Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2003 Santa Clara County, California SANTA CLARA VALLEY TRANSPORTATION AUTHORITY San Jose, California Comprehensive Annual Financial Report For Fiscal Year Ended June 30, 2003 Prepared by: Fiscal Resources Division TABLE OF CONTENTS INTRODUCTORY SECTION: Title Page Table of Contents GFOA Certificate for Achievement for Excellence in Financial Reporting Letter of Transmittal Organization Charts Principal Officials Service Area Map FINANCIAL SECTION: Independent Auditor's Report Management's Discussion and Analysis (Required Supplementary Information) Basic Financial Statements: Government-wide Financial Statements: Statement of Net Assets Government-wide Financial Statements: Statement of Activities Fund Financial Statements (Enterprise Fund): Statement of Fund Net Assets Fund Financial Statements (Enterprise Fund): Statement of Revenues, Expenses and Changes in Fund Net Assets Fund Financial Statements (Enterprise Fund): Statement of Cash Flows Fund Financial Statements (Governmental Funds): Balance Sheet Fund Financial Statements (Governmental Funds): Statement of Revenues Expenditures and Changes in Fund Balances Fund Financial Statements (Fiduciary Funds): Statement of Fiduciary Net Assets Fund Financial Statements (Fiduciary Funds): Statement of Changes in Plan Net Assets-Pension Trust Funds Notes to the Basic Financial Statements Required Supplementary Information (other than MD&A): Schedule of Funding Progress - ATU Pension Plan Schedule of Funding Progress - CalPERS Plan Budgetary Comparison Schedule - Congestion Management Program Special Revenue Fund Note to Required Supplementary Information - Budgetary Basis of Accounting Supplementary Information - Combining and Individual Fund Statements and Schedules: Enterprise Fund: Comparative Statements of Fund Net Assets Enterprise Fund: Comparative Statements of Revenues, Expenses and Changes in Fund Net Assets Enterprise Fund: Comparative Statements of Cash Flows Enterprise Fund: Budgetary Comparison Schedule Enterprise Fund: Schedule of Restricted Assets and Related Liabilities Fiduciary Funds: Combining Statement of Plan Net Assets - Pension Trust Funds Fiduciary Funds: Combining Statement of Changes in Plan Net Assets - Pension Trust Funds Fiduciary Funds: Combining Statement of Fiduciary Assets and Liabilities - Agency Funds Fiduciary Funds: Combining Statement of Changes in Fiduciary Assets and Liabilities - Agency Funds STATISTICAL SECTION (Unaudited): Government-wide Information: Government-wide Expenses by Function Government-wide Information: Government-wide Revenues Fund Information (Financial Ratios): Current Ratios Fund Information (Financial Ratios): Debt and Equity Ratios Fund Information (Financial Ratios): Operating Recovery Ratios Fund Information (Financial Ratios): Times Debt Service Coverage Fund Information (Ten-Year Comparisons): Operating Revenue and Net Operating Expenses Fund Information (Ten-Year Comparisons): Non-Operating Assistance and Interest Income Fund Information (Ten-Year Comparisons): Actual Reserve to Target Reserve Fund Information (Ten-Year Comparisons): Vehicle Revenue Miles Fund Information (Ten-Year Comparisons): Passenger Miles Fund Information (Ten-Year Comparisons): Selected Financial Data Fund Information (Ten-Year Comparisons): Selected Statistical Data Fund Information (Ten-Year Comparisons): Santa Clara County Demographic Data Fund Information (Bus and Rail System Facts): Current Bus System Data Fund Information (Bus and Rail System Facts): Current Rail System Data A picture presents VTA's certificate of achievement for excellence in financial reporting: Certificate of Achievement for Excellence in Financial Reporting presented to Santa Clara Valley Transportation Authority, California For its Comprehensive Annual Financial Report for the Fiscal Report for the Fiscal Year Ended June 30, 2002. A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting and financial report. Signed by the GFOA President and the Executive Director October 31, 2003 Board of Directors Santa Clara Valley Transportation Authority Subject: Comprehensive Annual Financial Report The Santa Clara Valley Transportation Authority (VTA) Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2003 was prepared in accordance with the guidelines recommended by the Government Finance Officers Association of the United States and Canada (GFOA). Responsibility for the accuracy, completeness, and fairness of the data and the clarity of the presentation, including all disclosures, rests with VTA. To the best of our knowledge, the enclosed data is reported in a manner designed to present fairly, in all material respects, VTA's financial position, changes in financial position, and cash flows in accordance with the requirements of accounting principles generally accepted in the United States of America as promulgated by the Governmental Accounting Standards Board (GASB). We are again pleased that the FY 2002 CAFR earned the recognition of the GFOA with a Certificate of Achievement for Excellence in Financial Reporting. This award reflects the fact that the VTA CAFR complied with the stringent GFOA standards for professional financial reporting. This report is organized into three sections: 1. Introduction Section, including a table of contents, this letter of transmittal, a list of principal officials and organization chart. This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. 2. Financial Section, including the Independent Auditor's Report, Management's Discussion and Analysis (MD&A), basic financial statements with accompanying footnotes, required supplementary information, and other supplementary information. 3. Statistical Section, including additional data about VTA over the last 10 years. The independent auditor for fiscal year 2003 was Macias, Gini & Company LLP, which issued an unqualified opinion on the VTA's June 30, 2003 basic financial statements. It is management's intention to submit this and future CAFRs to the Government Finance Officers Association of the United States and Canada to determine its eligibility for another Certificate of Achievement for Excellence under the Financial Reporting Program. We believe the current comprehensive annual financial report satisfies the reporting requirements and continues to meet the program requirements. The basic financial statements are in compliance with the GASB Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments. The objective of the GASB is to enhance the understandability and usefulness of the basic external financial reports of state and local governments to the citizenry, legislative and oversight bodies, and investors and creditors. It is important to note that with the implementation of GASB 34, capital contributions (grants) that defray capital acquisition costs and were previously reflected as contributed capital on the balance sheet, are now recognized as revenue on the Statement of Revenues, Expenses and Changes in Fund Net Assets. This change is significant. The corresponding acquisition of capital assets is not recognized on this statement to match the revenue reported; instead, depreciation expense of those assets is recognized periodically over the life of the asset. This represents a significant departure from VTA's budgeting methodology where the resources or grants are recorded in the year they are received and assets are recognized as expenditures in the year they are acquired. PROFILE OF VTA VTA is the result of a 1995 merger between two previously separate entities: the Santa Clara County Transit District and the Congestion Management Agency for Santa Clara County. VTA is also the successor organization to the Santa Clara County Traffic Authority, which terminated at the end of March 1997. VTA is an independent special district responsible for bus and light rail operations, congestion management, specific highway improvement projects, and countywide transportation planning. As such, it is both an accessible transit provider and a multi-modal transportation planning and development organization involved with transit, highways, roadways, bikeways, and pedestrian facilities. Bus Transit Service VTA owns a bus fleet of over 523 diesel-powered coaches, which includes 235 low-floor buses. The