NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the County of Santa Cruz have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standards-setting body for establishing governmental accounting and financial reporting principles. The more significant of the government’s accounting policies are described below.

A. Reporting Entity

The County of Santa Cruz was established by an act of the State Legislature of California in 1850 and is governed by a five-member elected board. As required by generally accepted accounting principles, the financial statements of the reporting entity include those of the County of Santa Cruz and its component units. The component units discussed below are included in the County’s reporting entity because of the significance of their operational or financial relationships with the County.

Blended Component Units. The following entities serve citizens of the government and provide for the construction and maintenance of County parks and recreation, police protection, mosquito abatement, fire protection, street lighting, roads, flood control, sewer, and refuse disposal districts. They are reported as if they were part of the primary government because they are governed by a board comprised of the County Board of Supervisors. The Board of Supervisors establishes the district work program and adopts the budget. Administrative services are provided by various departments of the County of Santa Cruz.

The following funds are grouped by the Special Revenue Fund under which they are reported in the Combining Statements:

Library

County Fire Protection

Off Highway, Road and Transportation

Public Financing Authority

Fish and Game

Private Revitalization of Downtown

Redevelopment Act

Park Dedication

Health Services Agency Capital Outlay

Santa Cruz County Flood Control and Water Conservation Zone 7

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Districts Governed by the Board of Supervisors

Public Protection

Aptos Seascape County Service Area (CSA) 3

County Fire Protection CSA 48

Police Protection CSA 38

Pajaro Storm Drain Maintenance District

Pajaro Dunes Fire Protection CSA 4

Pajaro Dunes Station Maintenance Fund

Pajaro Dunes Station Assessment District Reserve

Santa Cruz County Flood Control and Water Conservation Zone 4

Santa Cruz County Flood Control and Water Conservation Zone 5

Santa Cruz County Flood Control and Water Conservation Zone 6

Santa Cruz County Flood Control and Water Conservation Zone 8

Santa Cruz County Flood Control and Water Conservation Zone - General

Health and Sanitation

Pasatiempo Rolling Woods Sewer District

Recreation and Culture

Streetscape CSA 9E

Parks and Recreation District CSA 11

CSA 11 Zone E

CSA 11L Lompico Community

Public Ways and Facilities

County Highway Lighting CSA 9	Redwood Drive CSA 33
County Highway Residential Lighting CSA 9 Zone A	Larsen Road CSA 34
School Crossing Guard CSA 9 Zone B	Country Estates CSA 35
County Road Maintenance CSA 9D Zone 1	Forest Glen CSA 36
County Road Maintenance CSA 9D Zone 2	Roberts Road CSA 37
CSA 9D Zone 3	Reed Street CSA 39
Hutchinson Road CSA 13	Ralston Way CSA 40
Oakflat Road CSA 13A	Loma Prieta CSA 41
Huckleberry Woods Road CSA 15	Sunlit Lane CSA 42
Robak Drive CSA 16	Bonita-Encino Drive CSA 43
Empire Acres CSA 17	Sunbeam Woods CSA 44
Whitehouse Canyon CSA 18	Pinecrest CSA 46
Westdale Drive CSA 21	Braemoor CSA 47

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Public Ways and Facilities - Continued

Kelly Hill CSA 22	Vineyard CSA 50
Old Ranch Road CSA 23	Hopkins Gulch CSA 51
Pineridge CSA 24	Upper Pleasant Valley CSA 52
Viewpoint Road CSA 25	Mosquito Abatement CSA 53
Hidden Valley CSA 26	Riverdale Park Road CSA 55
Lomond Terrace CSA 28	Felton Grove CSA 56
Glenwood Acres CSA 30	Mansfield Street Assessment Dist
View Circle CSA 32	Underground Utilities #4-41^st Ave

Geologic Hazard Abatement Districts (GHAD)

Corralitos GHAD

Mid-County GHAD

Heartwood GHAD

The following funds are reported as Enterprise Funds (Sewer and Refuse Disposal Districts):

Boulder Creek CSA 7	Refuse Disposal CSA 9 Zone C
Pasatiempo Rolling Woods CSA 10	Place De Mer CSA 2
Septic Tank Maintenance CSA 12	Sand Dollar Beach CSA 5
Freedom County Sanitation District	Trestle Beach CSA 20
Davenport County Sanitation District	Summit West CSA 54

Santa Cruz County Flood Control and Water Conservation District – Zone 7, a Special Revenue Fund, was established to provide funding for the local share of proposed Army Corps of Engineers flood control projects on the Pajaro River, Salsipuedes Creek, and Corralitos Creek. The District is governed by a seven-member board consisting of the County Board of Supervisors and two additional members, one appointed by the City of Watsonville and another appointed by the Pajaro Valley Water Agency. Administrative services are provided by the County of Santa Cruz, Department of Public Works, 701 Ocean Street, Room 410, Santa Cruz, CA 95060.

The Redevelopment Agency, a Special Revenue Fund, was established by the County Board of Supervisors for the purpose of financing improvement projects in the Live Oak/Soquel areas. The Agency is governed by the Board of Supervisors. The Board of Supervisors establishes the Agency work program and adopts the budget. Administrative services are provided by the County of Santa Cruz, Redevelopment Agency, and complete financial statements may be obtained from 701 Ocean Street, Room 510, Santa Cruz, CA 95060.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The Public Financing Authority, a Special Revenue Fund, facilitates financing for the County and Redevelopment Agency. The Authority is established and governed by the Board of Supervisors; it is not legally required to adopt a budget. Administrative services are provided by the County of Santa Cruz, 701 Ocean Street, Room 100, Santa Cruz, CA 95060.

Discretely Presented Component Unit. The component unit columns in the combined financial statements provide the financial data for the Santa Cruz County Sanitation District. The component unit is reported in a separate column to emphasize that it is legally separate from the County, and its exclusion would cause the County's financial statements to be incomplete.

The Santa Cruz County Sanitation District is governed by a three-member board appointed by the Board of Supervisors. It is managed by the County Department of Public Works under the direction of the District Board of Directors. The District is reported as an enterprise fund. Administrative services are provided by the County of Santa Cruz, Department of Public Works, and complete financial statements may be obtained from 701 Ocean Street, Room 410, Santa Cruz, CA 95060.

B. Description of Funds and Account Groups

The accounts of the County are organized on the basis of funds and account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues, and expenditures or expenses, as appropriate. Government resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The various funds are grouped into three broad fund categories, eight generic fund types and two account groups as follows:

Government fund types account for those activities through which most governmental functions of the County are financed. The measurement focus is based upon spending or financial flow and the determination of changes in fund balance (net current assets). The following are the County’s governmental fund types:

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than capital projects) that are legally restricted to expenditures for specified purposes.

The Capital Projects Fund is used to account for financial resources to be used for the acquisition or construction of major capital facilities other than those financed by proprietary funds and trust funds.

The Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal, interest, and related costs.

Proprietary fund types account for the County’s ongoing organizations and activities which are similar to those found in the private sector. The measurement focus is based upon cost of services, determination of net income and capital maintenance. The following are the County’s proprietary fund types:

The Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges.

Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the County, or to other governments, on a cost-reimbursement basis.

Fiduciary fund types account for assets held by the County in a trustee capacity or as an agent for individuals or other entities. The following are the County’s fiduciary fund types:

Expendable Trust Funds are accounted for in essentially the same manner as governmental fund types.

Agency Funds are custodial in nature (assets = liabilities) and do not involve measurement of results of operations.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Account Groups are used to establish accounting control and accountability for the County’s governmental fund type fixed assets and long-term obligations. The following are the County’s account groups:

General Fixed Assets – This account group is used to account for fixed assets of the County other than those accounted for in the proprietary fund types.

General Long-Term Debt – This account group is used to account for all long-term obligations of the County, including compensated employee absences payable, except for those accounted for in the proprietary fund types and trust funds.

C. Basis of Accounting

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

All Governmental Fund Types, Expendable Trust Funds, and Agency Funds are accounted for using the modified accrual basis of accounting. Revenues are recorded when “susceptible to accrual” (i.e., when they become measurable and available). “Measurable” means the amount of the transaction can be determined and “available” means that revenues are collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Revenues not considered available are recorded as deferred revenues. Expenditures are recorded when the fund liability is incurred if it is expected to be paid within 12 months, except for principal and interest on general long-term obligations which are recorded when due or when resources to make debt service payments during the next year become available. Liabilities expected to be paid after 12 months are recorded in the General Long-Term Obligations Account Group.

