized cost for financial reporting purposes and for governments that participate in those pools. Those disclosures for both the qualifying external investment pools and their participants include information about any limitations or restrictions on participant withdrawals. MCOE has implemented the provisions of this Statement as of June 30, 2016.

35

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 New Accounting Pronouncements In June 2015, the GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. It also includes requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement No. 43, and Statement No. 50, Pension Disclosures. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2016. Early implementation is encouraged. In June 2015, the GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pension. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). It also improves information provided by state and local governmental employers about financial support for OPEB that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for all postemployment benefits (pensions and OPEB) with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, for OPEB. Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, establishes new accounting and financial reporting requirements for OPEB plans. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2017. Early implementation is encouraged. In August 2015, the GASB issued Statement No. 77, Tax Abatement Disclosures. This Statement requires governments that enter into tax abatement agreements to disclose the following information about the agreements:   

Brief descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients The gross dollar amount of taxes abated during the period Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement

36

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2015. Early implementation is encouraged. In December 2015, the GASB issued Statement No. 78, Pensions Provided Through Certain Multiple-Employer Defined Benefit Pension Plans. The objective of this Statement is to address a practice issue regarding the scope and applicability of Statement No. 68, Accounting and Financial Reporting for Pensions. This issue is associated with pensions provided through certain multiple-employer defined benefit pension plans and to state or local governmental employers whose employees are provided with such pensions. Prior to the issuance of this Statement, the requirements of Statement No. 68 applied to the financial statements of all state and local governmental employers whose employees are provided with pensions through pension plans that are administered through trusts that meet the criteria in paragraph 4 of that Statement. This Statement amends the scope and applicability of Statement No. 68 to exclude pensions provided to employees of state or local governmental employers through a cost-sharing multiple-employer defined benefit pension plan that (1) is not a state or local governmental pension plan, (2) is used to provide defined benefit pensions both to employees of state or local governmental employers and to employees of employers that are not state or local governmental employers, and (3) has no predominant state or local governmental employer (either individually or collectively with other state or local governmental employers that provide pensions through the pension plan). This Statement establishes requirements for recognition and measurement of pension expense, expenditures, and liabilities; note disclosures; and required supplementary information for pensions that have the characteristics described above. The requirements of this Statement are effective for reporting periods beginning after December 15, 2015. Early implementation is encouraged. In January 2016, the GASB issued Statement No. 80, Blending Requirements for Certain Component Units amendment of GASB Statement No. 14. The objective of this Statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. This Statement amends the blending requirements established in paragraph 53 of Statement No. 14, The Financial Reporting Entity, as amended. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. The additional criterion does not apply to component units included in the financial reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016. Early implementation is encouraged. In March 2016, the GASB issued Statement No. 81, Irrevocable Split-Interest Agreements. The objective of this Statement is to improve accounting and financial reporting for irrevocable split-interest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement.

37

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 This Statement requires that a government that receives resources pursuant to an irrevocable split-interest agreement recognize assets, liabilities, and deferred inflows of resources at the inception of the agreement. Furthermore, this Statement requires that a government recognize assets representing its beneficial interests in irrevocable split-interest agreements that are administered by a third party, if the government controls the present service capacity of the beneficial interests. This Statement requires that a government recognize revenue when the resources become applicable to the reporting period. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2016, and should be applied retroactively. Early implementation is encouraged. In March 2016, the GASB issued Statement No. 82, Pension Issues - An Amendment of GASB Statements No. 67, No. 68, and No. 73. The objective of this Statement is to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain Provisions of GASB Statements No. 67 and No. 68. Specifically, this Statement addresses issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016, except for the requirements of this Statement for the selection of assumptions in a circumstance in which an employer's pension liability is measured as of a date other than the employer's most recent fiscal year-end. In that circumstance, the requirements for the selection of assumptions are effective for that employer in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. Early implementation is encouraged.

NOTE 2 - DEPOSITS AND INVESTMENTS Summary of Deposits and Investments Deposits and investments as of June 30, 2016, are classified in the accompanying financial statements as follows:

Governmental activities Fiduciary funds Total Deposits and Investments

$ 38,196,759 6,912,006 $ 45,108,765

Deposits and investments as of June 30, 2016, consist of the following: Cash on hand and in banks Cash in revolving Investments Total Deposits and Investments

$

58,137 25,750 45,024,878 $ 45,108,765

38

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Policies and Practices MCOE 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. Investment in County Treasury - MCOE is considered to be an involuntary participant in an external investment pool as MCOE is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of MCOE's investment in the pool is reported in the accounting financial statements at amounts based upon MCOE's pro-rata share of the fair value provided by the 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. Investment in the Self-Insured Schools of California - MCOE is a voluntary participant in the Self-Insured Schools of California (SISC) OPEB Trust Fund that is regulated by California government code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of MCOE's investment in the Pool is reported in the accompanying financial statement at amounts based upon MCOE's pro-rata share of the fair value provided by SISC for the entire SISC portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by SISC, which is recorded on the amortized cost basis.

39

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below:

Authorized Investment Type Local Agency Bonds, Notes, Warrants Registered State Bonds, Notes, Warrants U.S. Treasury Obligations U.S. Agency Securities Banker's Acceptance Commercial Paper Negotiable Certificates of Deposit Repurchase Agreements Reverse Repurchase Agreements Medium-Term Corporate Notes Mutual Funds Money Market Mutual Funds Mortgage Pass-Through Securities County Pooled Investment Funds Local Agency Investment Fund (LAIF) Joint Powers Authority Pools

Maximum Remaining Maturity 5 years 5 years 5 years 5 years 180 days 270 days 5 years 1 year 92 days 5 years N/A N/A 5 years N/A N/A N/A

Maximum Percentage of Portfolio None None None None 40% 25% 30% None 20% of base 30% 20% 20% 20% None None None

Maximum Investment in One Issuer None None None None 30% 10% None None None None 10% 10% None None None None

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. MCOE does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. MCOE manages its exposure to interest rate risk by investing in the County Pool which purchases a combination of shorter term and longer term investments and which also times cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.

40

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Segmented Time Distribution Information about the sensitivity of the fair values of MCOE's investments to market interest rate fluctuations is provided by the following schedule that shows the distribution of MCOE's investments by maturity:

Investment Type Certificates of Deposit Held by Bond Trustee Investment Contract County Pool SISC Investment Pool Total

Fair Value 138,145

12 Months or Less $ -

$

902,991 43,245,385 738,357 $ 45,024,878

738,357 $ 738,357

$

13 - 24 Months -

25 - 60 Months $ -

More Than 60 Months $ 138,145

43,245,385 $ 43,245,385

-

902,991 $ 1,041,136

$

NOTE 3 - FAIR VALUE MEASUREMENTS MCOE categorizes the fair value measurements of its investments based on the hierarchy established by generally accepted accounting principles. The fair value hierarchy, which has three levels, is based on the valuation inputs used to measure an asset's fair value. The following provides a summary of the hierarchy used to measure fair value: Level 1 - Quoted prices in active markets for identical assets that the District has the ability to access at the measurement date. Level 1 assets may include debt and equity securities that are traded in an active exchange market and that are highly liquid and are actively traded in over-the-counter markets. Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable, such as interest rates and curves observable at commonly quoted intervals, implied volatilities, and credit spreads. For financial reporting purposes, if an asset has a specified term, a Level 2 input is required to be observable for substantially the full term of the asset. Level 3 - Unobservable inputs should be developed using the best information available under the circumstances, which might include MCOE's own data. MCOE should adjust that data if reasonably available information indicates that other market participants would use different data or certain circumstances specific to MCOE are not available to other market participants. Uncategorized - Investments in the Certificates of Deposit, Investment Contract, Merced County Treasury Investment Pool, and SISC Investment Pool are not measured using the input levels above because MCOE's transactions are based on a stable net asset value per share. All contributions and redemptions are transacted at $1.00 net asset value per share.

41

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 4 - RECEIVABLES Receivables at June 30, 2016, consist of intergovernmental grants, entitlements, state apportionments, and local sources. All receivables are considered collectible in full.