average age of these buses is about 5 years and were manufactured at various times, ranging from 1992 to 2002. The service area of approximately 326 square miles contains 69 bus routes. There are approximately 4,700 bus stops, 700 bus shelters and 15 Park & Ride lots - five owned by VTA and ten provided under a lease, permit, or joint use agreement with other agencies. Buses are operated and maintained from three operating divisions and an Overhaul and Repair (O&R) facility: Cerone Operating Division, Don Pedro Chaboya Operating Division, North Operating Division, and Cerone O&R Division. Light Rail Transit (LRT) Service VTA operates a 29.5-mile LRT system connecting the Silicon Valley employment areas of Mountain View, Sunnyvale, Santa Clara, North San Jose and Milpitas to residential areas in South San Jose. The LRT system has a total of 50 stations and 16 park & ride lots. It operates on three routes: service between Santa Teresa and the Baypointe Station in North San Jose, service between Mountain View and the I-880/Milpitas Station in Milpitas, and shuttle service between Almaden and Ohlone-Chynoweth Stations in South San Jose. VTA is purchasing a fleet of 100 new Kinkisharyo low floor light rail vehicles. Forty-five were in revenue service at the end of FY03. The remainder will arrive in the next fiscal year. VTA will deploy a mixed fleet of Kinkisharyo low floor and UTDC (Urban Transportation Development Corporation) high floor light rail vehicles on the Guadalupe line for part of 2003 until adequate numbers of the Kinkisharyo vehicles are commissioned and the interim platform retrofit project is complete. All 95 (45 Kinkisharyo and 50 UTDC) light rail vehicles are stored and maintained at the Guadalupe Operating Division near downtown San Jose. Currently there are three historic trolleys that VTA periodically operates from the Civic Center Station to the Convention Center Station. Construction of the Tasman East and Capitol Lines continues and are scheduled for completion in 2004. The Vasona Line is estimated to begin operation in 2006. Paratransit Services The Americans with Disabilities Act (ADA) was signed into law on July 26, 1990. VTA has implemented the ADA requirements and is in compliance with regulations issued by the U.S. Department of Transportation (DOT) and the Architectural and Transportation Barriers Compliance Board. In 1992, VTA established a paratransit system that operates throughout Santa Clara County. VTA contracts with Outreach and Escort, Inc., to serve as a broker and to provide service through contracts with vendors. Eligible riders call Outreach to schedule their trips, which are then assigned based on the most efficient mode of transportation that can meet the riders' needs: taxi, accessible van or transfer to or from fixed-route. Since 1997, VTA has been in full compliance with the ADA provisions. In January 1999, VTA began offering Same-Day paratransit service, which allows qualified individuals to arrange and take trips on the day of the request to provide for their urgent or unplanned transportation needs. ADA compliance has and will continue to have significant operational and financial impacts on VTA. In 2002, VTA began the development of the Paratransit Business Practices Improvement Plan. This four-phased plan is designed to control increasing costs through a variety of methodologies, which will improve productivity, decrease vendor and broker costs, and increase revenue. The desired results will be achieved by consolidating vendor operations, renegotiating vendor contracts, improving the eligibility certification process, and better aligning the paratransit services with ADA requirements. Phases I and II have been implemented. Phase III is scheduled for implementation in October 2003, and Phase IV may be implemented later in the year. Contracted, Interagency and Other Transit Services Caltrain Peninsula Corridor Joint Powers Board (PCJPB) Caltrain is the commuter rail service provided by PCJPB, which is governed by representatives from San Francisco, San Mateo, and Santa Clara Counties. There are 34 stations along the line; 16 are located in Santa Clara County. Seventy-six diesel-powered locomotives operate between San Jose Diridon Station and San Francisco each weekday, with 67 continuing south to the Tamien Station in San Jose. Eight peak-hour weekday trains extend Caltrain from the Tamien station to Gilroy. VTA LRT transfers can be made at both the Tamien and Mountain View Caltrain Stations The share of the operating costs apportioned to each member agency is based upon morning peak period boardings in each county. Altamont Commuter Express Rail Service The Altamont Commuter Express service (ACE) provides peak hour, weekday commuter rail service from the Central Valley to Santa Clara County (three morning and three afternoon trains). VTA, the San Joaquin Regional Rail Commission (SJRRC), and the Alameda County Congestion Management Agency (ACCMA) administered the service under a Joint Exercise of Powers Agreement until June 30,2003. The 85-mile rail line includes ten stations located in Stockton, Lathrop, Tracy, Livermore (two), Pleasanton, Fremont, Santa Clara (two), and San Jose. VTA provides free shuttles to transport ACE riders between the Great America and Diridion stations and nearby employment sites. The share of the operating costs apportioned to each participating county is based upon the proportional share of total daily boardings and alightings that occur in each county. Effective July 1, 2003, VTA funding of ACE is covered under a Cooperative Service Agreement with the SJRRC and ACCMA. On June 24, 2003, VTA entered into the agreement for continued VTA funding of Altamont Commuter Express (ACE) commuter rail service in the amount of $3,960,000 in fiscal year 2004 and $4,034,000 in fiscal year 2005. The cooperative agreement replaced the ACE Joint Powers Agreement (JPA) which was executed on May 15, 1997 by three ACE member agencies - VTA, SJRRC and ACCMA. Capitol Corridor Intercity Rail The Capitol Corridor Intercity Rail Service began in December 1991 and is a 170-mile train corridor from Auburn and Sacramento to San Jose, through the counties of Placer, Sacramento, Yolo, Solano, Contra Costa, Alameda and Santa Clara. Operating on the Union Pacific railroad tracks, Capital Corridor service consists of four daily round trips from Sacramento to San Jose and seven daily round trips from Sacramento to Oakland with connecting bus service to and from San Jose. One round trip per day extends beyond Sacramento to Auburn. The train service parallels the Interstate 80 corridor between Sacramento and Oakland, and Interstate 880 between Oakland and San Jose. Service includes stops in Roseville, Sacramento, Davis, Suisun/Fairfield, Martinez, Richmond, Berkeley, Emeryville, Oakland, Hayward, Fremont, Santa Clara at Great America, and San Jose Diridon Station. On July 1, 1998, the Capitol Corridor Joint Powers Authority (CCJPA), which is comprised of representatives from the eight counties served by the corridor, assumed responsibility for the service. Under contract with the CCJPA, the Bay Area Rapid Transit District (BART) manages the service and Amtrak operates the service on tracks owned by Union Pacific Railroad. Funding is provided to CCJPA by the State of California. Inter-County Bus Service VTA co-sponsors two inter-county bus services through cooperative arrangements with other transit systems. The Dumbarton Express is a transbay express bus route between the Union City BART Station and the Stanford Research Park in Palo Alto. It provides the only regularly scheduled public transit service over the Dumbarton Bridge. A consortium comprised of representatives from the Alameda-Contra Costa Transit District (AC Transit), San Francisco Bay Area Rapid Transit District (BART), City of Union City, San Mateo County Transit District (SamTrans), and VTA underwrite the net operating costs of the service. The service is contracted out to a private transit provider. SamTrans and VTA are responsible for 50% of the net operating costs and the other East Bay transit operators are responsible for the rest. The remaining 50% of the operating cots is apportioned based upon total daily boardings in Santa Clara and San Mateo Counties. Express