The County’s property tax accrual policy is discussed in Note 1(F). The County’s other primary revenue sources---interest and investment earnings and intergovernmental revenues---have been treated as “susceptible to accrual” under the modified accrual basis. Licenses and permits, fines, forfeitures and penalties, charges for services, and other revenue are not considered “susceptible to accrual” under the modified accrual basis and are recorded as revenues when received.

The Proprietary Fund Types are accounted for using the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized when incurred.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

D. Budget and Budgetary Accounting

General Budget Policies

Chapter 1, Division 3, Title 3, of the Government Code of the State of California, known as the “Budget Act”, the County prepares and adopts a budget for each fiscal year. The budget is a compilation of operating budgets from: individual functional units within the General Fund, Special Revenue Funds, Capital Projects Funds, and Proprietary Funds (operating plans). Budgets are adopted for all funds except for Debt Service Funds and certain special revenue funds, namely, Public Finance Authority, Health Services, Office of Criminal Justice Planning and Health and Sanitation Funds.

The County follows these procedures in establishing the budgetary data reflected in the financial statements.

· Prior to July 1, the County Administrative Officer submits to the Board of Supervisors a proposed program budget for the fiscal year commencing the following July 1. The budget includes proposed expenditures and the means of financing them. In addition, the Auditor-Controller submits a proposed budget containing the line items of revenue and appropriations based upon the County Administrative Office budget proposal.

· On or before August 20, public hearings are conducted to obtain public comments. Such hearings shall be concluded within 10 calendar days.

· On or before October 3, the budget is legally enacted through passage of a resolution.

· On or before November 1, the Auditor-Controller publishes a final budget as recommended by the County Administrative Officer and adopted by the Board of Supervisors.

· Budget units are expenditure classifications which identify accounting or cost centers necessary or desirable for control of the County financial operation. The Board of Supervisors approves all transfers of budgeted appropriation amounts between budget units within any fund or between expenditure objects.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

· The County of Santa Cruz uses formal budgetary integration as a management control device during the year for the primary government and all blended component units, except the Bostwick Lane, Mansfield Street, Pajaro Dunes, Fire Station, Local Assessment Districts, and the Public Financing Authority that do not annually adopt a budget.

· Budgets are adopted on a basis consistent with generally accepted accounting principles (GAAP).

· Budgetary control is maintained at the character level, except for fixed assets and other charges which are controlled by line item. Character levels are appropriation totals for salaries and employee benefits, services and supplies. All budgetary changes during the budget year require Board action as set forth in the “Budget Act”. Unencumbered appropriations at year-end lapse into fund balance. See the following paragraph for encumbered appropriations at year-end.

The County Board of Supervisors made several supplemental budgetary appropriations throughout the year, primarily to the Special Revenue, Capital Project, and Enterprise Funds as shown below. Other supplemental budgetary appropriations in other funds were not considered material.

Road Fund	$5,460,087
County Service Area #38	1,314,205
Redevelopment Agency	2,925,425
Capital Plant Fund	1,300,344

Encumbrances

Encumbrance accounting, under which purchase orders, contracts, and other commitments for the expenditure of monies are recorded in order to reserve that portion of the applicable appropriation, is employed as an extension of formal budgetary accounting in the General and Special Revenue Funds. Encumbrances outstanding at year-end are reported as reservations of fund balance since they do not constitute expenditures or liabilities. Encumbrances at year-end are rebudgeted in the new year.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

E. Cash and Investments

The County follows the practice of pooling cash and investments of all funds with the County Treasurer, except for restricted funds which are generally held by outside custodians and classified as “Restricted Cash” on the accompanying financial statements. The earned interest yield on all funds held by the County Treasurer for fiscal year 2000-2001 was approximately 6.276%. Interest earned on pooled investments is allocated to the appropriate funds based on the average daily cash balance of each fund.

Restricted cash represents (1) amounts held by a fiscal agent for capital project and equipment expenditures of the component unit Public Financing Authority, (2) amounts held by a fiscal agent for capital project and low moderate income housing project expenditures of the component unit Santa Cruz Redevelopment Agency, (3) amounts held by the Santa Cruz County Treasurer on behalf of the component unit, Santa Cruz County Sanitation District, for debt service as required by bond indentures, and (4) amounts held by the County Treasurer for various proprietary funds for fixed asset replacement.

Investments are stated at cost, except for the investments of the Local Agency Investments Funds, which are stated at fair value. Money market investments and interest-earning investment contracts that have a remaining maturity at the time of purchase of one year or less are carried at amortized cost.

For purposes of the Statement of Cash Flows, the County considers all highly liquid investments (including restricted assets) with a maturity of three months or less at the time of purchase to be cash equivalents. The proprietary funds’ deposits in the County Treasurer’s commingled pool are in substance, demand deposits and are, therefore, considered cash equivalents for purposes of the statement of cash flows.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

F. Property Tax Levy, Collection, and Maximum Rate

The State of California Constitution, Article XIIIA provides that the combined maximum property tax rate on any given property may not exceed 1% of its assessed value unless an additional amount for general obligation debt has been approved by the voters. Assessed value is calculated at 100% of market value as defined by Article XIIIA and may be increased by no more than 2% per year unless the property is sold or transferred. These general property tax rates do not apply to taxes levied to pay the interest and redemption charges on any indebtedness incurred prior to June 6, 1978, or subsequently approved by the voters. Supplemental property taxes are levied on a pro rata basis when changes in assessed valuation occur due to sales transactions or the completion of construction. The State Legislature has determined the method of distribution among the counties, cities, school districts, and other districts of receipts from the 1% property tax levy.

The County assesses properties, bills for, and collects taxes as follows:

	Secured	Unsecured
Levy dates	July 1	July 1
Lien dates	January 1	January 1
Due dates	50% on November 1	August 1
	50% on February 1
Delinquent after	December 10 (for Nov)	August 31
	April 10 (for Feb)
Tax rate per $100 full cash value	$1	$1
Late penalty	10%	10%
Delinquent interest	1 – ½% per month	1 – ½% per month

These taxes are secured by liens on the property being taxed. The Board of Supervisors annually sets the rates of the County and district taxes and levies State, County, and district taxes as provided by law. The term “secured” refers to taxes on land and buildings, while “unsecured” refers to taxes on personal property other than land and buildings. During fiscal year 1993-94, the Board adopted the Alternative Method of Tax Apportionment (the Teeter Plan). Under this method, the County allocates to all taxing jurisdictions under the County, 100% of the secured property taxes billed, even if it has not yet been collected. In return, the County retains the subsequent delinquent payments and associated penalties and interest. The penalties and interest are accumulated in a Tax Losses Reserve Agency Fund. The County may transfer to the General Fund any excess over the reserve required by the Board of Supervisors and the State.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Delinquent property taxes receivable are shown on the balance sheet of the property tax trust funds. Under California law, real property is not subject to sale for reasons of delinquent taxes until the end of the fifth year of delinquency, and the taxpayer may arrange to repay the delinquent taxes over a five year period any time within the five year period, although the property is subject to a cash redemption up to the time of the sale.

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

Under the alternate apportionment method, specified amounts of penalties and interest collected on delinquent secured taxes are held in trust in the secured tax losses reserve fund to fund specified tax redemption short falls. This reserve is used to fund the apportionment of secured taxes.

For the 1997-98 fiscal year, the County issued a Teeter Plan Tax and Revenue Anticipation Note in the amount of $7,350,000 to fund the anticipated amount of delinquent taxes. The note was rated SP-1+ by Standard and Poor’s and matured on May 26, 2001 including principal and interest at 4.0%. The note was priced to yield 3.72%. The note is secured by a lien on all delinquent redemptions and provided for back-up liquidity from a Letter of Credit issued by the Canadian Imperial Bank of Commerce and a promissory note to be executed by the County Treasurer.

The County did not issue a Teeter Plan Tax and Revenue Anticipation Note in 2000-2001 fiscal year but the County Tax and Revenue Anticipation Note issued subsequently on July 8, 2001 is partially secured by a lien on all delinquent redemptions. Please refer to Note 23 for additional information.

G. Inventory of Supplies

Inventories of the internal service funds, enterprise funds and the County’s Warehousing Revolving Trust Fund are stated at cost. Cost is determined by the average cost method.