General Fund Federal Government Categorical aid State Government State grants and entitlements Local Sources Total

$ 3,112,879

3,967,827 1,394,537 $ 8,475,243

Special Education Pass-Through Fund

Child Development Fund

Non-Major Governmental Funds $

-

$ 5,650,836

$

70,688 70,688

6,796,524 2,579,607 $ 15,026,967

Deductions

Balance June 30, 2016

$

-

$ 2,537,957

$

2,455,983 2,455,983

302,026 1,185,070 $ 4,025,053

Total

NOTE 5 - CAPITAL ASSETS Capital asset activity for the fiscal year ended June 30, 2016, is as follows: Balance July 1, 2015 Governmental Activities Capital Assets not being depreciated Land Construction in progress Total Capital Assets Not Being Depreciated Capital Assets being depreciated Land improvements Buildings and improvements Furniture and equipment Total Capital Assets Being Depreciated Less Accumulated Depreciation Land improvements Buildings and improvements Furniture and equipment Total Accumulated Depreciation Governmental Activities Capital Assets, Net

$ 4,850,801 2,534,058

Additions

$

40,434

$

2,250,391

$ 4,850,801 324,101

7,384,859

40,434

2,250,391

5,174,902

3,944,038 75,945,542 12,564,424

758,646 2,900,837 1,281,730

359,390

4,702,684 78,846,379 13,486,764

92,454,004

4,941,213

359,390

97,035,827

2,393,336 18,276,018 9,928,111 30,597,465 $ 69,241,398

203,757 2,453,750 881,429 3,538,936 $ 1,442,711

290,992 290,992 $ 2,318,789

2,597,093 20,729,768 10,518,548 33,845,409 $ 68,365,320

42

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Depreciation expense was charged to governmental functions as follows: Governmental Activities Instruction Supervision of Instruction Instructional Library Media and Technology School Administration Pupil Transportation Food Services Other Pupil Services Community Services Other General Administration Data Processing Services Plant Maintenance and Operations Total Depreciation Expenses, Governmental Activities

$

$

1,885,015 20,732 85,490 263,532 609,779 17,037 63,067 10,591 88,721 157,184 337,788 3,538,936

NOTE 6 - INTERFUND TRANSACTIONS Interfund Receivables/Payables (Due To/Due From) Interfund receivable and payable balances arise from interfund transactions and are recorded by all funds affected in the period in which transactions are executed. Interfund receivable and payable balances at June 30, 2016, between major and non-major governmental funds are as follows: Interfund Receivables Major Governmental Funds General Child Development Total Major Governmental Funds Non-Major Governmental Fund Charter Adult Education Total Non-Major Governmental Funds Total All Governmental Funds

43

Interfund Payables

$ 2,680,737 37,701 2,718,438

$

80,041 2,511,351 2,591,392

42,340 42,340 $ 2,760,778

160,741 8,645 169,386 $ 2,760,778

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 The General Fund owes the Charter School Fund for AB602 annual funding. The General Fund owes the Child Development Fund for various operating costs. The Charter School Fund owes the General Fund for indirect costs. The Charter School Fund owes the General Fund for various operating costs. The Adult Education Fund owes the General Fund for indirect costs. The Child Development Fund owes the General Fund for indirect costs. The Child Development Fund owes the General Fund for a cash flow loan. Total

$

42,340 37,701 151,949 8,792 8,645 511,351 2,000,000 $ 2,760,778

Operating Transfers Interfund transfers are used to (1) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use unrestricted revenues collected in the General Fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. Interfund transfers for the year ended June 30, 2016, consisted of the following: The General Fund transferred to the Adult Education Fund to assist with cash flow. The state adult funding is reimbursement based.

$

65,000

NOTE 7 - PREPAID EXPENDITURES Prepaid expenditures at June 30, 2016, consist of the following:

General Fund $ 61,270 23,428 $ 84,698

Service contracts Travel and conferences Total

44

Child Development Fund $ 2,398 $ 2,398

$ $

Total 61,270 25,826 87,096

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 8 - ACCOUNTS PAYABLE Accounts payable at June 30, 2016, consist of the following:

Vendor payables Salary and benefits Deferred payroll Total

General Fund $ 5,292,799 2,062,156 393,147 $ 7,748,102

Special Education Pass-Through Fund $ 3,154,271 $ 3,154,271

Child Development Fund $ 1,235,845 $ 1,235,845

Non-Major Governmental Funds $ 11,021 $ 11,021

General Fund $ 1,208 211,193 $ 212,401

Child Development Fund $ 449,522 $ 449,522

Total $ 9,693,936 2,062,156 393,147 $ 12,149,239

NOTE 9 - UNEARNED REVENUE Unearned revenue at June 30, 2016, consists of the following:

Federal financial assistance State categorical aid Total

$ $

Total 1,208 660,715 661,923

NOTE 10 - LONG-TERM OBLIGATIONS Summary The changes in MCOE's long-term obligations during the year consisted of the following:

Qualified Zone Academy Bonds Qualified Zone Academy Bonds Compensated absences - net Total

Balance July 1, 2015 $ 1,000,000 1,053,740 163,787 $ 2,217,527

Additions $ 290,964 $ 290,964

Deductions $ 105,140 $ 105,140

Balance June 30, 2016 $ 1,000,000 948,600 454,751 $ 2,403,351

Due in One Year $ 105,140 $ 105,140

The Qualified Zone Academy Bonds are paid by the General Fund. The compensated absences will be paid by the fund for which the employee works.

45

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Qualified Zone Academy Bonds MCOE issued $1,000,000 in Qualified Zone Academy Bonds. Interest is not payable with the Bonds. In lieu of receiving periodic interest payments, eligible holders of the Bonds are allowed an annual federal income tax credit equal to the credit rate times the face amount of the Bonds. The Bonds will be paid in a lump sum at maturity. The County deposited $554,464 from the net proceeds with the trustee. The guaranteed interest earnings are projected to be sufficient to pay off the $1,000,000 obligation upon maturity in March 2019. The County issued $2,000,000 in Qualified Zone Academy Bonds on September 23, 2005. Interest is not payable on the Bonds. In lieu of receiving periodic interest payments, eligible holder of the Bonds are allowed an annual federal income tax credit equal to the credit rate times the face amount of the Bonds. The liability at June 30, 2016, is $948,600. The required payments will total $1,682,240, which along with interest earnings will be sufficient to fund the total maturity of $2,000,000 due September 2021. The required payments through September 23, 2021, are as follows:

Fiscal Year 2017 2018 2019 2020 2021 2022 Total Remaining Payments Cumulative payments made by County Office of Education Projected cumulative interest earnings Total obligation

Required Payments $ 105,140 105,140 105,140 105,140 105,140 105,140 630,840 1,051,400 317,760 $ 2,000,000

Remaining obligation to be funded with required payments and interest earnings

$

Compensated Absences The long-term portion of compensated absences for MCOE at June 30, 2016, amounted to $454,751.