Service over Highway 17 between Santa Cruz and downtown San Jose is funded and operated through an agreement between the Santa Cruz Metropolitan Transit District and VTA. Santa Cruz Metro operates the service. The two agencies share the net operating costs equally. Shuttle Program Light Rail Shuttle Under this program, VTA offers financial assistance to employers that wish to operate shuttle bus service between light rail stations and nearby employment centers. The service is operated by private contractors provided by VTA or the employer. Shuttles operate trips carrying employees from light rail to work and back. Funding to operate this program is provided by the employers (minimum of 25%), VTA, and grants from the Transportation Fund for Clean Air Act (AB434). Downtown & HP Pavillion Shuttles VTA operates a Downtown Area Shuttle (DASH) on weekdays between the downtown San Jose Transit Mall, San Jose State University, and San Jose Diridion Train Station. VTA, the Transportation Fund for Clean Air Act, City of San Jose, and the San Jose Downtown Association provide funding for the service. In addition, VTA operates a free shuttle service from the downtown San Jose Transit Mall to all public events held in the HP Pavilion. Recently, VTA staff met with the City of San Jose, San Jose Arena Authority, San Jose Arena Management and San Jose Downtown Association to develop a new funding scheme for this shuttle. All parties agree that the Sharks game service is worth continuing and funding is being pursued. VTA has requested that the other parties fund 50% of the costs. If funding partners at this 50% level cannot be secured, this service will be discontinued. On May 9, 2003, service for other events was discontinued due to low ridership and existing parallel bus service. San Jose Airport Flyer VTA, in partnership with the City of San Jose, provides free Airport Flyer bus service connecting the Norman Y. Mineta San Jose International Airport terminals and airport parking lots with VTA's Metro/Airport Light Rail Station and the Santa Clara Caltrain Station. The City of San Jose and VTA equally share the operating costs for this service. Congestion Management In January 1995, VTA was designated as the Congestion Management Agency and changed from being exclusively a transit provider to an organization responsible for countywide transportation planning, funding, and congestion management within the County. VTA, as the Congestion Management Agency for Santa Clara County, is responsible for coordinating and prioritizing projects for state and federal transportation funds, administering the Transportation Fund for Clean Air Program, and coordinating land use and other transportation planning. Adoption of a Congestion Management Program (CMP) is necessary to qualify for certain transportation funds made available through the state gas tax increase authorized in 1990. FACTORS AFFECTING FINANCIAL CONDITION Local Economy Although we continue to experience tighter economic conditions, Santa Clara County has the largest employment base of any county in Northern California. Many high technology, computer manufacturing, and electronics companies are located within the County. In the last year we continued to post job losses. In comparison with the State's June 2003 preliminary average (6.7 percent), the Santa Clara County has a higher unemployment rate (8.5 percent). Employers have eliminated over 200,000 jobs since December 2000. The County's population has increased substantially over the last fifty years. In recent years, the percentage rise has been much smaller, but the population continues to increase. As the population grows, so does the need for housing. With home mortgage rates at all-time lows within the last year and the average price down slightly, home sales got a jumpstart despite the recession. Sales increased 11% over the last fiscal year and the real estate market in Santa Clara County appears to be stable as this time. The County is an important barometer of commercial activity. Taxable sales activity at businesses, personal services outlets, and other non-retail commercial establishments are a significant component of the County's commercial activity. Sales Tax Sales tax is the primary source of funds for VTA's operations, maintenance, and capital needs. Local sales tax is derived from a one-half cent sales tax restricted for transit purposes, levied within Santa Clara County. VTA also receives State of California Transportation Development Act (TDA) funds, which are derived from a one-quarter cent sales tax levied by the State of California and allocated on a "return to source" basis for transportation use. These two sales taxes account for approximately 64% of the total revenue (less capital contributions) for the year ended June 30, 2003. FY03 was the second consecutive year that VTA has experienced negative sales tax performance. Due to the heavy dependence on the high-tech industry, Santa Clara County's economy has been volatile, resulting in correspondingly volatile sales tax receipts. The adopted budget estimated to receive $147.1 million in sales tax revenue in FY02/03. The revised estimate was $133 million and the actual result was $132.7 million. The current estimate for FY03/04 half-cent sales tax revenue is $135 million, which is a 1.7% increase compared to FY02/03 receipts. Although there appears to be a minimal gain anticipated in the next fiscal year, any growth is expected to be very slow in materializing. Ridership & Farebox Revenue Due to the decline in economic activity and service reductions introduced in July 2002, ridership continued to decline. VTA directly-operated systemwide ridership decreased compared to FY02's figure by 14.2% as 45.2 million passengers boarded Bus and Light Rail during FY03. Light Rail system ridership was 6.1 million, a decrease of 22.3% compared to the same period last year. Bus ridership for FY03 totaled 39.2 million passengers, a decrease of 12.8% compared to FY02. Contracted and Inter-agency ridership numbers also declined with the exception of Dumbarton and Santa Clara County Caltrain Shuttles, which increased ridership by 3.7% and 6.5% respectively. Paratransit ridership increased 1.7% over the prior year's figures. Although posting an increase in ridership, Paratransit operating expenses have declined due to cost saving measures enacted in FY03. Overall system-wide cost cutting strategies applied at the start of the year have helped to reduce Paratransit expenses by 12.3% compared to the same period last year. Unemployment has a direct impact on VTA ridership. As Santa Clara County employment levels decline, ridership decreases. In order to compensate for declining sales tax revenue receipts and to alleviate our operating deficits, VTA implemented fare increases during both July 1, 2002 and August 2003, with the goal of increasing the percentage of operating costs paid by patrons and the average fare revenue per boarding. At the end of the fiscal year, the average fare paid by each transit passenger was $0.68. VTA's operating cost recovery ratio was 13 % in FY03 compared to 13.5% in FY02. Federal Section 5307 Urbanized Formula Program Federal Section 5307 allows eligible recipients (such as VTA) to claim capital grant funds for maintenance costs and other projects such as routine bus replacement. Grant applicants may apply for FTA grants in an amount up to 80 percent of annual vehicle maintenance costs. VTA has incorporated this policy in its grant application strategies. The funds are reflected in the financial statements as Federal Operating Assistance. VTA's request for the existing Section 5307 grant was approved in September 2002. Although the Section 5307 grant program is intended to primarily fund capital acquisitions, funds awarded for preventive maintenance support the maintenance portion of the operating budget and can be converted to operating assistance. VTA requested the shift of $9.8 million from replacement buses to preventive maintenance, increasing the Preventative Maintenance and making the funds available in FY03 for operations. The $9.8 million of Federal Preventative Maintenance (i.e., federal operating assistance) was recognized in VTA's audited financial statements in FY 2001-02, but received in FY 2002-03. 