Inventory of the Health Services Agency (HSA) in the general fund is stated at cost. Cost is determined by the first-in, first-out method. The purchase method is used to account for HSA inventory; that is, inventories are recorded as expenditures when purchased.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

H. Fixed Assets

Fixed assets for general governmental purposes are recorded as expenditures at the time of purchase and are accounted for in the General Fixed Assets Account Group at historical cost, or at estimated historical cost where costs are not available. Donated assets are recorded at their fair market value at the time of receipt. No depreciation has been provided on fixed assets for general governmental purposes.

The County capitalizes equipment and vehicles which costs at least $1,500 and has an estimated useful life of at least one year. Buildings and structures of $25,000 and over are capitalized. The costs of normal maintenance and repairs or renovations that do not add to the value of the asset or materially extend the life of the asset are not capitalized. Public domain (infrastructure) general fixed assets consisting of certain improvements other than buildings, including roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems have not been capitalized. Such assets normally are immovable and of value only to the County.

Fixed assets acquired by proprietary fund types are recorded at cost or estimated historical cost. Donated assets are recorded at their fair market value at the time of receipt. Net interest costs are capitalized on projects during the construction period. No interest costs are capitalized on projects during the construction period. No interest costs were capitalized during the 2000-2001 fiscal year. Depreciation and amortization of fixed assets, including capitalized leases, are computed using the straight-line method applied over the estimated useful lives of the assets. Depreciation and amortization are charged against operations and accumulated depreciation is reported on proprietary fund balance sheets. Depreciation on contributed assets is recorded as a reduction of contributed capital.

The following analysis details the estimated useful lives for the various kinds of proprietary fund type assets:

Type of Asset	Estimated Useful Life in Years
Building and Structures	10 – 50
Equipment and Vehicles	3 – 15

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

I. Long-Term Liabilities

Long-term liabilities expected to be financed with resources from governmental fund types are accounted for in the General Long-Term Debt Account Group. Long-term liabilities of all proprietary fund types are accounted for in the respective funds.

In accordance with GASB Statement No. 16, Accounting for Compensated Absences, amounts recorded as accumulated leave benefits include an amount representing salary-related payments such as the employer’s share of social security and medicare taxes associated with payments made for such compensated absences. Accumulated leave benefits including vacation ($10,114,194), sick leave ($2,284,103), and other employee leave ($1,160,621) in the amount of approximately $13,558,918 for the governmental fund types as of June 30, 2001, is recorded in the General Long-Term Debt Account Group (see Note 6). These amounts would not be expected to be liquidated from expendable available financial resources but would be expected to be liquidated in future years as employees elect to use these benefits as prescribed by Civil Service rules and regulations.

J. Leases

The County leases various assets under both operating and capital lease agreements. For Governmental Fund Types, assets under capital leases and the related long-term lease obligations are reported in the General Fixed Assets and General Long-Term Debt Account Groups, respectively. For Proprietary Fund Types, the assets and related capital lease obligations are recorded in the appropriate proprietary fund.

K. Self-Insurance

The County is self-insured for general liability, automobile liability, property damage, medical malpractice, workers’ compensation and dental insurance claims. Internal Service Funds are used to account for the County’s self-insurance activities. It is the County’s policy to provide in each fiscal year, by premiums charged to affected operating funds, amounts sufficient to cover the estimated charges for self-insured claims, excess insurance and administrative costs. The Liability and Property Insurance and the Workers’ Compensation Self-Insurance Funds’ estimated claim liabilities are actuarially determined and include claims incurred but not reported.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

L. Intergovernmental Revenues

The Federal and State governments reimburse the County for a portion of the costs associated with various programs, e.g. public assistance and public health, administered by the County. These reimbursements are recorded in the fund administering the program in the appropriate governmental aid category with the related program costs included in expenditures.

The respective grant agreements generally require the County to maintain accounting records and substantiating evidence sufficient to determine if all costs incurred and claimed are proper, and that the County is in substantial compliance with other terms of the grant agreements. These records are subject to audit by the appropriate government agency. Any amounts disallowed will either reduce future claims or be directly recovered from the County.

M. Interfund Transactions

During the course of normal operations, the County has numerous transactions between funds. Transfers of resources from a fund receiving revenue to a fund in which the resources are to be expended are recorded as operating transfers. Internal Service Funds record charges for services to County departments as operating revenue, and payments by County funds to the Internal Service Funds are recorded as operating expenses. Nonrecurring or nonroutine transfers of equity between funds are recorded as residual equity transfers and, accordingly, are reported as additions to or deductions from fund balances for governmental funds, and as additions to contributed capital or deductions from retained earnings for proprietary funds.

Receivables and payables arising from interfund transactions are classified as “due from other funds” or “due to other funds” in the accompanying combined balance sheet. Occasionally, more formal, long-term advances or loans are made between individual funds as a means of financing certain activities. The long-term part of these loans are classified as “advances to other funds” or “advances from other funds” in the accompanying combined balance sheet. Noncurrent portions of long-term interfund receivables are offset by a fund balance reserve account which indicates they do not constitute expendable financial resources available for appropriation.

Eliminations of interfund activity have been made within fund types but not between fund types.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

N. Indirect Cost Allocation

The County prepares a County-wide cost allocation plan in accordance with Federal OMB Circular A-87. Using this directive, all central support costs are allocated to County funds and departments using a step-down method so that the true cost of operations can be included in determining the rates to be charged to users.

O. Income Taxes

The County and its related entities fall under the purview of Internal Revenue Code, Section 115, and corresponding California Revenue and Taxation Code provisions. As such, they are not subject to federal or state income taxes.

P. Use of Estimates

The preparation of general-purpose financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the general-purpose financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.

Q. “Total (Memorandum Only)” Columns

Total columns on the accompanying general-purpose financial statements are captioned “Memorandum Only” to indicate that they are presented only to facilitate financial analysis. Data in these columns does not present financial position, results of operations, or cash flows in conformity with generally accepted accounting principles. Such data is not comparable to a consolidation since interfund eliminations have not been made.

R. Comparative Data

Comparative total data for the prior year have been presented in the accompanying financial statements in order to provide an understanding of changes in the County’s financial position and operations. However, comparative (i.e., presentation of prior year totals by fund type) data has not been presented in each of the statements since their inclusion would make the statements unduly complex and difficult to read. Prior year data have been reclassified in some cases to allow for a more meaningful comparison.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

S. Applicability of GASB and FASB Pronouncements

The County has elected to apply all applicable pronouncements and all FASB Statements and Interpretations, Accounting Principles Board (APB) Opinions and Accounting Research Bulletins (ARB) issued on or before November 30, 1989, unless they conflict with or contradict GASB pronouncements. This option has been selected for all proprietary funds.

NOTE 2. CASH AND INVESTMENTS

The County maintains a cash and investment pool that is available for use by all funds with various financial institutions and a safekeeping agent, Bank of the West. Each fund type’s portion of this pool is displayed on the combined balance sheet as “cash and investments”. In addition, Special Revenue Public Financing Authority, Special Revenue Redevelopment Agency, Debt Service Redevelopment Agency, Santa Cruz Criminal Justice Council Agency Funds, Place de Mer Agency Funds, Enterprise County Disposal CSA 9, Agency Welfare Advances, Agency Substitute Payee Welfare, Agency Deferred Compensation, Santa Cruz County Schools, and Santa Cruz County Sanitation District (a component unit) hold deposits or investment accounts in addition to the cash and investment pool.

Statutes authorize the County to invest in obligations of the U.S. Treasury, agencies, and instrumentalities, commercial paper rated A-1 by Standard & Poor’s Corporation or P-1 by Moody’s Commercial Paper Record, banker’s acceptances, repurchase agreements, and the State Treasurer’s investment pool.

Investment Policy

Pooled Investments – Funds available from all sources, when permitted, may be pooled in order to achieve greater investment potential. All earnings from pooled fund investments shall be deposited in the Interest Trust Fund. Each calendar month, the Fund shall be charged and each participant in the pooled investments shall be credited in proportion to their investment, based on an average daily balance.