46

948,600

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 11 - FUND BALANCES Fund balances are composed of the following elements:

General Fund Nonspendable Revolving cash Stores inventories Prepaid expenditures Total Nonspendable Restricted Legally restricted programs Capital projects Total Restricted Assigned Instructional services Facility repairs Instructional programs/ community school LCAP oversight ROP CalSTRS/CalPERS increases JLB outdoor facility Other postemployment benefits Total Assigned Unassigned Reserve for economic uncertainties Total

$

25,750 49,604 84,698 160,052

Child Development Fund

Non-Major Governmental Funds

$

$

2,398 2,398

-

Total $

25,750 49,604 87,096 162,450

11,645,542 11,645,542

129,777 129,777

955,679 3,716,522 4,672,201

12,730,998 3,716,522 16,447,520

842,592 2,106,384

-

-

842,592 2,106,384

1,245,086 652,231 1,963,754 300,000 750,000 1,109,427 8,969,474

-

-

1,245,086 652,231 1,963,754 300,000 750,000 1,109,427 8,969,474

132,175

$ 4,672,201

14,969,820 $ 40,549,264

14,969,820 $ 35,744,888

47

$

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 12 - EXPENDITURES (BUDGET VERSUS ACTUAL) At June 30, 2016, the following District major funds exceeded the budgeted amounts as follows:

Expenditures and Other Uses Budget Actual Excess

Funds General Capital outlay Other outgo Child Development Certificated salaries Services and operating expenditures Other outgo

$ 1,645,390 $ (1,497,049)

$ $

2,535,779 (1,528,968)

$ $

890,389 31,919

$ $ $

$ $ $

4,350,942 9,931,731 1,758,344

$ $ $

23,072 715,624 33,587

4,327,870 9,216,107 1,724,757

NOTE 13 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description The Postemployment Benefits Plan (the "Plan") is a single-employer defined benefit healthcare plan administered by the Merced County Office of Education. The Plan provides medical and dental insurance benefits to eligible retirees and their spouses. Membership of the Plan consists of 80 retirees and beneficiaries currently receiving benefits and 39 active plan members. Contribution Information The required contribution is based on projected pay-as-you-go financing requirements, with an additional amount to prefund benefits as determined by the County's administration. MCOE is a voluntary participant in the SelfInsured Schools of California (SISC) OPEB Trust Fund that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The trust fund is established as an investment vehicle for participating employers to accumulate assets to fund OPEB. Plan assets are, which are irrevocable, are dedicated to providing retiree benefits. MCOE contributed $864,135 to the plan, and the plan lost $4,557 in investment returns.

48

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Annual OPEB Cost and Net OPEB Asset MCOE's annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years.

Annual required contribution Interest on net plan asset Adjustment to annual required contribution Annual OPEB cost (expense) Contributions made Loss on plan assets Increase in net OPEB asset Net OPEB asset, beginning of year Net OPEB asset, end of year

$

678,106 (102,069) 131,705 707,742 (864,135) 4,557 (151,836) (1,523,414) $ (1,675,250)

Trend Information Trend information for annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB asset is as follows: Year Ended June 30, 2016 2015 2014

Annual OPEB Cost $ 707,742 879,530 880,958

Actual Contribution $ 864,135 1,348,598 674,453

Percentage Contributed 122.10% 153.33% 76.56%

Net Plan Asset $ 1,675,250 1,523,414 1,029,274

Funded Status and Funding Progress A schedule of funding progress as of the most recent actuarial valuation is as follows:

Actuarial Valuation Date July 1, 2015

Actuarial Value of Assets (a) $ 874,141

Actuarial Accrued Liability (AAL) Entry Age Normal Cost (b) $ 8,404,647

Unfunded AAL (UAAL) (b - a) $ 7,530,506

49

Funded Ratio (a / b) 10.40%

Covered Payroll (c) $ 41,224,255

UAAL as a Percentage of Covered Payroll ([b - a] / c) 18.27%

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, investment returns, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the July 1, 2015, actuarial valuation, the entry age normal cost method was used. The actuarial assumptions included a 6.7 percent investment rate of return (net of administrative expenses), based on the plan being funded in an irrevocable employee benefit trust invested in a combined equity and fixed income portfolio. Healthcare cost trend rates were 4.0 percent. The cost trend rate used for the Dental and Vision programs was also 4.0 percent. The UAAL is being amortized at a level dollar method. The remaining amortization period at June 30, 2016, was 22 years. The actuarial value of assets at July 1, 2015, was $874,141. At June 30, 2016, the Trust held assets in the amount of $738,357, which is invested in SISC Investment Pool.

NOTE 14 - RISK MANAGEMENT MCOE is exposed to various risks of loss related to torts; theft, damage and destruction of assets; errors and omissions; injuries to employees; life and health of employees; and natural disasters. MCOE's risk management activities are recorded in the General Fund. Employee life, health, and disability programs are administered by the General Fund through the Self-Insured Schools of California (SISC III) public entity risk pool (JPA). MCOE participates in the Merced County Schools Insurance Group public entity risk pool (JPA) for the workers' compensation program. Refer to Note 16 for additional information regarding the JPAs. The Property and Liability Program, for which the County retains risk of loss, is administered by the General Fund through the purchase of insurance from the Self-Insured Schools of California (SISC II) public entity risk pool (JPA). Excess property and liability coverage is obtained by the JPA though AIG, CHUBB, and the National Union Fire Insurance Company.

50

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 NOTE 15 - EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Academic employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). For the fiscal year ended June 30, 2016, MCOE reported net pension liabilities, deferred outflows of resources, deferred inflows of resources, and pension expense for each of the above plans as follows:

Pension Plan CalSTRS CalPERS Total

Collective Net Pension Liability $ 26,684,856 30,269,214 $ 56,954,070

Collective Deferred Outflows of Resources $ 4,088,344 9,399,597 $ 13,487,941

Collective Deferred Inflows of Resources $ 5,826,207 10,190,852 $ 16,017,059

Collective Pension Expense $ 1,969,755 1,937,978 $ 3,907,733

The details of each plan are as follows: California State Teachers' Retirement System (CalSTRS) Plan Description MCOE contributes to the State Teachers Retirement Plan (STRP) administered by the California State Teachers' Retirement System (CalSTRS). STRP is a cost-sharing multiple-employer public employee retirement system defined benefit pension plan. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2014, annual actuarial valuation report, Defined Benefit Program Actuarial Valuation. This report and CalSTRS audited financial information are publically available reports that can be found on the CalSTRS website under Publications at: http://www.calstrs.com/member-publications. Benefits Provided The STRP provides retirement, disability and survivor benefits to beneficiaries. Benefits are based on members' final compensation, age, and years of service credit. Members hired on or before December 31, 2012, with five years of credited service are eligible for the normal retirement benefit at age 60. Members hired on or after January 1, 2013, with five years of credited service are eligible for the normal retirement benefit at age 62. The normal retirement benefit is equal to 2.0 percent of final compensation for each year of credited service.

51

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 The STRP is comprised of four programs: Defined Benefit Program, Defined Benefit Supplement Program, Cash Balance Benefit Program, and Replacement Benefits Program. The STRP holds assets for the exclusive purpose of providing benefits to members and beneficiaries of these programs. CalSTRS also uses plan assets to defray reasonable expenses of administering the STRP. Although CalSTRS is the administrator of the STRP, the state is the sponsor of the STRP and obligor of the trust. In addition, the state is both an employer and nonemployer contributing entity to the STRP. MCOE contributes exclusively to the STRP Defined Benefit Program, thus disclosures are not included for the other plans. The STRP provisions and benefits in effect at June 30, 2016, are summarized as follows:

Hire date Benefit formula Benefit vesting schedule Benefit payments Retirement age Monthly benefits as a precentage of eligible compensation Required employee contribution rate Required employer contribution rate Required state contribution rate

STRP Defined Benefit Program On or before On or after December 31, 2012 January 1, 2013 2% at 60 2% at 62 5 years of service 5 years of service Monthly for life Monthly for life 60 62 2.0% - 2.4% 2.0% - 2.4% 9.20% 8.56% 10.73% 10.73% 7.12589% 7.12589%

Contributions Required member, District and State of California contributions rates are set by the California Legislature and Governor and detailed in Teachers' Retirement Law. The contributions rates are expressed as a level percentage of payroll using the entry age normal actuarial method. In accordance with AB 1469, employer contributions into the CalSTRS will be increasing to a total of 19.1 percent of applicable member earnings phased over a seven-year period. The contribution rates for each plan for the year ended June 30, 2016, are presented above and MCOE's total contributions were $1,985,828.