1996 Measure B Transportation Improvement Program In November 1996, voters in Santa Clara County overwhelmingly approved Measure A, an advisory measure listing an ambitious program of transportation improvements for Santa Clara County. Also approved on the same ballot, Measure B authorized the Santa Clara County Board of Supervisors to collect a nine-year half-cent sales tax for general county purposes. Subsequently, the County Board of Supervisors adopted a resolution dedicating the tax for Measure A projects. Collection of the tax began in April 1997; however, use of the revenue was delayed pending the outcome of litigation challenging the legality of the sales tax. In August 1998, the California courts upheld the tax allowing the implementation of the 1996 Measure A transportation projects to move forward. In February 2000, the VTA Board of Directors approved a Master Agreement formalizing VTA's partnership with the County of Santa Clara to implement the 1996 Measure B Transportation Improvement Program (MBTIP). With this partnership in place, the County and VTA are now delivering a transportation program valued at over $1.8 billion. VTA agreed to secure Federal or State grant funds for certain 1996 MBTIP projects and to release MBTIP funds to fund other local projects. Currently, fund transfers have been performed on the Tasman East, Vasona, and Capitol Light Rail Projects. The 1996 MBTIP and other sources provide funds to local jurisdictions for street repair and other transportation projects. Administration and distribution of these funds is managed by the 1996 Measure B Ancillary Program. Over the life of the 1996 Measure B sales tax, local jurisdictions will receive a combined total of $448 million countywide. After approval of a ten-year expenditure plan by VTA and the County Board of Supervisors, VTA's Board of Directors adopted the 20-year Countywide Bicycle Plan. The 20-year plan includes three prioritized tiers of capital bicycle projects. The ten-year Bicycle Expenditure Program included in the Countywide Bicycle Plan is the funding mechanism for the Tier 1 projects. This program administers and distributes funds to Member Agencies to implement and construct the projects. In 2001, the VTA Board of Directors requested that the VTA Advisory Committee structure be modified to focus more directly on pedestrian issues. In response, staff recommended that the existing Bicycle Advisory Committee be re-established as the Bicycle and Pedestrian Advisory Committee (BPAC), and that its duties be augmented to focus on pedestrian-related issues. The Board also requested that staff develop a VTA Pedestrian Program that delineates the agency's pedestrian-related activities. VTA is responsible for project management of the following transit and highway projects as well as the administration of the pavement management and bicycle elements of the 1996 MBTIP program under the master agreement with the County of Santa Clara. The Transit Projects, estimated at a cost of $928.2 million, include: 1. Tasman East Light Rail Project - extending the current Light Rail system from Milpitas to Northeast San Jose 2. Vasona Light Rail Extension Project - constructing the Vasona Light Rail line from downtown San Jose to Winchester, utilizing the Union Pacific Vasona rail corridor 3. Capitol Light Rail Extension Project - building the Capitol Light Rail line from northeast San Jose (connecting to the Tasman line) down Capitol Avenue through east San Jose to the Alum Rock area, with eventual service to Eastridge 4. 30 low-floor light rail vehicles (LFV's) 5. Fremont/South Bay Corridor Service - interim improvements service connecting BART in Alameda County with San Jose (bus and possible ACE and Capitol Corridor improvements) 6. Caltrain Service Improvements - improving Caltrain commuter rail service by adding trains and improvements between Gilroy and Palo Alto The Highway Projects, estimated at a cost of $463.5 million include: 1. Interstate 880 widening from four to six lanes from Montague Expressway to U.S. 101, and an auxiliary lane on Southbound I-880 from U.S. 101 to the North First Street exit ramp 2. Routes 85/87 direct connector ramps for the southbound 85 to northbound 87 and southbound 87 to northbound 85, plus addition of a HOV lane in each direction of Route 87 3. U.S. 101 widening from four to six lanes, plus two HOV lanes between Metcalf Road in San Jose and Burnett Road in Morgan Hill 4. Route 85/U.S.101 interchange in Mountain View, including HOV Direct Connector 5. Routes 237/880 HOV direct connector ramps for southbound I-880 to westbound 237 and eastbound 237 to northbound I-880, and a southbound braided exit ramp from I-880 to Tasman Drive interchange 6. Route 87 HOV lane projects between I-280 and Julian Street as well as between Branham lane and I-280 7. Route 17 improvements between Lark Avenue in the Town of Los Gatos and I-280 in San Jose 8. Routes 85/101 interchange in South San Jose - complete the existing interchange by adding two direct connectors, a branch connector, and widening of U.S. 101 to eight lanes between Bernal Road and Metcalf Road 9. Route 152 safety improvements - safety and operation improvements between U.S. 101 and Route 156 10. Route 85 Noise Mitigation between U.S. 101 and Route 87 The 1996 Measure B Ancillary Program, estimated at a cost of $447.7 million includes: 1. Pavement Management Program - provides $90 million to local jurisdictions for street maintenance and repairs 2. Bicycle Program - provides $12 million for the development of a Countywide Bicycle Plan and the implementation of a series of bicycle projects 3. Level of Service Intersection Improvement Program - provides $11.3 million for the improvement of several critical expressway intersections 4. Expressway Signal Synchronization Program - provides $24.1 million to improve expressway capacity and operations 5. Fund Swap Projects - provides $310.3 million; through a series of actions taken by VTA's Board of Directors, federal, state, and local funds were programmed to the Tasman East Light Rail, Vasona Light Rail and Capitol Light Rail Extensions, to release local 1996 Measure B funds to other transportation projects. These projects include the I-680 HOV Lanes, U.S. 101/Bailey Road Interchange, Gateway studies, Montague Expressway Project, U.S. 101/Route-85 HOV Direct Connectors, Local Program Reserve, the purchase of 70 new light rail vehicles, and the Vasona Winchester extension. Financial Status - Enterprise Fund The Statement of Revenues, Expenses and Changes in Fund Net Assets states that VTA had a net operating loss of approximately $301.4 million. Even with net non-operating revenues of $223.3 million, there still was a $78.1 million decrease in net assets. During FY03, VTA acquired capital assets and completed construction in progress (CIP) projects of approximately $553 million. VTA started the year with $177.6 million in budgetary reserves (net working capital) and by the end of FY03, the balance was $114.9 million. The $62.7 million decrease in budgetary reserves was due to the operating loss of $36.6 million (exclusive of depreciation), as well as the acquisition and development of capital assets amounting to $26.1 million. The $26.1 million in capital assets came as the result of an offset of $36 million due to cancelled, closed, or scaled back projects that were previously approved and earmarked for reserves as of June 30, 2002. Table 1.1 presents restricted and unrestricted budgetary reserves as of June 30, 2003: The Restricted Budgetary Operating Reserves is $46.8 million The Restricted Budgetary Reserves Local Share of Approved Capital is $62.5 million The Restricted Budgetary Reserves Operating Encumbrance is $.9 million The Total Restricted Budgetary Reserves is $110.2 million The Unrestricted Budgetary Reserves is $4.7 million The Total Budgetary Reserves is $114.9 million END OF TABLE In accordance with the Board policy, 15% of the subsequent year operating budget is restricted to meet emergency needs that cannot be funded from any other source. This is meant to ensure that some funds are available in the event of unanticipated revenue shortfalls or if unavoidable expenditures may be required. Local share of approved capital represents the amount of revenue that VTA