Authorized Investments – Investments shall be limited to the following listed investment instruments and shall further be limited to the maximum percentage of total accountability, valued at cost:

NOTE 2. CASH AND INVESTMENTS - Continued

Instrument	Percentage Limits on Investments	Limitations
Repurchase Agreements	100%	Collateralized by Government Securities, Bankers’ Acceptances, Commercial Paper, or Negotiable Certificates of Deposits. Collateral will be included in percentage limitations under authorized investments. The market value plus accrued interest of the collateral must equal or exceed 102% of the repurchase cost at all times. Unless approved by the Treasurer, all collateral will be delivered to a safekeeping account.
U.S. Treasury Bills	100%	None.
U.S. Treasury Notes	100%	None.
U.S. Treasury Bonds	100%	None.
Municipal Bonds	100%	None.
Other Federal Securities	100%	None.
Bankers’ Acceptances	40%	Top 100 banks of the world or top 20 banks of the United States with 270 days maximum maturity.
Commercial Paper	15%	Rating A or better, $500,000,000 assets plus 180 days maximum maturity.
Negotiable Certificates of Deposit	30%	Top 20 banks National or State Chartered banks or State or Federal Savings Associations or top 10 State licensed foreign banks, 5 years maximum maturity.
Time Certificates of Deposit	100%	Bank or Home Loan Association, 100% government collateral, 1 ½ years maximum maturity.
Medium-Term Notes	30%	Notes must be rated “A”, or its equivalent, or better with a 5-year maximum maturity.
State Local Agency Investment Fund (LAIF)		$20,000,000 maximum allowed.

NOTE 2. CASH AND INVESTMENTS - Continued

Cash and Investments

A summary of amounts disclosed as cash and investments and restricted cash as of June 30, 2001 are as follows:

Description	Cash and Investments	Restricted Cash		Total
Primary Government:
Cash on hand or imprest cash	$ 49,144	$ - .		$ 49,144
Deposits in treasury pool	17,471,137	- .		17,471,137
Investments in treasury pool	495,828,207	- .		495,828,207
Deposits in other banks	4,905,276	- .		4,905,276
Investments in other banks	7,582,230	14,346,374		21,928,604
Restricted cash in treasury pool, Boulder Creek CSA	( 16,302)		16,302	- .
Restricted cash in treasury pool, Rolling Woods CSA	( 18,638)		18,638	- .
Restricted cash in treasury pool, Freedom County Sanitation	( 43,753)		43,753	- .
Restricted cash in treasury pool, Davenport Sanitation	( 27,468)		27,468	- .
Restricted cash in treasury pool, Disposal Sites	( 2,942,553)		2,942,553	- .
Restricted cash in treasury pool, Sand Dollar Beach	( 495)		495	- .
Total	522,786,785	17,395,583		540,182,368
Component Unit:
Restricted cash in treasury pool	( 1,022,979)		1,022,979	- .
Investments in treasury pool	38,496,060	- .		38,496,060
Investments in other banks	- .	1,012,031		1,012,031
Total	37,473,081	2,035,010		39,508,091
Total Reporting Entity	$560,259,866	$19,430,593		$579,690,459

NOTE 2. CASH AND INVESTMENTS - Continued

The County cash on hand, deposits and investments as of June 30, 2001 consist of:

Description	Treasury Pool	Other Banks	Cash on Hand or Imprest Cash	Total
Primary Government:
Cash on hand or imprest cash	$ - .	$ - .	$49,144	$ 49,144
Deposits	17,471,137	4,905,276	- .	22,376,413
Investments	495,828,207	21,928,604	- .	517,756,811
Total	513,299,344	26,833,880	49,144	540,182,368
Component Unit:
Investments	38,496,060	1,012,031	- .	39,508,091
Total Reporting Entity	$551,795,404	$27,845,911	$49,144	$579,690,459

Deposits

At June 30, 2001, the balance of the County’s deposits was $22,376,413. Of the bank balance in the treasury pool, $471,000 was covered by federal depository insurance. The remainder of the deposits are collateralized with securities held by the County or its agent in the County’s name. In accordance with the Governmental Accounting Standards Board Statement 3, “Deposits with Financial Institutions, Investments and Reverse Repurchase Agreements,” the County’s deposits are categorized by the level of risk assumed by the County at year end. Category 1 includes deposits insured or collateralized with securities held by the County or its agent in the County’s name. Category 2 includes deposits collateralized with securities held by the pledging financial institution’s trust department or agent in the County’s name. Category 3 includes uncollateralized deposits, which includes any bank balance that is collateralized with securities held by the pledging financial institution or by its trust department or agent but not in the County’s name. The County had no deposits in Category 2 or 3 as of June 30, 2001.

NOTE 2. CASH AND INVESTMENTS - Continued

County deposits in Category 1 at June 30, 2001 are as follows:

Description	Bank	Insured Amount	Total
Primary Government:
Treasury Pool	Bank of the West	$400,000	$17,470,822
Welfare Advances Agency Funds, Unrestricted	Bank of the West	70,000	70,000
Welfare Substitute Payee Agency Funds, Unrestricted	Bank of America	1,000	1,000
Santa Cruz Criminal Justice Council Agency Funds, Unrestricted	Bank of America	- .	3,572
Place de Mer Agency Funds, Unrestricted	Bank of America	- .	20,648
Enterprise County Disposal CSA 9, Unrestricted	Bank of America	- .	27,046
Total Primary Government		471,000	17,593,088
Restricted Special Revenue:
Redevelopment Agency	Bank of New York	- .	4,783,325
Total Reporting Entity		$471,000	$22,376,413

NOTE 2. CASH AND INVESTMENTS - Continued

Investments

GASB 31 requires governmental external investment pools to report certain investments at fair value in the financial statements and report the change in the fair value of investments in the year in which the change occurred. In compliance with these requirements, the fair value of the County’s combined pool is determined annually and is based on current market prices received from the securities custodian except for money market investments and interest-earning investment contracts that have a remaining maturity at the time of purchase of one year or less which are carried at amortized cost. The fair value of the participants’ position in the pool is the same as the value of the pool shares. The County also participates in the State Local Agency Investment Fund (LAIF), an investment fund sponsored by the State of California. Funds placed in the LAIF are subject to State statute. The fair value of the County's position in the State pool is the same as the value of the pool shares. The County Treasury has provided a fair value dollar factor in the Quarterly Report of Investments which can be used for financial reporting by the pool participants.

The County’s investments are categorized below to give an indication of the level of risk assumed by the County at year-end. Category 1 includes investments that are insured or registered, or securities held by the County or its agent in the County’s name. Category 2 includes uninsured and unregistered investments, with securities held by the counterparty’s trust department or agent in the County’s name. Category 3 includes uninsured and unregistered, with securities held by the counterparty or by its trust department or agent but not in the County’s name.

It is the County’s intent to hold investments until maturity, unless earlier liquidation would result in an investment gain. Investments for the Santa Cruz County Sanitation District in the amount of $38,496,060 are held in the County’s treasury pool and are commingled with those funds.

NOTE 2. CASH AND INVESTMENTS - Continued

County investments by category as of June 30, 2001 are follows:

Description	Category 1	Carrying Amount	Fair Value
Investments in Treasury Pool:
Negotiable Certificates of Deposit	$ 83,117,305	$ 83,117,305	$ 83,209,329
Repurchase agreements	7,938,207	7,938,207	7,950,000
Other Government Agency Securities	89,626,763	89,626,763	89,768,647
Commercial paper	75,839,319	75,839,319	75,933,593
Medium Term Notes	142,160,169	142,160,169	142,481,535
Tax and Revenue Anticipation Notes	30,000,000	30,000,000	30,000,000
Restricted Special Revenue Public Financing Authority:
U.S. Treasury bills and notes	783,683	783,683	783,683
Other government agencies securities	2,384,548	2,384,548	2,384,548
Component Unit - Santa Cruz County Sanitation District:
U.S. Treasury bills and notes	1,012,031	1,012,031	1,012,031
Totals	$432,862,025	$432,862,025	$433,523,366
County Treasury pool Money Market Funds		45,000,000	45,000,000
County Treasury pool investment in State Treasurer’s Investment Pool		30,000,000	30,000,000
Special Revenue Redevelopment Agency investment in State Treasurer’s Investment Pool		27,456,847	27,456,847
Special Revenue Redevelopment Agency restricted debt service Money Market Funds		6,628,840	6,628,840
Special Revenue Redevelopment Agency Money Market Funds		7,582,230	7,582,230
Special Revenue Public Financing Authority restricted Money Market Funds		4,549,303	4,549,303
Santa Cruz County Schools Medical Insurance investment in State Treasurer’s Investment Pool		2,390,657	2,390,657
Santa Cruz County Schools Self-Insurance investment in State Treasurer’s Investment Pool		795,000	795,000
Total Investments – Reporting Entity		$557,264,902	$557,926,243

NOTE 3. DUE TO/FROM OTHER FUNDS, INTERFUND ADVANCES, AND

OPERATING TRANSFERS

Interfund receivables and payables as of and for the year ended June 30, 2001, by individual fund are summarized as follows (in thousands):