52

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2016, MCOE reported a liability for its proportionate share of the net pension liability that reflected a reduction for State pension support provided to MCOE. The amount recognized by MCOE as its proportionate share of the net pension liability, the related state support and the total portion of the net pension liability that was associated with MCOE were as follows: Total net pension liability, including State share: District's proportionate share of net pension liability State's proportionate share of the net pension liability associated with the District Total

$ 26,684,856 14,113,347 $ 40,798,203

The net pension liability was measured as of June 30, 2015. MCOE's proportion of the net pension liability was based on a projection of MCOE's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts and the State, actuarially determined. MCOE's proportionate share for the measurement period June 30, 2015 and June 30, 2014, respectively was 0.0396 percent and 0.0414 percent, resulting in a net decrease in the proportionate share of 0.0018 percent. For the year ended June 30, 2016, MCOE recognized pension expense of $1,969,755. In addition, MCOE recognized pension expense and revenue of $1,093,237 for support provided by the State. At June 30, 2016, MCOE reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Pension contributions subsequent to measurement date Net change in proportionate share of net pension liability Difference between projected and actual earnings on pension plan investments Differences between expected and actual experience in the measurement of the total pension liability Total

53

Deferred Outflows of Resources $ 1,985,828 -

Deferred Inflows of Resources $ 1,102,531

2,102,516

4,277,766

4,088,344

445,910 5,826,207

$

$

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 The deferred outflows of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the subsequent fiscal year. The deferred outflows/(inflows) of resources related to the difference between projected and actual earnings on pension plan investments will be amortized over a closed five-year period and will be recognized in pension expense as follows:

Deferred Outflows/(Inflows) of Resources $ (900,293) (900,293) (900,293) 525,629 $ (2,175,250)

Year Ended June 30, 2017 2018 2019 2020 Total

The deferred outflows/(inflows) of resources related to the net change in proportionate share of net pension liability and the differences between expected and actual experience in the measurement of the total pension liability will be amortized over the Expected Average Remaining Service Life (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the 2014-2015 measurement period is seven years and will be recognized in pension expense as follows: Deferred Outflows/(Inflows) of Resources $ (258,073) (258,073) (258,073) (258,073) (258,073) (258,076) $ (1,548,441)

Year Ended June 30, 2017 2018 2019 2020 2021 Thereafter Total

54

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Actuarial Methods and Assumptions Total pension liability for STRP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2014, and rolling forward the total pension liability to June 30, 2015. The financial reporting actuarial valuation as of June 30, 2014, used the following methods and assumptions, applied to all prior periods included in the measurement: Valuation date Measurement date Experience study Actuarial cost method Discount rate Investment rate of return Consumer price inflation Wage growth

June 30, 2014 June 30, 2015 July 1, 2006 through June 30, 2010 Entry age normal 7.60% 7.60% 3.00% 3.75%

CalSTRS uses custom mortality tables to best fit the patterns of mortality among its members. These custom tables are based on RP2000 series tables adjusted to fit CalSTRS experience. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. The best estimate ranges were developed using capital market assumptions from CalSTRS general investment consultant. Based on the model for CalSTRS consulting actuary's investment practice, a best estimate range was determined by assuming the portfolio is re-balanced annually and that the annual returns are lognormally distributed and independent from year to year to develop expected percentiles for the long-term distribution of annualized returns. The assumed asset allocation is based on Teachers' Retirement Board of the California State Teachers' Retirement System (board) policy for target asset allocation in effect on February 2, 2012, the date the current experience study was approved by the board. Best estimates of ten-year geometric real rates of return and the assumed asset allocation for each major asset class used as input to develop the actuarial investment rate of return are summarized in the following table:

Asset Class Global equity Private equity Real estate Inflation sensitive Fixed income Cash/liquidity

Assumed Asset Allocation 47% 12% 15% 5% 20% 1%

55

Long-Term Expected Real Rate of Return 4.50% 6.20% 4.35% 3.20% 0.20% 0.00%

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Discount Rate The discount rate used to measure the total pension liability was 7.60 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Projected inflows from investment earnings were calculated using the long-term assumed investment rate of return (7.60 percent) and assuming that contributions, benefit payments and administrative expense occurred midyear. Based on these assumptions, the STRP's fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents MCOE's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate: Net Pension Liability $ 40,292,055 $ 26,684,856 $ 15,376,175

Discount Rate 1% decrease (6.60%) Current discount rate (7.60%) 1% increase (8.60%)

California Public Employees Retirement System (CalPERS) Plan Description Qualified employees are eligible to participate in the School Employer Pool (SEP) under the California Public Employees' Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Law. A full description of the pension plan regarding benefit provisions, assumptions (for funding, but not accounting purposes), and membership information is listed in the June 30, 2014 annual actuarial valuation report, Schools Pool Actuarial Valuation, 2014. This report and CalPERS audited financial information are publically available reports that can be found on the CalPERS website under Forms and Publications at: https://www.calpers.ca.gov/page/forms-publications.

56

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Benefits Provided CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of service credit, a benefit factor and the member's final compensation. Members hired on or before December 31, 2012, with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. Members hired on or after January 1, 2013, with five years of total service are eligible to retire at age 52 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after five years of service. The Basic Death Benefit is paid to any member's beneficiary if the member dies while actively employed. An employee's eligible survivor may receive the 1957 Survivor Benefit if the member dies while actively employed, is at least age 50 (or 52 for members hired on or after January 1, 2013), and has at least five years of credited service. The cost of living adjustments for each plan are applied as specified by the Public Employees' Retirement Law. The CalPERS provisions and benefits in effect at June 30, 2016, are summarized as follows:

Hire date Benefit formula Benefit vesting schedule Benefit payments Retirement age Monthly benefits as a precentage of eligible compensation Required employee contribution rate Required employer contribution rate

School Employer Pool (CalPERS) On or before On or after December 31, 2012 January 1, 2013 2% at 55 2% at 62 5 years of service 5 years of service Monthly for life Monthly for life 55 62 1.1% - 2.5% 1.0% - 2.5% 7.000% 6.000% 11.847% 11.847%

Contributions Section 20814(c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Total plan contributions are calculated through the CalPERS annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. MCOE is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. The contributions rates are expressed as percentage of annual payroll. The contribution rates for each plan for the year ended June 30, 2016, are presented above and the total District contributions were $2,698,271.

57

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions As of June 30, 2016, MCOE reported net pension liabilities for its proportionate share of the CalPERS net pension liability totaling $30,269,214. The net pension liability was measured as of June 30, 2015. MCOE's proportion of the net pension liability was based on a projection of MCOE's long-term share of contributions to the pension plan relative to the projected contributions of all participating school districts, actuarially determined. MCOE's proportionate share for the measurement period June 30, 2015 and June 30, 2014, respectively was 0.2054 percent and 0.2175 percent, resulting in a net decrease in the proportionate share of 0.0122 percent. For the year ended June 30, 2016, MCOE recognized pension expense of $1,937,978. At June 30, 2016, MCOE reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Pension contributions subsequent to measurement date Net change in proportionate share of net pension liability Difference between projected and actual earnings on pension plan investments Differences between expected and actual experience in the measurement of the total pension liability Changes of assumptions Total

Deferred Outflows of Resources $ 2,698,271 -

Deferred Inflows of Resources $ 2,323,188

4,971,396

6,007,839

1,729,930 9,399,597

1,859,825 10,190,852

$

$

The deferred outflows of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the subsequent fiscal year. The deferred outflows/(inflows) of resources related to the difference between projected and actual earnings on pension plan investments will be amortized over a closed five-year period and will be recognized in pension expense as follows:

Deferred Outflows/(Inflows) of Resources $ (759,764) (759,764) (759,764) 1,242,849 $ (1,036,443)

Year Ended June 30, 2017 2018 2019 2020 Total

58

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 The deferred outflows/(inflows) of resources related to the net change in proportionate share of net pension liability, changes of assumptions, and the differences between expected and actual experience in the measurement of the total pension liability will be amortized over the Expected Average Remaining Service Life (EARSL) of all members that are provided benefits (active, inactive, and retirees) as of the beginning of the measurement period. The EARSL for the 2014-2015 measurement period is 3.9 years and will be recognized in pension expense as follows: Deferred Outflows/(Inflows) of Resources $ (992,206) (992,205) (468,672) $ (2,453,083)

Year Ended June 30, 2017 2018 2019 Total

Actuarial Methods and Assumptions Total pension liability for the SEP was determined by applying update procedures to a financial reporting actuarial valuation as of June 30, 2014, and rolling forward the total pension liability to June 30, 2015. The financial reporting actuarial valuation as of June 30, 2014, used the following methods and assumptions, applied to all prior periods included in the measurement: Valuation date Measurement date Experience study Actuarial cost method Discount rate Investment rate of return Consumer price inflation Wage growth

June 30, 2014 June 30, 2015 July 1, 1997 through June 30, 2011 Entry age normal 7.65% 7.65% 2.75% Varies by entry age and service

Mortality assumptions are based on mortality rates resulting from the most recent CalPERS experience study adopted by the CalPERS Board. For purposes of the post-retirement mortality rates, those revised rates include five years of projected ongoing mortality improvement using Scale AA published by the Society of Actuaries.