must provide towards Board approved capital projects. There was a decrease during FY03 of $72.2 million due to deferred and cancelled capital projects. The Capital Improvement Program Oversight Committee (CIPOC), which is composed of senior management and supporting staff from all five divisions within VTA, conducts thorough reviews of the entire capital program. The process examines every capital project as to its criticality to VTA's operations, strategic plan, and goals. Consequently, 46 projects were closed, cancelled, scaled back, or budgets reduced, returning over $36 million to reserves to help offset operating deficits. One example of a major project realizing savings from this review was the Guadalupe Corridor Platform Retrofit. Retrofits of platforms in the Downtown and Southline segments have been deferred. Operating encumbrances are for one-time non-recurring programs or projects, which are not expended during the fiscal year, and carryover to the successive fiscal years until the programs or projects are completed or terminated. All other operating appropriations lapse at year-end. Future Long-Term Financial Planning During FY02, a Benchmark analysis was completed to evaluate VTA's performance in comparison with other transit agencies. The results of this lead to the development of the recommendations of the Business Review Team and subsequent consideration by the Ad-Hoc Committee. VTA plans to implement the recommendations received. FY2003/2004 Goals, Projects and Major Efforts Business Review Team Recommendations: 1. VTA should establish a multi-year strategy to increase its farebox recovery ratio and average fare per boarding. This will require a program of regular fare increases and reductions in fare discounts. Assuming a $300 million budget for directly-operated service, each 5% improvement in farebox recovery ratio would generate $15 million in additional revenue. 2. To address the increasing costs in health benefits, VTA should consider cost containment opportunities, including employee cost sharing which is a standard practice in the private sector. These changes could result in estimated savings of as much as $2.5 million to $3.8 million annually. 3. To address the rising costs of its ADA Paratransit Program, VTA should consider modifying its existing service to reduce premium services, modify the eligibility verification process, and provide, as close as possible, only the level of service that is actually required by the ADA. Further, the Team concurred with the cost containment strategies VTA has set forth in their Paratransit Business Practice Improvement Plan. These changes could result in estimated savings of between $2.3 million and $3.5 million, depending on which options the Board approves. 4. VTA must continue to increase its marketing efforts to increase its market share and constantly evaluate services, making necessary modifications to assure efficiency and effectiveness. Each 1% increase in VTA ridership would generate approximately 465,000 more boardings and approximately $280,000 in additional revenue. 5. For Joint Power Authorities, VTA's Board of Directors should be involved in the approval of the operating and the annual incremental capital budget, and further should approve in concept the next five years of operating, maintenance, and capital funding requirements. 6. The VTA Board adopt and adhere to a structured Fare Policy and Program that establishes "fair fares", encourages and sustains ridership growth and incorporates ongoing assessments of business efficiency as part of VTA business practices. Ad Hoc Financial Stability Committee Recommendations: CONCLUSIONS In response to a dramatic and unprecedented decline in sales tax revenue to VTA, the Board and staff have made substantial in-roads toward the reduction of the near-term operating deficit by reducing expenses and improving productivity and efficiency. However, in spite of these efforts, VTA is still facing annual operating deficits averaging between $40-50 million beyond FY04-05. As a consequence, VTA must urgently address the need to enhance revenues and reduce expenses in the very near term. Additional delay in addressing this structural problem would simply exacerbate the problem. The Ad Hoc Committee has adopted the following recommendations. Adoption, in the whole or in part, by VTA's Board of Directors is pending. Adopted Board Actions 1. Adopt the proposed 21 percent service reductions, but defer implementation until January 2004. (On September 24, 2003, a Superior Court ruling allowed Measure A funds to be used for operational expenses, thereby making the Board Action inapplicable). 2. Direct staff to explore the feasibility of the limited, temporary use of future Measure A revenues to fund most, if not all of the bus and light rail service reductions contained in the Fiscal Year 2003-2004 and Fiscal Year 2004-2005 proposed budget. 3. Defer the door-to-door paratransit per trip service surcharge of $1.50 for one Fiscal Year and until current paratransit customers have been evaluated for their medical need for the service and their ability to pay. 4. Adopt all of the recommendations of the Ad-Hoc Financial Stability Committee, recognizing that all recommendations related to employee working conditions and benefits are subject to meet-and-confer requirements. 5. Conduct a Board Workshop in October 2003 to determine Board consensus on a new local revenue source to present to the voters for consideration in 2004. Adopt the consensus local revenue alternative at the Board's November 2003 Meeting. 6. Waive the three-quarter mile residency rule on paratransit service for one year in South Santa Clara County south of Cochran Road pending the pursuit of additional funds to continue to provide paratransit service throughout that extended rural area with the clarification that if funds for the one-year period are identified, the position would be reconsidered. 7. Adopt Phase III of the Paratransit Service Business Practices Improvement Plan, which includes modifications to the minimum account balance policy, implementation of the Americans with Disabilities Act (ADA) defined service area and hours, a modified door-to-door/curb-to-curb program, and premium service pricing. 8. Approve $14,105,000 and $14,387,000 for Fiscal Year 2003-04 and Fiscal Year 2004-05 to provide Santa Clara Valley Transportation Authority's share of Caltrain operating support; and further approve in concept VTA's use of $1,486,000 Federal Section 5309 funds in lieu of the local match requirement for FY 2003-04 capital support. 9. Authorize the General Manager to execute a Cooperative Service Agreement with the San Joaquin Regional Rail Commission and the Alameda County Congestion Management Agency for continued VTA funding of Altamont Commuter Express (ACE) commuter rail service in the amount of $3,960,000 in Fiscal Year 2003-04 and $4,034,000 in Fiscal Year 2004-05. 10. Adopt a finding that a fare increase is necessary to meet operating expenses and to fund capital projects necessary to maintain service within the existing service area, while maintaining minimum required financial reserves. 