	Due From Other Fund	Due To Other Fund	Advances To Other Funds	Long-term Advances From Gen. Fund	Operating Transfers In	Operating Transfers Out
General Fund	$11,896	$ 13	$ 128	$ - .	$27,345	$33,662
Due fr Component Unit	1	- .	- .	- .	- .	- .
Special Revenue Funds:
Off Hwy Road & Trans	9,858	9,858	- .	- .	- .	- .
Public Financing Auth	- .	- .	- .	- .	4,750	- .
Redevelopment Act	114	114	- .	- .	1,497	7,425
Park Dedication	- .	4	- .	- .	155	54
Private Revitalization of Downtown	- .	- .	- .	- .	50	50
Dist Gov by BOS
Public Protection	- .	- .	- .	- .	5,924	6,010
Geologic Hazard Abate	- .	53	- .	- .	- .	- .
Total Spec Rev Funds	9,972	10,029	- .	- .	12,376	13,539
Debt Service Funds:
Redev Agency Bonds	- .	- .	- .	- .	5,927	- .
Local Assess Bonds	- .	2	- .	- .	- .	- .
Total Debt Serv Funds	- .	2	- .	- .	5,927	- .
Capital Projects Fund	45	118	- .	- .	13,427	66

NOTE 3. DUE TO/FROM OTHER FUNDS, INTERFUND ADVANCES, AND

OPERATING TRANSFERS - Continued

	Due From Other Fund	Due To Other Fund	Advances To Other Funds	Long-term Advances From Gen. Fund	Operating Transfers In	Operating Transfers Out
Enterprise Funds:
Davenport San Dist	$ - .	$ 8	$ - .	$ - .	$ - .	$ - .
County Disposal CSA 9	- .	- .	- .	- .	- .	111
Total Enterprise Funds	- .	8	- .	- .	- .	111
Internal Service Funds:
Central Duplicating	- .	43	- .	- .	- .	- .
Public Works	- .	- .	- .	- .	111	- .
Total Int Serv Funds	- .	43	- .	- .	111	- .
Expendable Trust Funds:
H&W Trust Health	- .	- .	- .	- .	7,505	9,657
H&W Trust Mental	- .	- .	- .	- .	1,254	5,626
H&W Trust Soc Serv	- .	- .	- .	- .	146	5,430
Total Exp Trust Funds	- .	- .	- .	- .	8,905	20,713
Agency Funds:
County Departmental	- .	3,531	- .	- .	- .	- .
Payroll	- .	17	- .	- .	- .	- .
Property Tax Collection	- .	8,147	- .	- .	- .	- .
Independent Agencies	- .	5	- .	128	- .	- .
Total Agency Funds	- .	11,700	- .	128	- .	- .
Component Unit:
SC Sanitation District	- .	1	- .	128	- .	- .
Total Component Unit	- .	1	- .	128	- .	- .
Totals	$21,914	$21,914	$ 128	$ 128	$68,091	$68,091

NOTE 4. FIXED ASSETS

A summary of changes in the General Fixed Assets Account Group follows (in thousands):

	Balance 7/1/00		Additions		Deletions		Balance 6/30/01
Land	$ 31,684	$ 351		$ 351		$ 31,684
Building and structures	78,586	3,077		- .		81,663
Equipment	14,586	1,900		2,212		14,274
Total	$124,856	$5,328		$2,563		$127,621

The following is a summary of proprietary fund type fixed assets for the County as of June 30, 2001 (in thousands):

		Enterprise Funds		Internal Service Funds
Land	$ 1,859		$ 97
Building and structures	26,294		1,641
Equipment	6,021		28,566
Total	34,174		30,304
Less accumulated depreciation and amortization	8,897		23,502
Net	$25,277		$ 6,802

NOTE 5. CAPITAL LEASES

The following schedule of property under capital leases by major classes at June 30, 2001 (in thousands):

	General Fixed Assets Account Group		Enter-prise Funds			Internal Service Funds
Equipment	$1,810	$500		$858
Less: accumulated depreciation	- .	(250)			(368)
Total	$1,810	$250		$490

The following is a schedule of future minimum lease payments under capital leases together with the present value of future minimum lease payments as of June 30, 2001 (in thousands):

Year ending June 30,	General Long- Term Debt Account Group			Enter- prise Funds		Internal Service Funds
2001 – 2002	$ 355	$165			$168
2002 – 2003	298	- .			168
2003 – 2004	175	- .			145
2004 – 2005	164	- .			86
2005 – 2006	157	- .			25
Total minimum lease payments	1,149	165			592
Less: amount representing interest	( 141)		- .		( 66)
Present value of minimum lease payments	$1,008	$165			$526

NOTE 6. GENERAL LONG-TERM DEBT

All long-term debt, except Local Assessment Bonds, shown in the following schedule is the responsibility of the Santa Cruz County Public Financing Authority, a component unit. The County is not responsible in any way for this debt under the bond indentures.

Interest rates on the bonded debt outstanding for the Public Financing Authority Certificates of Participation at June 30, 2001 are as follows (in thousands):

Interest Rates
4.1 – 4.5%	$ 2,625
4.6 – 5.0%	8,185
5.1 – 5.5%	20,445
5.6 – 6.0%	12,309
6.1 – 6.5%	3,122
8.1 – 8.5%	4,005
	$50,691

The following is a summary of long-term debt transactions of the County for the fiscal year ended June 30, 2001 (in thousands):

		Balance 7/1/00		Additions		Reductions		Balance 6/30/01
Certificates of Participation	$ 53,034		$ - .		$ 2,343		$ 50,691
California Health Facilities Financing Authority	2,084		- .		124		1,960
Redevelopment Agency Tax Allocation Bonds	74,500		55,300		16,940		112,860
Redevelopment Agency Note Payable	1,782		- .		241		1,541
Local Assessment Bonds	305		- .		100		205
Compensated Absences	12,007		1,552		- .		13,559
Capital Leases	607		800		399		1,008
Totals	$144,319		$57,652		$20,147		$181,824

NOTE 6. GENERAL LONG-TERM DEBT - Continued

For financial reporting purposes, generally accepted accounting principles define the reporting entity as the primary government (the County), organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. Accordingly, at June 30, 2001, long-term debt of the Santa Cruz County includes debt of the Santa Cruz County Redevelopment Agency, the Public Financing Authority, and Local Assessment Districts in the amounts of $114,401,300, $50,690,785, and $205,000, respectively.

California Community Redevelopment Law (Health and Safety Code 33000 et seq) establishes the Santa Cruz County Redevelopment Agency as a distinct and separate legal entity responsible for its own bonded debt obligations. The RDA Tax Allocation Bonds are not a debt of the County of Santa Cruz, and the County is under no circumstances liable therefore. Similarly, the Public Financing Authority is a separate legal entity for whose debts the County of Santa Cruz is not liable. All Special Assessment debt disclosed on the County’s financial report is payable solely from levies collected from property owners within an assessment area. The County has no obligations on this debt. The County is acting in an agent capacity for the property owners.

The County of Santa Cruz is therefore not obligated in any way for Redevelopment, Public Financing Authority, or Local Assessment obligations. If these amounts were omitted from the financial statements, the long-term debt for which the County is liable would be $16,526,812.

The County’s legal debt margin is $256,768,030 for general obligations bond indebtedness. The County had no general obligation bond indebtedness outstanding at June 30, 2001.

Long-Term Debt Service Requirements to Maturity

Under the reporting entity requirements, long-term debt of certain component units is included in the County’s long-term debt group. Schedules of annual payment requirements for this debt follow:

NOTE 6. GENERAL LONG-TERM DEBT - Continued

Certificates of Participation – Public Financing Authority

In 1987, 1991, 1994, 1995, 1996, and 2000, debt was issued by the Public Financing Authority for the purpose of acquiring fixed assets, which are leased to the County of Santa Cruz. A summary of future payments for these issues, including interest, to maturity follows (in thousands):

Year	Principal		Interest	Total
2001 – 2002	$ 2,445	$ 2,786		$ 5,231
2002 – 2003	2,587	2,653		5,240
2003 – 2004	2,694	2,509		5,203
2004 – 2005	2,693	2,354		5,047
2005 – 2006	2,855	2,196		5,051
Thereafter	37,417	21,336		58,753
Totals	$50,691	$33,834		$84,525

California Health Facilities Financing Authority (CHFFA)

Debt was issued in 1986 by CHFFA to finance capital projects including construction, acquisition, renovation, and expansion for County health facilities. A summary of future payments to maturity (2026), including interest at 7.2% follows (in thousands):

Year	Principal		Interest		Total
2001 – 2002	$ 134	$137		$ 271
2002 – 2003	144	127		271
2003 – 2004	154	116		270
2004 – 2005	166	105		271
2005 – 2006	179	92		271
Thereafter	1,183	242		1,425
Totals	$1,960	$819		$2,779

NOTE 6. GENERAL LONG-TERM DEBT - Continued

Redevelopment Agency Tax Allocation Bonds

In December 1993, the Santa Cruz County Public Financing Authority issued Revenue (Tax Allocation) Bonds 1993 Series A (Parity Refunding Loan), on behalf of the Agency in the original amount of $43,780,000. Interest from 5.0% to 5.3% is paid semi-annually and principal payments made at specified maturity dates. Payments are secured by the pledge of tax revenues. As of June 30, 2001, total principal balance is $39,055,000.