59

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound returns were calculated over the short-term (first ten years) and the longterm (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:

Asset Class Global equity Global fixed income Private equity Real estate Inflation sensitive Infrastructure and Forestland Liquidity

Assumed Asset Allocation 51% 19% 10% 10% 6% 2% 2%

Long-Term Expected Real Rate of Return 5.25% 0.99% 6.83% 4.50% 0.45% 4.50% -0.55%

Discount Rate The discount rate used to measure the total pension liability was 7.65 percent. The projection of cash flows used to determine the discount rate assumed the contributions from plan members and employers will be made at statutory contribution rates. Based on these assumptions, the School Employer Pool fiduciary net position was projected to be available to make all projected future benefit payments to current plan members. Therefore, the long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine total pension liability. The following presents MCOE's proportionate share of the net pension liability calculated using the current discount rate as well as what the net pension liability would be if it were calculated using a discount rate that is one percent lower or higher than the current rate: Net Pension Liability $ 49,265,667 $ 30,269,214 $ 14,472,394

Discount rate 1% decrease (6.65%) Current discount rate (7.65%) 1% increase (8.65%)

60

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 On Behalf Payments The State of California makes contributions to CalSTRS on behalf of MCOE. These payments consist of State General Fund contributions to CalSTRS in the amount of $1,322,441 (7.12589 percent of annual payroll). Contributions are no longer appropriated in the annual Budget Act for the legislatively mandated benefits to CalPERS. Therefore, there is no on behalf contribution rate for CalPERS. Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. Accordingly, these amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves, and have not been included in the budgeted and actual amounts reported in the General Fund - Budgetary Comparison Schedule and the Child Development Fund Budgetary Comparison Schedule.

NOTE 16 - COMMITMENTS AND CONTINGENCIES Grants MCOE received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the General Fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of MCOE at June 30, 2016. Litigation MCOE is involved in one case of litigation in which MCOE is the defendant. In the opinion of legal counsel it is too early in this litigation to make an evaluation of the outcome.

NOTE 17 - PARTICIPATION IN PUBLIC ENTITY RISK POOLS AND JOINT POWER AUTHORITIES MCOE is a member of the Self-Insured Schools of California Health and Welfare Program (SISC III), SelfInsured Schools of California Property and Liability Program (SISC II), and the Merced County Schools Insurance Group (MCSIG) public entity risk pools. MCOE pays an annual premium to each entity for its health, workers' compensation, and property liability coverage. The relationships between MCOE and pools are such that they are not component units of MCOE for financial reporting purposes. These entities have budgeting and financial reporting requirements independent of member units and their financial statements are not presented in these financial statements; however, fund transactions between the entities and MCOE are included in these statements. Audited financial statements are available from the respective entities.

61

MERCED COUNTY OFFICE OF EDUCATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 MCOE has appointed one member to the governing board of SISC III. During the year ended June 30, 2016, MCOE made payment of $8,729,242 to SISC III for medical, dental, and vision insurance. MCOE has appointed one member to the governing board of SISC II. During the year ended June 30, 2016, MCOE made payment of $218,532 to SISC II for property and liability insurance. MCOE has appointed one member to the governing board of MCSIG. During the year ended June 30, 2016, MCOE made payment of $1,180,302 to MCSIG for workers' compensation.

62

REQUIRED SUPPLEMENTARY INFORMATION

63

MERCED COUNTY OFFICE OF EDUCATION GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2016

Budgeted Amounts Original Final REVENUES Local Control Funding Formula Federal sources Other State sources Other local sources 1

Total Revenues EXPENDITURES Current Certificated salaries Classified salaries Employee benefits Books and supplies Services and operating expenditures Other outgo Capital outlay Debt service - principal 1

Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Sources (Uses) Transfers out Net Financing Sources (Uses) NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending 1

Actual

Variances Favorable (Unfavorable) Final to Actual

$ 20,817,723 13,673,695 20,653,365 14,668,332

$ 19,919,729 14,784,948 20,841,802 15,481,405

$ 20,416,282 13,174,754 22,804,333 15,938,913

69,813,115

71,027,884

72,334,282

1,306,398

16,343,983 22,564,941 15,026,077 3,634,992 13,589,976 (1,359,577) 443,091 105,140

16,368,686 22,275,080 14,859,493 4,514,871 14,856,848 (1,497,049) 1,645,390 105,140

15,581,865 21,526,968 14,001,271 2,909,273 12,461,605 (1,528,968) 2,535,779 105,140

786,821 748,112 858,222 1,605,598 2,395,243 (31,919) (890,389) -

70,348,623

73,128,459

67,592,933

5,471,688

(2,100,575)

4,741,349

6,841,924

(535,508) (535,508) 31,068,539 $ 30,533,031

$

(65,000) (65,000) (2,100,575) 4,676,349 31,068,539 31,068,539 $ 28,967,964 $ 35,744,888 $

496,553 (1,610,194) 1,962,531 457,508

(65,000) (65,000) 6,776,924 6,776,924

On behalf payments are not included in revenues and expenditures in this schedule. In addition, due to the consolidation of Fund 17, Special Reserve Non-Capital Fund and Fund 20, Special Reserve Postemployment Benefits Fund for reporting purposes into the General Fund, additional revenues and expenditures pertaining to these other funds are included in the actual revenues and expenditures, however, are not included in the original and final General Fund budgets.

See accompanying notes to required supplementary information. 64

MERCED COUNTY OFFICE OF EDUCATION SPECIAL EDUCATION PASS-THROUGH FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2016

Budgeted Amounts Original Final REVENUES Federal sources Other State sources Total Revenues EXPENDITURES Current Other outgo Total Expenditures NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending

Actual

$ 7,796,627 15,335,902 23,132,529

$ 7,902,657 16,064,972 23,967,629

$ 7,942,957 15,523,451 23,466,408

23,132,529 23,132,529 $ -

23,967,629 23,967,629 $ -

23,466,408 23,466,408 $ -

See accompanying notes to required supplementary information. 65

Variances Favorable (Unfavorable) Final to Actual $

$

40,300 (541,521) (501,221)

501,221 501,221 -

MERCED COUNTY OFFICE OF EDUCATION CHILD DEVELOPMENT FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2016

Budgeted Amounts Original Final REVENUES Federal sources Other State sources Other local sources 1

Total Revenues EXPENDITURES Current Certificated salaries Classified salaries Employee benefits Books and supplies Services and operating expenditures Other outgo Capital outlay 1

Total Expenditures NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending 1

Actual

Variances Favorable (Unfavorable) Final to Actual

$ 17,028,897 3,347,421 3,517,601

$ 17,801,462 4,565,821 3,673,130

$ 16,500,784 5,716,783 3,953,766

23,893,919

26,040,413

26,171,333

130,920

4,409,727 4,817,813 3,463,652 1,698,314 7,686,929 1,617,484 200,000

4,327,870 4,893,507 3,645,449 2,033,414 9,216,107 1,724,757 200,000

4,350,942 4,893,131 3,417,591 1,734,993 9,931,731 1,758,344 124,901

(23,072) 376 227,858 298,421 (715,624) (33,587) 75,099

23,893,919 172,475 $ 172,475

26,041,104 26,211,633 (691) (40,300) 172,475 172,475 $ 171,784 $ 132,175 $

On behalf payments have been excluded from revenues and expenditures in this schedule.