11. Approve the Fiscal Year 2003-04 and Fiscal Year 2004-05 Recommended Biennial Budget. Operations Division OPERATIONS ADMINISTRATION: Protective Services Continue the expansion of the On Board Closed Circuit Television (CCTV) including the completion of the Remote Viewing Demonstration Project by establishing CCTV data viewing at the Eastridge Transit Center and the Chynoweth Light Rail Station. Service Planning Transition from current manual passenger data collection to an automated system using Automatic Passenger Counters (APC's). This new technology works in concert with the Advanced Communications System (ACS) on both bus and light rail vehicles. Operations Planning Work with VTA's service partners, such as Caltrain, ACE, Highway 17 Express and Dumbarton Express to develop service and operating plans that meet passenger needs, while reflecting VTA's financial condition. Accessible Services Contain paratransit program costs and overall utilization through a 20% reduction in enrollment rate. Further contain paratransit program costs through the development and implementation of Phase II of the Paratransit Business Practices Improvement Plan. September 1, 2003 - modify minimum account balance policy October 13, 2003 - implement ADA service area October 13, 2003 - implement curb-to-curb service TRANSPORTATION: Meet or exceed the goal of providing 99.25 percent of scheduled service for bus and 99.9 percent for rail. Desired outcome is 99.25 percent or greater for bus and 99.9 percent for light rail. Plan and coordinate all Operations Division programs to effect the activation of the Tasman East/Capitol light rail extension. Desired outcome is to successfully complete timeline goals in preparation for planned revenue service in Summer 2004. MAINTENANCE: Continue the implementation of VTA's Clean Fuel Strategy. This includes working with the California Air Resources Board on emissions reductions by developing and implementing a program for bus engine overhaul to ensure compliance with emission regulations, demonstrating and testing technology that has the potential to reduce NOx (nitrogen oxide) emissions by 70% or more on three buses operating in revenue service over a three-year period, the Zero Emission Bus Demonstration Project and continued participation in the California Fuel Cell Partnership. As a part of VTA's Clean Fuel Strategy, manage the contract for the purchase of three Zero Emission Buses (hydrogen fuel cell) and complete the installation of the hydrogen fueling station at the Cerone Division. In addition, coordinate maintenance procedures and training development to support the Zero Emission Bus Demonstration Project and coordinate the delivery of Zero Emission Bus vendor training. Continue to manage the contract for the construction and commissioning of 100 low floor light rail vehicles from Kinkisharyo and place into revenue service 48 of these low floor light rail vehicles. In addition, complete the decommissioning of the 39 UTDC light rail vehicles, which includes schedule preventive maintenance, exterior rust removal and body repair if needed. Provide support and conduct system integration testing in preparation for the opening of the Tasman East and Capitol Light Rail Corridors in early June 2004. At this time, the Way, Power & Signal section of the Maintenance Department will assume maintenance responsibility for this light rail extension. Additional responsibilities will include the maintenance of eight light rail stations, five substations, five Park & Ride Lots and 12.6 miles of track and overhead catenary. Administrative Services Division Continue to reduce overall IT costs through the complete knowledge transfer from consultants to VTA employees and development of IT Strategic Plan. Successfully negotiate equitable labor agreements with the Transportation Authority Engineers and Architects' Association; Service Workers Local 715 Service Employees International Union; AFL-CIO, Santa Clara Valley Transportation Authority Chapter; and the County Employees Management Association, Santa Clara Valley Transportation Authority Chapter. Construction Division CAPITAL IMPROVEMENTS: Transit Operations Complete construction of projects in the Facilities Improvement Program including North and the Cerone O&R Division Improvements Project, and the Cerone ZEB Demonstration Project. Complete construction of north line Guadalupe platform modifications to accommodate low floor light rail vehicles. 1996 MEASURE B TRANSPORTATION IMPROVEMENT PROGRAM: Transit Program Continue construction of the Vasona Light Rail Project as scheduled and budgeted. Complete the Tasman East and Capitol Light Rail Projects for revenue service by July 2004. Construction completed on the double track from Tamien Station to Lick for the Caltrain Service Improvements Project. Complete construction on Caltrain Improvement Program projects to include: Lawrence Bus/Shuttle & Parking Expansion; Palo Alto Transit Center Improvements and Santa Clara Parking & Bus Expansion. Highway Program Complete construction on the following contracts: I-880 Widening in San Jose; Route 152 Improvements Phase A2 in Gilroy. Continued construction on the following contracts: Route 85/101 (North) Interchange in Mountain View; Route 85/101 (South) Interchange in San Jose; Route 237/880 Interchange Stage C Phase 2; Consolidated Biological Mitigation in San Jose. Begin construction on the following contracts: Route 87 (S) HOV lanes in San Jose; Route 87 (N) HOV lanes in San Jose; Replacement planting/landscaping for I-880 Widening. HIGHWAY PROJECT DEVELOPMENT & ADMINISTRATION Award construction contracts for 152-B, I-880/Coleman Avenue Interchange, Route 87 S, Route 97 N, and the River Oaks Bicycle/Pedestrian Bridge. Complete design of 87N, 87S, I-880/Coleman Avenue Interchange, Route 87 N, and Route 87 S. Begin design of Route 85 Noise Mitigation Project. Commence preliminary engineering/environmental approval activities for highway projects selected by the VTA Board in implementation of VTP 2020. Develop the 10-year project list for local streets and roads program. OTHER PROJECTS Continue construction of the U.S. 101/Bailey Avenue Interchange project for the City of San Jose. Begin interchange construction work for the I-880/Coleman Avenue Interchange project for the City of San Jose. Begin construction of the River Oaks Bicycle/Pedestrian Bridge I San Jose and Santa Clara. Development & Congestion Management Division CONGESTION MANAGEMENT PROGRAM Develop the 2003 Congestion Management Program. Update Valley Transportation Plan 2020 (VTP 2020), the comprehensive multimodal transportation plan for Santa Clara County. Continue and expand the outreach and education for the Community Design and Transportation program, to ensure that all cities adopt the guidelines. Develop the Capital Improvement Program (CIP) element of the 2003 Congestion Management Program (CMP). TRANSIT PLANNING & DEVELOPMENT Complete Conceptual Engineering and Final EIR/EIS for the SVRTC (BART Extension) Project. Complete Conceptual Engineering and Final EIR/EIS for the Downtown East Valley (Capitol Expressway segment) Project. Complete and release Draft EIR/EIS for the Downtown East Valley (Santa Clara/Alum Rock segment) Project. MARKETING & CUSTOMER SERVICE Coordinate design, fabrication, and installation of more than 40 CODE projects within 1996 Measure B light rail and highway projects. Implement and evaluate comprehensive strategic marketing plan in accordance with VTA's financial condition and service levels. Fiscal Resources Division Complete a subleasing transaction involving VTA's Light Rail vehicles to Salt Lake City and Sacramento Regional Transit District. Complete a series of two lease to service contracts financial transaction for Low Floor Light Rail Vehicles. Complete lease to service contract financial transaction on buses. Complete refinancing of Measure A repayment obligation 2000 Measure A Transportation Improvement Program and VTP 2020 In August 2000, the VTA Board of Directors approved placing a measure on the November 7, 2000 General Election ballot which would approve a 30 year half-cent sales tax to take effect in the county after the 1996 Measure B Sales Tax expires (March 31, 2006). More than 70% of voters approved the 2000 Measure A. The tax cannot be extended past March 31, 2036 without the vote and approval of the residents of Santa Clara County. It is estimated that over $6 billion (FY 2000 constant dollars) will be collected. The revenue from this Measure will be collected by the State and sent to VTA. The funds may be used to finance the transit projects and operations specified in 2000 Measure A and listed in VTA's Valley Transportation Plan and Expenditure Program (VTP 2020). The activities specified in 2000 Measure A include: Connect BART to Milpitas, San Jose, and Santa Clara; Build a rail connection from the Norman Y. Mineta San Jose International Airport to BART, Caltrain, light rail; Purchase vehicles for disabled access, senior safety, clean air buses; Provide light rail throughout San Jose through the Downtown East Valley Transit Improvement Plan; Expand and electrify Caltrain; Increase rail and bus services; and Provide for related operating expenses. Staff is currently developing the implementation details of the program for adoption by the VTA Board of Directors. VTP 2020 provides for a balanced transportation system consisting