In December 1993, the Santa Cruz County Public Financing Authority issued Revenue (Tax Allocation) Bonds 1993 Series B (Subordinate Loan), on behalf of the Agency in the original amount of $9,375,000. Interest from 4.5% to 6.2% is paid semi-annually and principal payments made at specified maturity dates. Payments are secured by the pledge of tax revenues. As of June 30, 2001, total principal balance is $8,590,000.

In December 1996, the County of Santa Cruz Redevelopment Agency issued 1996 Subordinate Tax Allocation Bonds (Live Oak/Soquel Community Improvement Project Area) in the original amount of $10,800,000. Interest from 4.5% to 5.625% is paid semi-annually and principal payments made at specified maturity dates. Payments are secured by the pledge of tax revenues. As of June 30, 2001, total principal balance is $9,915,000.

In August 2000, the County of Santa Cruz Redevelopment Agency issued the 2000 Subordinate Tax Allocation Refunding Bonds (Live Oak/Soquel Community Improvement Project Area) in the original amount of $17,885,000. Interest from 4.25% to 5.25% is paid semi-annually and principal payments made at specified maturity dates. Payments are secured by the pledge of tax revenues. As of June 30, 2001, total principal balance is $17,885,000.

In December 2000, the County of Santa Cruz Redevelopment Agency issued Subordinate Tax Allocation Bonds, 2000 Series A (Live Oak/Soquel Community Improvement Project Area) in the original amount of $27,415,000. Interest from 5% to 5.4% is paid semi-annually and principal payments made at specified maturity dates. Payments are secured by the pledge of tax revenues. As of June 30, 2001, total principal balance is $27,415,000.

NOTE 6. GENERAL LONG-TERM DEBT - Continued

In December 2000, the County of Santa Cruz Redevelopment Agency issued Subordinate Tax Allocation Bonds, 2000 Taxable Series B (Live Oak/Soquel Community Improvement Project Area) in the original amount of $10,000,000. Interest from 7.75% to 7.875% is paid semi-annually and principal payments made at specified maturity dates. Payments are secured by the pledge of tax revenues. As of June 30, 2001, total principal balance is $10,000,000.

A summary of future payments to maturity, including interest, are as follows (in thousands):

Year	Principal		Interest	Total
2001 – 2002	$ 2,021	$ 6,055		$ 8,076
2002 – 2003	2,120	5,955		8,075
2003 – 2004	2,220	5,850		8,070
2004 – 2005	2,325	5,738		8,063
2005 – 2006	1,789	6,147		7,936
Thereafter	102,385	80,472		182,857
Totals	$112,860	$110,217		$223,077

Redevelopment Agency Notes Payable

In August 1996, a CERTS loan from the County of Santa Cruz in the amount of $2,000,000 was incurred by the Agency as additional financing for the Community Swim Center project. Additional costs for a share of the cost of issuance and reserve fund bring the total amount of the loan to $2,231,380. Funds have been drawn down wholly. Interest is calculated with rates ranging from 4.25% to 5.0%. The balance extended as of June 30, 2001 is $1,541,300. A summary of future payments to maturity follows (in thousands):

Year	Principal		Interest		Total
2001 – 2002	$ 270	$ 68		$ 338
2002 – 2003	285	55		340
2003 – 2004	307	41		348
2004 – 2005	327	25		352
2005 – 2006	352	9		361
Totals	$1,541	$198		$1,739

NOTE 6. GENERAL LONG-TERM DEBT - Continued

Special Assessment Bonds – Non-Enterprise

Various Non-Enterprise Special Assessment Bonds are included as component units for reporting purposes in the County’s long-term debt group. The bonds were issued to finance the cost of various construction activities and infrastructure improvements which have a special and direct benefit to the related property owners. A summary of the bonds issued follows (in thousands):

	Balance 6/30/01
Bostwick Lane Street Improvement Project, 6.4% - 8% Serial Bonds		$140
Pajaro Dunes Fire Station Assessment District, 6% - 8% Serial Bonds		65
Total		$205

At June 30, 2001, the debt service requirements until maturity on these issues are as follows (in thousands):

Year	Principal		Interest		Total
2001 – 2002	$ 95	$13		$108
2002 – 2003	35	7		42
2003 – 2004	35	5		40
2004 – 2005	40	1		41
Totals	$205	$26		$231

In accordance with the Improvement Bond Act of 1915, the County is obligated to provide funds for delinquent assessments. The County has established redemption funds to facilitate bond payments for these purposes. However, these bonds do not constitute an indebtedness of the County, and are payable solely from special taxes collected from property owners within the improvement districts.

Other Liabilities

It is not practicable to determine the specific year for payment of the estimated liabilities for unpaid compensated absences. Unpaid compensated absences are discussed in Note 1. Capital lease obligations are discussed in Note 5.

NOTE 7. PROPRIETARY FUND TYPES LONG-TERM DEBT

Enterprise Fund Debt

Primary Government:

Various sanitation districts, included as component units in the County of Santa Cruz financial statements, have issued long-term debt, and are accounted for as Enterprise Funds. At June 30, 2001, material debt service requirements on maturity on these issues are as follows (in thousands):

Year	Special Assessment Bonds
2001 – 2002	$ 51
2002 – 2003	23
2003 – 2004	21
2004 – 2005	20
2005 – 2006	19
Thereafter	61
	195
Less: interest	( 39)
Total	$156

NOTE 7. PROPRIETARY FUND TYPES LONG-TERM DEBT - Continued

Component Unit Debt:

Year	Revenue Bonds		Special Assessment Bonds			Certificates of Participation			Loan Payable		Total
2001 – 2002	$ 400	$ 125		$ 511			$ 1,608			$ 2,644
2002 – 2003	402	127		509			1,608			2,646
2003 – 2004	407	125		511			1,608			2,651
2004 – 2005	407	127		508			1,608			2,650
2005 – 2006	411	129		508			1,608			2,656
Thereafter	4,911	1,642		8,371			20,905			35,829
	6,938	2,275		10,918			28,945			49,076
Less: unamortized bond discount	( 89)		- .	- .			- .			( 89)
Less: interest	(2,448)		(1,035)		( 4,573)			( 6,450)			(14,506)
Totals	$4,401	$1,240		$ 6,345			$22,495			$34,481

General obligation bonds have been approved by voters of the various districts and secured by all real property within the districts. Special assessment bonds have been issued to finance improvements of benefit to specific properties, as authorized by various state improvements acts, and are collateralized by liens against properties of the districts. Bonds are repaid from assessments levied against the affected properties. The County of Santa Cruz has no obligation for payment of special assessment debt in the event of default.

Certificates of Participation were authorized and issued to finance the Santa Cruz County Sanitation District’s (a component unit of Santa Cruz County) share of an expansion and improvement of the City of Santa Cruz’s sewage treatment facility. Pursuant to a joint operating agreement between the Sanitation District and the City, the District is entitled to treatment capacity at the City’s treatment facility. The certificates are payable from the Sanitation District’s net revenues after provision has been made for payment on the Sanitation District’s 1977 Revenue Bonds.

NOTE 7. PROPRIETARY FUND TYPES LONG-TERM DEBT - Continued

The loan payment represents a State Water Resources Control Board loan with the City of Santa Cruz for which the Sanitation District has an agreement to participate in the repayment. The total loan available in fiscal year 1998-99 is approximately $48 million, of which the Sanitation District’s share will be 47% or approximately $24.37 million in original principal amount. Interest accrued to date of completion is added to principal. These funds were used to construct the treatment plant expansion of which the Sanitation District has capacity rights.