See accompanying notes to required supplementary information. 66

$

(1,300,678) 1,150,962 280,636

(170,529) (39,609) (39,609)

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS FOR THE YEAR ENDED JUNE 30, 2016

Actuarial Valuation Date July 1, 2015 July 1, 2013 July 1, 2011

Actuarial Value of Assets (a) $ 874,141 $ 723,027 $ 1,353,035

Actuarial Accrued Liability (AAL) Entry Age Normal Cost (b) $ 8,404,647 $ 10,355,875 $ 8,558,145

Unfunded AAL (UAAL) (b - a) $ 7,530,506 $ 9,632,848 $ 7,205,110

See accompanying notes to required supplementary information. 67

Funded Ratio (a / b) 10.40% 6.98% 15.81%

Covered Payroll (c) $ 41,224,255 $ 41,331,916 $ 39,554,816

UAAL as a Percentage of Covered Payroll ([b - a] / c) 18.27% 23.31% 18.22%

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF COUNTY OFFICE OF EDUCATION'S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY FOR THE YEAR ENDED JUNE 30, 2016 2016

2015

CalSTRS MCOE's proportion of the net pension liability (asset)

0.0396%

0.0414%

MCOE's proportionate share of the net pension liability (asset) State's proportionate share of the net pension liability (asset) associated with the MCOE Total

$

26,684,856

$

24,194,489

$

14,113,347 40,798,203

$

14,609,677 38,804,167

MCOE's covered - employee payroll

$

18,382,095

$

18,557,976

MCOE's proportionate share of the net pension liability (asset) as a percentage of its covered - employee payroll Plan fiduciary net position as a percentage of the total pension liability

145.17%

130.37%

74%

77%

0.2054%

0.2175%

CalPERS MCOE's proportion of the net pension liability (asset) MCOE's proportionate share of the net pension liability (asset)

$

30,269,214

$

24,694,067

MCOE's covered - employee payroll

$

22,686,858

$

22,842,169

MCOE's proportionate share of the net pension liability (asset) as a percentage of its covered - employee payroll Plan fiduciary net position as a percentage of the total pension liability

133.42%

108.11%

79%

83%

Note : In the future, as data become available, ten years of information will be presented.

See accompanying notes to required supplementary information. 68

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF COUNTY OFFICE OF EDUCATION CONTRIBUTIONS FOR THE YEAR ENDED JUNE 30, 2015 2016

2015

CalSTRS Contractually required contribution Contributions in relation to the contractually required contribution Contribution deficiency (excess)

$

MCOE's covered - employee payroll

$

$

1,985,827 1,985,827 -

$

1,639,512 1,639,512 -

$

18,507,241

$

18,462,973

Contributions as a percentage of covered - employee payroll

10.73%

8.88%

CalPERS Contractually required contribution Contributions in relation to the contractually required contribution Contribution deficiency (excess)

$

MCOE's covered - employee payroll Contributions as a percentage of covered - employee payroll

$

$

2,698,271 2,698,271 -

$

2,675,446 2,675,446 -

$

22,775,985

$

22,729,131

11.847%

Note : In the future, as data become available, ten years of information will be presented.

See accompanying notes to required supplementary information. 69

11.771%

MERCED COUNTY OFFICE OF EDUCATION NOTES TO REQUIRED SUPPLEMENTARY INFORMATION JUNE 30, 2016 NOTE 1 - PURPOSE OF SCHEDULES Budgetary Comparison Schedules These schedules present information for the original and final budgets and actual results of operations, as well as the variances from the final budget to actual results of operations. Schedule of Other Postemployment Benefits (OPEB) Funding Progress This schedule is intended to show trends about the funding progress of MCOE's actuarially determined liability for postemployment benefits other than pensions. Schedule of MCOE's Proportionate Share of the Net Pension Liability This schedule presents information on MCOE's proportionate share of the net pension liability (NPL), the plans' fiduciary net position and, when applicable, the State's proportionate share of the NPL associated with MCOE. In the future, as data becomes available, ten years of information will be presented. Schedule of District Contributions This schedule presents information on MCOE's required contribution, the amounts actually contributed, and any excess or deficiency related to the required contribution. In the future, as data becomes available, ten years of information will be presented. NOTE 2 - CHANGES IN BENEFIT TERMS AND ASSUMPTIONS Changes in Benefit Terms There were no changes in benefit terms since the previous valuation for either CalSTRS and CalPERS. Changes in Assumptions The CalSTRS plan rate of investment return assumption was not changed from the previous valuation. The CalPERS plan rate of investment return assumption was changed from 7.50 percent to 7.65 percent since the previous valuation.

70

SUPPLEMENTARY INFORMATION

71

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2016

Federal Grantor/Pass-Through Grantor/Program or Cluster Title U.S. DEPARTMENT OF EDUCATION Passed Through California Department of Education (CDE): No Child Left Behind Title I - Part A, Basic Title I - Part A, Basic School Support Title I - Part D, Subpart 2, Local Delinquent Program Title I - Part C, Migrant Education Title II - Part A, Teacher Quality Title II - Math/Science Partnership Title III - Limited English Proficient Special Education Cluster IDEA - Basic Local Assistance IDEA - Preschool Grants IDEA - Preschool Local Entitlement IDEA - Preschool Accountability Grants IDEA - Mental Health Allocation Plan IDEA - Preschool Staff Development Subtotal - Special Education Cluster IDEA - Early Intervention ARRA, CCDF Race to the Top Vocational Education: Technology Secondary II C Passed Through the California Department of Developmental Services: Family Resource Center/Network Subtotal U.S. Department of Education

Federal CFDA Number

Pass-Through Entity Identifying Federal Number Expenditures

84.010 84.010

14329 14416

84.010 84.011 84.367 84.366 84.365

14357 14326 14341 14512 14346

236,271 7,094,874 6,243 530,440 100,077

-

84.027 84.173 84.027A

13379 13430 13682

9,301,859 206,894 492,784

7,579,108 76,666 180,206

84.173A 84.027 84.173A

14688 14468 13431

28,825 624,482 1,703

106,977 -

84.181 84.412

23761 15181

10,656,547 89,865 262,158

7,942,957 -

84.048

14894

24,544

-

84.181

[1]

51,926

-

19,750,404

7,942,957

[1] Pass-Through Entity Identifying Number not available See accompanying note to supplementary information. 72

$

626,811 70,648

Provided to Subrecipients

$

-

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS, Continued FOR THE YEAR ENDED JUNE 30, 2016

Federal Grantor/Pass-Through Grantor/Program or Cluster Title U.S. DEPARTMENT OF AGRICULTURE Passed Through CDE: Child Nutrition-School Program Child Nutrition-Centers and Family Day Care Subtotal U.S. Department of Agriculture U.S. DEPARTMENT OF LABOR Passed Through CDE: Workforce Investment Act-Youth Activities Subtotal U.S. Department of Labor U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Head Start Passed Through California Department of Health Care Services: Medicaid Programs Medi-Cal Billing Option Medi-Cal Administration Activities Subtotal - Medicaid Programs Child Care and Development Fund (CCDF) Cluster CD Block Grant 25 Percent Alternate Payment Alternate Payment Stage III Resource and Referral Local Child Care Planning Council Subtotal - CCDF Cluster Subtotal U.S. Department of Health and Human Services Total Federal Programs

Federal CFDA Number

Pass-Through Entity Identifying Federal Number Expenditures

10.553

13390

10.558

13393

17.259

10055

$

51,159

Provided to Subrecipients

$

-

666,163

-

717,322

-

723,849

-

723,849

-

93.600

10016

12,677,768

-

93.778 93.778

10013 10060

1,867 852,591 854,458

-

93.575 93.596 93.575 93.575 93.575

13979 13694 13881 13950 13946

359,228 1,991,676 464,894 27,054 51,842 2,894,694

-

16,426,920 $ 37,618,495

$ 7,942,957

[1] Pass-Through Entity Identifying Number not available See accompanying note to supplementary information. 73