NOTE 8. LANDFILL CLOSURE AND POSTCLOSURE COSTS

The County of Santa Cruz operates the Buena Vista landfill for the disposal of municipal waste and a transfer station at the site of the closed Ben Lomond landfill. State and federal laws and regulations, including the California Integrated Waste Management Board Title 14, The California State Water Resources Control Board Title 23, and the Environmental Protection Agency Subtitle D of the Codified Federal Regulations 40, require the County to place a final cover on its landfill sites when it stops accepting waste and to perform certain maintenance and monitoring functions at the site for 30 years after closure. Although closure and postclosure care costs will be paid only near or after the date that landfills stop accepting waste, the County reports a portion of these closure and postclosure care costs as an operating expense in each period based on each County landfill’s capacity used as of each balance sheet date.

As of June 30, 2001, a liability for closure and postclosure maintenance in the amount of $2,619,385 is reflected in the County Disposal Sites Enterprise Fund based upon landfill capacity used to date. As of June 30, 2001, Ben Lomond landfill was filled to 100% capacity, and the County estimates that the Buena Vista landfill is filled to 35.4% of capacity with an estimated remaining useful life of 17 years. The County will recognize the remaining estimated cost of closure and postclosure maintenance of $4,653,041 as the remaining estimated capacity is filled. These amounts are based on what it would cost to perform all closure and postclosure care in 2001. Actual cost may be higher due to inflation, changes in technology, or changes in regulations. The estimates will also be adjusted annually for inflation or deflation, in accordance with State guidelines.

NOTE 8. LANDFILL CLOSURE AND POSTCLOSURE COSTS - Continued

The County is required by State and Federal laws and regulations to make annual contributions to a fund to finance closure and postclosure maintenance. The County is in compliance with these requirements, and at June 30, 2001, cash of $2,942,553 is held for this purpose, reported as restricted assets on the balance sheet. The County expects that future inflation costs will be paid from interest earnings on these annual contributions. However, if interest earnings are inadequate or additional postclosure care requirements are determined (due to changes in technology or applicable laws and regulations, for example) these costs may need to be covered by charges to future landfill users.

Postclosure maintenance for both the Buena Vista and closed Ben Lomond landfills is provided for through a “Pledge of Revenue”. The County Board of Supervisors adopted resolutions pledging future Refuse Disposal District (CSA 9-C) revenues annually through the prescribed postclosure maintenance period. An initial postclosure cost was estimated at the time of adoption of Pledge of Revenue resolutions and is adjusted for inflation on an annual basis.

NOTE 9. PRIOR YEAR DEFEASANCE OF DEBT

Public Financing Authority

In prior years, the Santa Cruz County Public Financing Authority defeased Certificates of Participation (CERTS) by placing the proceeds of the new CERTS in an irrevocable trust to provide for all future debt service payments on the old CERTS. Accordingly, the trust account assets and liability for the defeased CERTS are not included in the County’s financial statements. On June 30, 2001, $505,000 of CERTS outstanding are considered defeased and have been removed from the general long-term debt account group.

NOTE 10. ADVANCE REFUNDING - REDEVELOPMENT AGENCY

On August 15, 2000, the County of Santa Cruz Redevelopment Agency issued Subordinate Tax Allocation Refunding Bonds in the amount of $17,885,000 with an average interest rate of 4.95% to advance refund $15,705,000 of 1990 Revenue Tax Allocation Series A Bonds with an average interest rate of 7.1%. The net proceeds were deposited in an irrevocable escrow account with a trustee to provide for the payment of the refunded debt. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the General Long-Term Debt Account Group of the Redevelopment Agency.

As a result of the advance refunding, the County of Santa Cruz Redevelopment Agency reduced its total debt service requirements by $4,201,168 and obtained an economic gain of $2,185,824.

NOTE 11. FUND EQUITY

Deficit Retained Earnings – Proprietary Funds

Individual proprietary fund retained deficits at June 30, 2001 are as follows:

Internal Service Funds
Central Duplicating	$ 76,986
Self-Insurance – Workers’ Compensation	$3,334,553
Self-Insurance – Liability and Property	$ 225,286

The Internal Service Fund for Central Duplicating had a retained earnings deficit of $76,986 which resulted from current year losses. This deficit will be recovered in fiscal year 2001-02.

The Workers’ Compensation, and the Liability and Property Insurance funds had retained earnings deficits of $3,334,553 and $225,286, respectively, related to the losses payable for claims and the inclusion of estimates for incurred but not reported (IBNR) claims. It is anticipated that the County will have sufficient funds to pay annual requirements.

NOTE 11. FUND EQUITY - Continued

Contributed Capital

Contributed capital of the Proprietary Fund Types includes grant revenues and donations restricted for the acquisition or construction of capital assets.

During fiscal year 2000-2001, contributed capital increased or decreased by the following amounts (in thousands):

	Balance 7/1/00	Increase	Decrease	Balance 6/30/01
Enterprise Funds:
Rolling Woods	$ 2	$ - .	$ - .	$ 2
County Disposal Site	1,082	- .	- .	1,082
Total Enterprise Funds	$1,084	$ - .	$ - .	$1,084
Internal Service Funds:
Central Duplicating	$ 40	$ - .	$ - .	$ 40
Information Services	131	- .	- .	131
Public Works	1,805	- .	- .	1,805
Service Center	1,473	- .	- .	1,473
Total Internal Service Fund	$3,449	$ - .	$ - .	$3,449
Component Unit	$4,840	$ 1,043	$ 292	$5,591

NOTE 12. BUDGET – GAAP DIFFERENCES

The following schedule reconciles reporting for budgetary and GAAP purposes. The adjustment for Special Revenue funds is necessary because the Public Financing Authority, Health Services, and the Health and Sanitation Funds governed by the Board of Supervisors, all unbudgeted funds, are included as component units.

Budgetary Fund Classification (in thousands)	General	Special Revenue	Total
Excess of revenue and other financing sources over (under) expenditures and other financing uses – budgeted funds	$3,845	$37,717	$41,562
Adjustments:
To record excess of revenues and other financing sources over (under) expenditures and other uses – non-budgeted funds	- .	416	416
Excess of revenues and other financing sources over (under) expenditures and other financing uses – GAAP	$3,845	$38,133	$41,978

NOTE 13. DEFINED BENEFIT PENSION PLAN

Plan Description

All eligible County employees participate in the California Public Employees’ Retirement System (PERS). PERS is an agent multiple-employer defined benefit retirement plan that acts as a common investment and administrative agent for various local and state governmental agencies within the state. PERS provides retirement, disability, and death benefits based on the employees’ years of service, age and final compensation. Employees vest after five years of PERS-credited service and they are eligible for service retirement if they are 50 years old or over and have at least 5 years of PERS-credited service. These provisions and all other requirements are established by state statute and County resolutions. Copies of PERS’ annual financial report and the required 10-year trend information may be obtained from their executive office at 400 P Street, Sacramento, California 95814.

NOTE 13. DEFINED BENEFIT PENSION PLAN - Continued

Funding Policy

Participants are required to contribute 7% and 9% for miscellaneous and safety employees, respectively, of their annual covered salary. The County makes the contributions required of County employees on their behalf and for their account. The County is also required to contribute at an actuarially determined rate. The 2001 fiscal year contributions as a percentage of annual covered payroll, were 0% for miscellaneous employees and 2.706% for safety employees. The contribution requirements of plan members and the County are established and may be amended by PERS. For the required Supplementary Schedule of Funding Progress, see page 69.

Annual Pension Costs

The County’s annual pension cost for the current year and two previous years was $8,738,958, $8,997,252, and 13,506,317, respectively. These were equal to the annually required contribution. The current year’s required contribution was determined as part of the June 30, 1999 actuarial valuation using a modification of the Entry Age Normal Actuarial Cost Method. The actuarial assumptions includes: (a) a rate of return on investments of 8.25%; (b) projected salary increases of 3.75% to 14.20% or 11.59% (for miscellaneous and safety employees, respectively) depending on age, service, and type of employment. Both (a) and (b) included an inflation component of 3.5%. The actuarial value of the pension plan’s assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments. PERS unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on a closed basis. There are 25 years (13 years under safety plan) remaining in the amortization period at June 30, 2001. There was no net pension obligation upon implementation of GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers.

Three year trend information (amounts in thousands):

Fiscal Year	Annual Pension Cost (APC)		Percentage Of APC Contributed	Net Pension Obligation
6/30/99	$13,506	100%			-
6/30/00	8,997	100%			-
6/30/01	8,739	100%			-

NOTE 14. POST-RETIREMENT HEALTH CARE BENEFITS

In addition to the pension benefits described above, the County provides post-retirement pre-Medicare health care benefits for retirees and their dependents in accordance with the various employee representation units’ agreements. These benefits are provided for those retirees who:

· Are enrolled in a medical plan at the time of retirement, and

· File an application for monthly retirement through PERS at the time of separation.

At June 30, 2001, 318 retirees were eligible to receive such benefits. County contributions for fiscal year 2000-2001 were $399,638. These contributions are funded on a pay-as-you-go basis.

NOTE 15. DEFERRED COMPENSATION PLAN

The County offers all of its full-time employees a deferred compensation plan (the Plan) created in accordance with Section 457 of the Internal Revenue Code. The Plan permits employees to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or emergency. Employees direct the investment of plan assets into certificates of deposits and various mutual funds. The County has insignificant administrative duties.

The County implemented GASB Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, on July 1, 1997. The Statement requires new reporting standards for deferred compensation plans. Under these new requirements, the County no longer owns the amount deferred by employees or related income on these amounts as long as all assets and income of the Plan are held in trust for the exclusive benefit of participants and their beneficiaries.

As of June 30, 2001, the Plan’s assets, at market value, of $41,693,118 are not recorded in the County’s financial statements.

NOTE 16. SEGMENT INFORMATION FOR ENTERPRISE FUNDS

The County (Primary Government) has ten enterprise funds which provide for sanitation, refuse or septic tank Maintenance. Segment information for the year ended June 30, 2001, is presented in the following table.

NOTE 17. COMMITMENTS

As of June 30, 2001, the County has construction contract commitments in the Department of Public Works (all fund types) and in Special Revenue and Capital Project Funds in the amount of $2,532,872 and $9,416,988, respectively.

NOTE 18. CONTINGENCIES

A. Litigation

The County is currently a defendant in many lawsuits involving personal injury and damages in which substantial losses are claimed. The Santa Cruz County Redevelopment Agency, a component unit, is involved in an eminent domain action which has a potential for significant legal costs. Sufficient funds have been deposited with the court to cover the damages. The estimated potential losses and costs are included in the amount recorded for general liability as discussed in Note 19.

The County is a codefendant in litigation arising from the flooding of the Pajaro River during the winter of 1997. The lower court has ruled in the favor of the plaintiff and the extent of liability and damages have yet to be determined. This matter may be appealed and legislation has been passed to limit future liability for public agencies.

Various lawsuits have been instituted and claims have been made against the County, with provisions for potential losses included in the combined financial statements. In the opinion of County Counsel, it is not possible to accurately predict the County’s liability under these actions, but final disposition should not materially affect the financial position of the County.

B. Federal and State Grants

The County participates in a number of Federal and State grant programs subject to financial and compliance audits by the grantors or their representatives. Audits of certain grant programs for or including the year ended June 30, 2001, have not yet been conducted or settled. Accordingly, the County’s compliance with applicable grant requirements will be established at some future date. The amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time. However, management does not believe that any audit disallowances would have a significant effect on the financial position of the County.

NOTE 18. CONTINGENCIES - Continued

C. Medicare and Medi-Cal Reimbursements

The County’s Medicare and Medi-Cal cost reports for certain prior years are in various stages of review by the third-party intermediaries and have not been settled as a result of certain unresolved reimbursement issues. The County believes that it has adequately provided for any potential liabilities which may arise from the intermediaries’ review.

NOTE 19. SELF-INSURANCE

The County is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; natural disasters; medical malpractice; unemployment coverage and dental benefits to employees. The County is self-insured for its general and auto liability, workers’ compensation, medical malpractice, and employees’ dental coverage. The County has chosen to establish risk-financing internal service funds where assets are set aside for claim settlements associated with the above risks of loss up to certain limits. Excess coverage is provided by the California State Association of Counties (CSAC) Excess Insurance Authority, a joint powers authority whose purpose is to develop and fund programs of excess insurance for its member counties. The Authority is governed by a Board of Directors consisting of representatives of the member counties. Self-insurance limits per occurrence and Authority limits per year are as presented in the Statistical Section of this report, Table XII.

Amounts in excess of these limits are self-insured. None of the insurance settlements over the past three years has exceeded the amount of insurance coverage. As of July 1, 2001, the workers’ compensation liability limit per occurrence was reduced from $500,000 to $250,000.

The unpaid claims liability included in each of the Self-Insurance Internal Service Funds are based on the results of actuarial studies and include amounts for claims incurred but not reported. Claim liabilities are calculated considering the effects of inflation, recent claim settlement trends, including frequency and amount of payouts, and other economic and social factors. It is the County’s practice to obtain full actuarial studies annually. Annual premiums are charged by each self-insurance fund using various allocation methods which include actual costs, trends in claims experience and number of participants.

NOTE 19. SELF-INSURANCE - Continued

Changes in the balances of claims liabilities during the past two fiscal years ended June 30, for all self-insurance Internal Service Funds combined are as follows:

	2001	2000
Unpaid claims and claim adjustment expenses, beginning of the fiscal year	$7,840,489	$6,988,020
Incurred claims and claim adjustment expenses	4,307,114	3,996,632
Claim payments	(3,753,903)		(3,144,163)
Unpaid claims and claim adjustment expenses, end of the fiscal year	$8,393,700	$7,840,489

At June 30, 2001, the self-insurance funds held a total of $6,778,530 in cash for the payment of these claims.

Workers’ Compensation

The Workers’ Compensation self-insurance program is funded on a cash flow plus contingency reserve basis. The County is liable for the first $250,000 and carries catastrophic insurance coverage for any amount required by statute. At June 30, 2001, the estimated future liabilities were $5,600,789. This was determined by adding the future liability amount to an estimate for incurred but not reported (IBNR) claims and subtracting the amounts in excess of the self-insured retention.

Dental and Health

On September 30, 1994, the County discontinued its medical self-insurance program. On January 5, 1991, the County established a self-insurance program to provide dental benefits. At June 30, 2001, the County had an estimated future liability of $64,030 for dental. The County is fully insured for its alternative capitation dental program and for health coverage for employees represented by Operating Engineers Union Local 3.

Liability and Property

The County is fully self-insured with no excess insurance coverage under the County’s general insurance program. At June 30, 2001, the County had estimated future liabilities totaling $2,687,631 which included estimates for known claims and losses as well as 50% of losses incurred but not reported (IBNR), and multiplying the amount by an estimated present value discount factor of 89.1%.

NOTE 19. SELF-INSURANCE - Continued

Unemployment Insurance

The Unemployment Insurance self-insurance program is considered a “reimbursable” program by EDD, since EDD provides benefits and bills the County quarterly after the fact. As billings are always one quarter in arrears, the estimated future liabilities are based on 25% of the amount budgeted for the new fiscal year. At June 30, 2001, estimated future liabilities were $41,250.

NOTE 20. EXCESS OF EXPENDITURES/EXPENSES OVER APPROPRIATIONS

The following funds had expenditures/expenses that exceeded appropriations:

Fund	Appropriation		Expenditures		Variance
Service Center	$1,583,721	$1,596,377		($12,656)
Davenport Sanitation District	180,000	267,520		( 87,520)

NOTE 21. PRIOR PERIOD ADJUSTMENTS

The following explains why prior period adjustments were made during the fiscal year ended June 30, 2001:

Prior Period Adjustments - Service Center Fund

The prior period adjustment of $84,342 reflects the adjustment on depreciation to correct an error in recording the useful life of assets.

NOTE 22. RECLASSIFICATION

Reclassifications were made for fiscal year 1999-2000. This was done for comparative purposes and has no effect on the excess (deficiency) of revenues and other sources over expenditures and other uses for fiscal year 2000-2001.

NOTE 23. SUBSEQUENT EVENTS

On September 20, 2001, the County issued Tax and Revenue Anticipation Notes at a 3.5% rate with reoffering yield of 2.45% rate in the amount of $16 million. Tax and Revenue Anticipation Notes are issued annually as part of a cash management policy to maintain the County's working capital until sufficient taxes or revenues are collected to fund the County's operations. The notes are due September 19,2002 and are collateralized by fiscal year 2001-2002 unrestricted revenues.

On October 15, 2001, the County of Santa Cruz Public Financing Authority issued Lease Revenue Bonds Series B to finance building repairs and the purchase of a building and various equipment. The bond issue consists of $9,675,000 serial bonds with interest ranging from 2.1% to 4.625% and $2,225,000 of 4.75% term bonds. The bonds are secured by the equity in the County's Water Street and Harkins Slough Road detention facilities.