MERCED COUNTY OFFICE OF EDUCATION LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE JUNE 30, 2016 ORGANIZATION The Merced County Office of Education (MCOE) provides services to 20 school districts within Merced County, operates education programs for special populations of students, and manages programs with educational related objectives. Services provided to districts include administrative, fiscal, personnel, technology, media, educational television, curriculum, professional development, leadership training, beginning teacher support and assessment, Tier II professional services credential, psychological, occupational training, mental health, foster youth services, California student opportunity and access program, outdoor school, and governmental relations. Educational programs operated for special populations of students are three-county (Merced, Stanislaus, and Madera) regional Migrant program, Special Education, Regional Occupational Program, Community School, Juvenile Court School, Workforce Investment Act Youth Programs, Merced Scholars Charter School, and Head Start/Early Head Start. Programs related to educational objectives include child care subsidy programs (for CalWORKS recipients and other financially eligible families), a multitude of child care and workforce support services, a six-county regional California Preschool Instructional Network and the Race To The Top – Early Learning Challenge grant. Other education-related grant programs support business-education partnerships and the work of the Family Resource Council. MCOE operates an after school program in collaboration with Merced County school districts. The MCOE has a main administrative complex which houses the Superintendent, Human Resources, and other various administrative offices as well as a media center and a print shop. MCOE has an ancillary administrative complex which houses Head Start administration offices, Information Technology, and a warehouse. In addition MCOE maintains five smaller off-site administrative offices and has over 200 school sites housing employee workstations. GOVERNING BOARD MEMBER

OFFICE

TERM EXPIRES

Dennis Hanks Chris Chavez Fred Honoré Gloria Honey Tom Bates

Chairperson Vice Chairperson Member Member Member

2018 2018 2016 2016 2018

ADMINISTRATION Steven E. Gomes, Ed.D. Janet Riley, MBA

County Superintendent of Schools Assistant Superintendent, Business Services

See accompanying note to supplementary information. 74

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE YEAR ENDED JUNE 30, 2016 Second Period Report

Annual Report

Elementary School ADA Juvenile halls, homes and camp Probation referred, on probation or parole, expelled Total Elementary School ADA

6.65 35.04 41.69

7.02 40.49 47.51

High School ADA Juvenile halls, homes and camp Probation referred, on probation or parole, expelled Total High School ADA Total ADA

64.60 250.21 314.81 356.50

68.54 244.79 313.33 360.84

MERCED SCHOLARS CHARTER SCHOOL Regular ADA (All non-classroom based) Fourth through sixth Seventh and eighth Ninth through twelfth Total Regular ADA

4.80 13.40 83.79 101.99

4.61 13.00 84.03 101.64

See accompanying note to supplementary information. 75

MERCED COUNTY OFFICE OF EDUCATION RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2016 There were no adjustments to the Unaudited Actual Financial Report which required reconciliation to the audited financial statements at June 30, 2016.

See accompanying note to supplementary information. 76

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2016

GENERAL FUND 3 Revenues and other financing sources Expenditures and other financing uses INCREASE/(DECREASE) IN FUND BALANCE ENDING FUND BALANCE 2 AVAILABLE RESERVES AVAILABLE RESERVES AS A PERCENTAGE OF TOTAL OUTGO LONG-TERM OBLIGATIONS AVERAGE DAILY 4 ATTENDANCE AT ANNUAL

3

(Budget) 1, 5 2017

2016

$ 73,998,145

$ 72,228,600

$ 69,340,840

$ 72,636,941

75,167,947

69,607,933

65,988,105

71,940,746

$ (1,169,802) $ 18,085,678

$ 2,620,667 $ 19,255,480

$ 3,352,735 $ 16,634,813

$ 696,195 $ 13,282,078

$ 15,212,963

$ 14,969,820

$ 13,879,333

$ 13,954,530

20.24% Not Available

21.51% $ 2,403,351

21.03% $ 2,217,527

19.40% $ 2,599,909

340

5

361

2015

5

462

2014

5

482

The General Fund balance has increased by $5,973,402 over the past two years. For a county office of education this size, the State recommends available reserves of at least 2.0 percent of total General Fund expenditures, transfers out, and other uses (total outgo) or $1,392,159. The fiscal year 2016-2017 budget projects a decrease of $1,169,802. MCOE has incurred operating surpluses in each of the past three years but anticipates an operating deficit during the 2016-2017 fiscal year. Total long-term obligations have decreased by $196,558 over the past two years. Average daily attendance has decreased by 121 ADA over the past two years due primarily to the restructuring of the Community School Independent Study Program and student retention by school districts. Additional decline of 21 ADA is anticipated during fiscal year 2016-2017. 1 2 3 4 5

Budget 2017 is included for analytical purposes only and has not been subjected to audit. Available reserves consist of all unassigned fund balances including all amounts reserved for economic uncertainties contained with the General Fund. On behalf payments have been excluded from this schedule and from the calculation of available reserves. Excludes Charter School ADA. General Fund amounts do not include activity related to the consolidation of the Special Reserve Non-Capital Fund and the Retiree Benefits Special Reserve Fund, as required by GASB Statement No. 54.

See accompanying note to supplementary information. 77

MERCED COUNTY OFFICE OF EDUCATION SCHEDULE OF CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2016

Name of Charter School Merced Scholars Charter School (Charter Number 0631)

See accompanying note to supplementary information. 78

Included in Audit Report Yes

MERCED COUNTY OFFICE OF EDUCATION NON-MAJOR GOVERNMENTAL FUNDS COMBINING BALANCE SHEET JUNE 30, 2016

Charter School Fund ASSETS Deposits and investments Receivables Due from other funds Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts payable Due to other funds Total Liabilities Fund Balances: Restricted Total Fund Balances Total Liabilities and Fund Balances

$

1,010,163 9,607 42,340 1,062,110

$

$

$

79

$

County School Facilities Fund

12,232 61,081 73,313

$

3,064 160,741 163,805

7,294 8,645 15,939

$

898,305 898,305

57,374 57,374

1,062,110

See accompanying note to supplementary information.

Adult Education Fund

$

$

73,313

$

3,717,185 3,717,185

663 663 3,716,522 3,716,522

$

3,717,185

Total Non-Major Governmental Funds $

$

$

4,739,580 70,688 42,340 4,852,608

11,021 169,386 180,407 4,672,201 4,672,201

$

4,852,608

79

MERCED COUNTY OFFICE OF EDUCATION NON-MAJOR GOVERNMENTAL FUNDS COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2016

Charter School Fund REVENUES Local Control Funding Formula Other State sources Other local sources Total Revenues EXPENDITURES Current Instruction Instruction-related activities: Supervision of instruction School site administration Pupil services: All other pupil services Administration: All other administration Plant services Facility acquisition and construction Other outgo Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Sources (Uses) Transfers in Net Financing Sources (Uses) NET CHANGE IN FUND BALANCES Fund Balance - Beginning Fund Balance - Ending

$

930,610 64,498 6,521 1,001,629

$

See accompanying note to supplementary information. 80

Adult Education Fund $

117,482 49 117,531

County School Facilities Fund $

12,399 12,399

408,034

115,330

-

128,970 121,012

138 -

-

12,602

1,044

-

54,136 59,264 30,141 814,159

8,645 125,157

44,084 1,206,134 1,250,218

187,470

(7,626)

(1,237,819)

187,470 710,835 898,305

65,000 65,000 57,374 57,374

(1,237,819) 4,954,341 3,716,522

$

$

Total Non-Major Governmental Funds $

930,610 181,980 18,969 1,131,559

523,364 129,108 121,012 13,646 62,781 59,264 74,225 1,206,134 2,189,534 (1,057,975)

$

65,000 65,000 (992,975) 5,665,176 4,672,201

80

MERCED COUNTY OFFICE OF EDUCATION NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2016 NOTE 1 - PURPOSE OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying Schedule of Expenditures of Federal Awards includes the Federal grant activity of MCOE and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. MCOE has not elected to use the ten percent de minimis cost rate as covered in Section 200.414 Indirect (F&A) costs of the Uniform Guidance. Local Education Agency Organization Structure This schedule provides information about the County Office of Education's boundaries and schools operated, members of the governing board, and members of the administration. Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of MCOE. 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. Reconciliation of Annual Financial and Budget Report With Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Annual Financial and Budget Report Unaudited Actuals to the audited financial statements. Schedule of Financial Trends and Analysis This schedule discloses MCOE's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate MCOE's ability to continue as a going concern for a reasonable period of time. Schedule of Charter Schools This schedule lists all charter schools chartered by the County Office of Education, and displays information for each charter school on whether or not the charter school is included in the County Office of Education audit. Non-Major Governmental Funds - Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances The Non-Major Governmental Funds Combining Balance Sheet and Combining Statement of Revenues, Expenditures and Changes in Fund Balances is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances.

81

INDEPENDENT AUDITOR'S REPORTS

82

Vavrinek, Trine, Day & Co., LLP

VA L U E T H E D I F F E R E N C E

Certified Public Accountants

INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

Governing Board Merced County Office of Education Merced, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of Merced County Office of Education (MCOE) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise Merced County Office of Education's basic financial statements, and have issued our report thereon dated December 15, 2016. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Merced County Office of Education's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Merced County Office of Education's internal control. Accordingly, we do not express an opinion on the effectiveness of Merced County Office of Education's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of MCOE's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

83 6051 N. Fresno Street, Suite 101 Fresno, CA 93710 Tel: 559.248.0871

www.vtdcpa.com Fax: 559.248.0875

Compliance and Other Matters As part of obtaining reasonable assurance about whether Merced County Office of Education's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of MCOE's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering MCOE's internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Fresno, California December 15, 2016

84

Vavrinek, Trine, Day & Co., LLP

VA L U E T H E D I F F E R E N C E

Certified Public Accountants

INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE

Governing Board Merced County Office of Education Merced, California Report on Compliance for Each Major Federal Program We have audited Merced County Office of Education's compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of Merced County Office of Education's (MCOE) major Federal programs for the year ended June 30, 2016. Merced County Office of Education's major Federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the federal statutes, regulations, and the terms and conditions of its Federal awards applicable to its Federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of Merced County Office of Education's major Federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major Federal program occurred. An audit includes examining, on a test basis, evidence about Merced County Office of Education's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major Federal program. However, our audit does not provide a legal determination of Merced County Office of Education's compliance.

85 6051 N. Fresno Street, Suite 101 Fresno, CA 93710 Tel: 559.248.0871

www.vtdcpa.com Fax: 559.248.0875

Opinion on Each Major Federal Program In our opinion, Merced County Office of Education complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major Federal programs for the year ended June 30, 2016. Report on Internal Control Over Compliance Management of Merced County Office of Education is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Merced County Office of Education's internal control over compliance with the types of requirements that could have a direct and material effect on each major Federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major Federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Merced County Office of Education's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a Federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a Federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.

Fresno, California December 15, 2016

86

Vavrinek, Trine, Day & Co., LLP

VA L U E T H E D I F F E R E N C E

Certified Public Accountants

INDEPENDENT AUDITOR'S REPORT ON STATE COMPLIANCE

Governing Board Merced County Office of Education Merced, California Report on State Compliance We have audited Merced County Office of Education's compliance with the types of compliance requirements as identified in the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting that could have a direct and material effect on each of the Merced County Office of Education's State government programs as noted below for the year ended June 30, 2016. Management's Responsibility Management is responsible for compliance with the requirements of State laws, regulations, and the terms and conditions of its State awards applicable to its State programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance of each of the Merced County Office of Education's State programs based on our audit of the types of compliance requirements referred to above. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting. These standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the applicable government programs noted below. An audit includes examining, on a test basis, evidence about Merced County Office of Education's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Merced County Office of Education's compliance with those requirements. Unmodified Opinion In our opinion, Merced County Office of Education complied, in all material respects, with the compliance requirements referred to above that are applicable to the government programs noted below that were audited for the year ended June 30, 2016.

87 6051 N. Fresno Street, Suite 101 Fresno, CA 93710 Tel: 559.248.0871

www.vtdcpa.com Fax: 559.248.0875

In connection with the audit referred to above, we selected and tested transactions and records to determine the Merced County Office of Education's compliance with the State laws and regulations applicable to the following items: Procedures Performed LOCAL EDUCATION AGENCIES OTHER THAN CHARTER SCHOOLS Attendance Teacher Certification and Misassignments Kindergarten Continuance Independent Study Continuation Education Instructional Time Instructional Materials Ratios of Administrative Employees to Teachers Classroom Teacher Salaries Early Retirement Incentive Gann Limit Calculation School Accountability Report Card Juvenile Court Schools Middle or Early College High Schools K-3 Grade Span Adjustment Transportation Maintenance of Effort SCHOOL DISTRICTS, COUNTY OFFICES OF EDUCATION, AND CHARTER SCHOOLS Educator Effectiveness California Clean Energy Jobs Act After School Education and Safety Program: General Requirements After School Before School Proper Expenditure of Education Protection Account Funds Unduplicated Local Control Funding Formula Pupil Counts Local Control Accountability Plan Independent Study - Course Based Immunizations CHARTER SCHOOLS Attendance Mode of Instruction Non Classroom-Based Instruction/Independent Study for Charter Schools Determination of Funding for Non Classroom-Based Instruction Annual Instruction Minutes Classroom-Based Charter School Facility Grant Program

Yes Yes No (see below) Yes No (see below) No (see below) Yes No (see below) No (see below) No (see below) Yes Yes Yes No (see below) No (see below) Yes Yes Yes Yes Yes No (see below) Yes Yes Yes No (see below) Yes Yes No (see below) Yes Yes No (see below) No (see below)

MCOE does not offer kindergarten instruction; therefore, we did not perform procedures related to Kindergarten Continuance. We did not perform Continuation Education procedures because the program is not offered by MCOE. We did not perform instructional time procedures because MCOE does not have any programs subject to instructional time requirements.

88

We did not perform ratios of administrative employees to teachers procedures because MCOE is not a school district. We did not perform classroom teacher salaries procedures because MCOE is not a school district. MCOE did not have any employees retire under the CalSTRS Early Retirement Incentive program; therefore, testing was not required. MCOE does not have any Middle or Early College High Schools; therefore, we did not perform procedures related to Middle or Early College High Schools. MCOE does not have grades K - 3; therefore, we did not perform procedures related to K-3 Grade Span Adjustment. MCOE does not offer a Before School Education and Safety Program; therefore, we did not perform procedures related to the Before School Education and Safety Program. MCOE does not have a course based independent study program; therefore, we did not perform any procedures related to course based independent study. We did not perform procedures for the Charter Schools Mode of Instruction or Annual Instruction Minutes Classroom-Based because MCOE's charter school is entirely non-classroom based. Additionally, we did not perform procedures for the Charter School Facility Grant Program because MCOE did not receive funding for this program.

Fresno, California December 15, 2016

89

SCHEDULE OF FINDINGS AND QUESTIONED COSTS

90

MERCED COUNTY OFFICE OF EDUCATION SUMMARY OF AUDITOR'S RESULTS FOR THE YEAR ENDED JUNE 30, 2016 FINANCIAL STATEMENTS Type of auditor's report issued: Internal control over financial reporting: Material weaknesses identified? Significant deficiencies identified? Noncompliance material to financial statements noted? FEDERAL AWARDS Internal control over major Federal programs: Material weaknesses identified? Significant deficiencies identified? Type of auditor's report issued on compliance for major Federal programs: Any audit findings disclosed that are required to be reported in accordance with Section 200.516(a) of the Uniform Guidance? Identification of major Federal programs: CFDA Numbers 84.011 84.412 93.575, 93.596

Unmodified No None reported No

No None reported Unmodified No

Name of Federal Program or Cluster Title I - Part C, Migrant Education ARRA, CCDF Race to the Top Child Care and Development Fund Cluster

Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee?

$ 1,128,555 Yes

STATE AWARDS Type of auditor's report issued on compliance for programs:

91

Unmodified

MERCED COUNTY OFFICE OF EDUCATION FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2016 None reported.

92

MERCED COUNTY OFFICE OF EDUCATION FEDERAL AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016 None reported.

93

MERCED COUNTY OFFICE OF EDUCATION STATE AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2016 None reported.

94

MERCED COUNTY OFFICE OF EDUCATION SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2016 There were no audit findings reported in the prior year's schedule of financial statement findings.

95