of transit, roadway, bicycle and pedestrian improvements. It is a twenty-year multi-modal transportation plan that guides overall planning and programming efforts within Santa Clara County. It deals with many transportation issues including decision-making on land use, maintenance and upgrades to the infrastructure, and environmental preservation. VTP 2020 will establish the capital improvement project selection process and establish a ten-year implementation schedule for the first phase of the Capital Improvement Program (CIP). The Best Practices Land Use Program will also be incorporated into the Implementation Program. The Implementation Plan will be updated every other year to reflect the VTP 2020 update. TransLink Demonstration Project In 1998, VTA agreed to participate in a demonstration of "TransLink," an innovative regional fare collection program sponsored by MTC. This demonstration commenced in early 2002 and includes BART, Caltrain, AC Transit, San Francisco MUNI, and Golden Gate Transit in addition to VTA. TransLink will utilize "smart cards" for fare collection. The card will allow riders to store value on the card after money was loaded electronically at sales outlets, vending machines, or by other sales channels. Once the card has a balance, the value would be deducted from the card each time it is used for travel. It offers several potential advantages to VTA and customers, including convenience, security, simplified transfers, and reduced handling of coins and bills. A regional clearinghouse was established to track all card loading and fare payment transactions, and to "settle" funds among all the participating transit operators. An evaluation of the first six months of the Demonstration concluded that the system worked and that customers wanted to see it extended region wide. During 2003, MTC and the transit operators have been working to resolve governance, financial, and design issues with the intent of enabling a full region wide implementation of TransLink over the next two to three years. Cash & Investment Management Policies and Practices VTA's cash and investments are managed in accordance with California Government Code Section 53601 and other applicable state law. The Restricted and Unrestricted Investment Policy is periodically reviewed and approved by the Board of Directors. The Investment Policy defines permitted investments and prescribes investment strategies. The investment strategies are expressed through asset allocation ranges and targets. Risk tolerance and performance expectations are defined by benchmark indexes. Restricted investments are for all non-retirement assets. Restricted assets consist of monies and other resources that are either Board designated or legally restricted for the following purposes: Capital and Operating General Liability Insurance Workers' Compensation Long-term Accrued Vacation and Debt Service Sick Leave Benefits Retiree Healthcare VTA changed its investment strategy to safeguard principal and mitigate possible losses by shifting the unrestricted funds earmarked to underwrite operating deficits and local share of capital projects using a new benchmark, the table money market index which has much shorter duration. The taxable money market index is the benchmark for short-term funds, and the Lehman Brothers U.S. Government Intermediate Index is the benchmark for Intermediate Term Funds. All securities are "marked-to-market" at month-end. VTA's investment program is actively managed by professional money managers whose performance is overseen by VTA. The Restricted/Unrestricted Investment Policy includes three asset allocation and accompanying benchmarks as shown below. In accordance with California Government Code Section 53620 - 53622, the assets of the Retiree Health Care Program funds may be invested in a manner similar to those made by pension funds. Operating/Non-Retirement: Benchmark- US Government Intermediate Fixed Income: Target Ranges N/A, Target Asset Allocation 54%, and the Actual was 51% Operating/Non-Retirement: Benchmark- Institutional Money Market: Target Ranges N/A, Target Asset Allocation 46%, and the Actual was 43% Operating/Non-Retirement: Benchmark- Cash/Commingled Investments: Target Ranges N/A, Target Asset Allocation none, and the Actual was 6% Retiree Health: Benchmark- Lehman Aggregate (Fixed Income): Target Ranges 30-70%, Target Asset Allocation 48%, and the Actual was 40% Retiree Health: Benchmark- S&P 500 Index (Equity): Target Ranges 25-60%, Target Asset Allocation 50%, and the Actual was 40% Retiree Health: Benchmark- Cash/Commingled Investments: Target Ranges 0-5%, Target Asset Allocation 2%, and the Actual was 20% The ATU/VTA Pension Plan Investment Policy functions like the Restricted/Unrestricted Investment Policy, with the notable exception that Pension Plan Trustees review and approve the policy, (pursuant to California State Proposition 162 enacted in November 1992). The Pension Plan is a defined benefit plan and its financial position and changes in financial position are reported in separately issued stand-alone financial statements. A table presenting VTA/ATU Pension Plan benchmark and asset allocation range as of June 30, 2003: ATU Pension Plan: Benchmark - Lehman Brother Aggregate (Fixed Income) - Target Ranges 35-45%, Target Asset Allocation is 39%, and the Actual is 41% ATU Pension Plan: Benchmark - S&P/Barra Value (Large Cap Equity) - Target Ranges 15-25%, Target Asset Allocation is 20%, and the Actual is 19% ATU Pension Plan: Benchmark - Russell 2000 Value (Small Cap Equity) - Target Ranges 5-15%, Target Asset Allocation is 10%, and the Actual is 11% ATU Pension Plan: Benchmark - S&P 500 (Large Cap Equity Index) - Target Ranges 10-20%, Target Asset Allocation is 15%, and the Actual is 14% ATU Pension Plan: Benchmark - MSCI EAFE (International Equity Index) - Target Ranges10-20%, Target Asset Allocation is 15%, and the Actual is14% ATU Pension Plan: Benchmark - Cash/Commingled Investments Target Ranges 0-5%, Target Asset Allocation is 1%, and the Actual is 1% END OF TABLE An addition to the management of this investment fund is the rebalancing of the allocations. The Plan's asset allocation will be reviewed relative to the targets on a monthly basis and action will be taken to re-balance to within the target ranges by means of asset transfers among categories. When necessary and/or available, cash inflows/outflows will be deployed in a manner consistent with the strategic asset allocation on the system. With respect to assets still held by the County, the investment policies of the commingled pool conform to State statutes. In addition, VTA has an adopted policy regarding the types of investments which may be made and the maximum amounts which may be invested in any one financial institution or amounts which may be invested in long-term instruments. Investment earnings, recognized on the Statement of Revenues, Expenses and Changes in Fund Net Assets - Enterprise Fund (Business-Type Activity), amounted to $14.3 million during FY03. $7.5 million in net investment earnings is reported on the Statement of Changes in Plan Net Assets - Pension Trust Funds. Funds invested for restricted assets include workers' compensation, general liability, and retiree medical activities. The expense for these activities is recognized in the Enterprise Fund for contribution payments that is net of expected earnings. The contribution amounts are based on actuarial studies. The increase in investment assets is recognized as an increase in cash and increase in other accrued liabilities. Approximately $7.6 million in restricted investment earnings are accounted for in this manner. Table 1.2 reads: The Enterprise Fund Earnings for FY2003 were $14,425 million, The Special Revenue and Capital Projects Fund Earnings were $99 million The Pension Trust Fund was $7,523 million Income Recognized was $21,867 million The Earnings for Discounted Liabilities was $7,556 million The Total Investment Earnings were $29,423 million END OF TABLE Risk Management For the year ended June 30, 2003, VTA self-insured the first $3 million of all public liability claims and all worker's compensation claims. Based on annual independent actuarial studies, the claims program funds are adjusted annually to maintain a projected financial position at an estimated 75% confidence level. Risk Management Department Claims Staff oversee third party administrators for the adjustment and payment of claims from both self-insurance funds. The Risk Manager obtains excess casualty and property insurance coverage for operations and also manages the Owner-Controlled Insurance Programs (OCIP) for major transit and highway construction projects. The OCIP is a fully insured program providing general liability coverage, and statutory worker's compensation coverage for construction contractors, at a reduced premium cost to VTA. Internal Controls To reasonably assure compliance with established policies and procedures, and to protect assets, VTA has established a system of internal controls, including budget guidelines. The Internal Audit Department reviews internal controls, conducts performance audits, and then issues reports on its findings, which include recommendations for improvement. Internal Audit reports to the Chief Financial Officer. There are inherent limitations that should be recognized in considering the potential effectiveness of any system of internal control. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the benefits derived therefrom, and that the evaluation of those factors requires estimates and judgments made by management. We believe VTA's internal controls adequately safeguard assets against loss from unauthorized use or disposition, and provides reasonable assurance of adherence to prescribed managerial policies as well as proper recording of financial transactions in the financial statements. Major subjects reported on during FY03 by the Internal Audit Department are: Operational review to improve process effectiveness and efficiency; Assessment of internal controls; Compliance audit on contractors/vendors (pre-award and incurred cost audits); Analyses of contractors' proposed costs; and Follow up of recommendations issued by Internal Audit Department and external regulatory agencies. Pension and Other Post-employment Benefits There are two specific pension plans offered by the VTA. All ATU employees are covered under the Santa Clara Valley Transportation Authority Amalgamated Transit Union Pension Plan. The plan provides retirement, disability, and death benefits based on the employees' years of service, age, and final compensation. The second pension plan is the State's Public Employees Retirement System (CalPERS) for non-ATU employees. Further information on the two plans can be obtained in footnotes 11 and 12 of the Notes to the Basic Financial Statements, starting on pages 2-48 and 2-50 respectively. Additionally, there are Schedules of Funding Progress for the two plans within the Required Supplementary Information on pages 2-60 through 2-61. There are three health benefits programs for employees who retire directly from VTA. First, for ATU employees, there is an ATU Medical Trust which includes a Spousal Medical Trust and Retiree Vision and Dental Trust. Secondly, there is the ATU Retiree Health Care Program. Finally, there is the non-ATU Retiree Health Care Program. Additional information can be found in footnotes 13 and 14, pages 2-51 through 2-52. Awards and Acknowledgements The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to Santa Clara Valley Transportation Authority (VTA) for its comprehensive annual financial report (CAFR) for the fiscal year ended June 30, 2002. This was the 7th consecutive year that VTA has achieved this prestigious award. In order to be awarded a Certificate of Achievement, a government agency must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both accounting principles generally accepted in the United States of America and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements and we are submitting it to GFOA to determine its eligibility for another certificate. The preparation of this Comprehensive Annual Financial Report required a concerted team effort throughout VTA, including team members from Financial Accounting, Disbursements, Revenue Services, Contracts and Purchasing, Risk Management, Budget and Analysis, Investments, Service and Operations Planning, and the Debt Administration/Business Analysis Departments. The team members demonstrated a commendable degree of personal dedication and determination in producing this document. In addition, special thanks to Macias, Gini & Company LLP for their contribution, as well as all other VTA staff for responding positively and promptly to the request for information that occurs with each annual audit. The Copy Center and the Marketing and Customer Service Departments also made significant contributions to the form, content, and production of the report. October 31, 2003 Signed by the General Manager (Peter M. Cipolla) and Chief Financial Officer (Scott Buhrer) 2003 VTA Board of Directors The table reads: VTA is an independent special district governed by its own Board of Directors. The Board consists of 12 elected city and county officials, appointed by the jurisdictions they represent. Board membership is based on population as follows: 1. Five city council members from the City of San Jose. 2. Three city council members from among the Cities of Los Altos, Los Altos Hills, Mountain View, Palo Alto, Santa Clara, and Sunnyvale. 3. One city council member from among the Cities of Campbell, Cupertino, Los Gatos, Monte Sereno, and Saratoga. 4. One city council member from among the Cities of Gilroy, Milpitas and Morgan Hill. 5. Two members from the Santa Clara County Board of Supervisors. 6. Ex-Officio, Santa Clara County's two representatives to the Metropolitan Transportation Commission (MTC). Each grouping has one alternate. The Board of Directors meets at 6 p.m. on the first Thursday of each month. Jane P. Kennedy, Chairperson Don Gage, Vice-Chairperson Group 1 consists of the City of San Jose - represented by Cindy Chavez, David Cortese, Pat Dando, Ron Gonzales, Forrest Williams, and Ken Yeager, Alternate. Group 2 consists of the City of Los Altos, represented by Francis La Poll, Alternate; Town of Los Altos - no representative; City of Mountain View - no representative; City of Palo Alto - represented by Dena Mossar; City of Santa Clara - represented by John McLemore; and City of Sunnyvale - represented by Manuel Valerio. Group 3 consists of the City of Campbell - represented by Jane P. Kennedy; City of Cupertino - no representative; Town of Los Gatos - represented by Joe Pirzynski, Alternate; City of Monte Sereno - no representative; and City of Saratoga - no representative. Group 4 consists of City of Gilroy, represented by Thomas Springer; City of Milpitas, represented by Patricia Dixon, Alternate; and City of Morgan Hill - no representative. Group 5 consists of the County of Santa Clara - represented by Blanca Alvarado, Don Gage, and Pete McHugh, Alternate. Group 6 is Ex-Officio, Santa Clara County's two representatives to the Metropolitan Transportation Commission represented by Jim Beall, Jr. The Board of Directors established three policy committees and six advisory committees. The policy committees advise on policy matters and provide in-depth review of individual issues before the Board of Directors take final action. The committees include: 1. Administrative and Finance Committee (A&F) 2. Congestion Management Program and Planning Committee (CMPP) 3. Transit Planning and Operations Committee (TP & O) The advisory committees review policies under development to ensure that they meet the needs of constituents, customers, elected officials, the business community and others. The committees include: 1. Committee for Transit Accessibility (CTA) 2. Citizens Advisory Committee (CAC) 3. Bicycle and Pedestrian Advisory Committee (BPAC) 4. Technical Advisory Committee (TAC) 5. Policy Advisory Committee (PAC) 6. Transportation Corridor Policy Advisory Boards (PABS) END OF TABLE A pie shows the number of employee positions in each organizational unit: Operations has 1,850 employee positions, or 77.2 % of the VTA workforce. Development & Congestion Management has 125 employee positions, or 5.2% of the VTA workforce. Fiscal Resources has 122 employee positions, or 5.1% of the VTA workforce. Construction has 130 employee positions, or 5.4% of the VTA workforce. Administrative Services has 126 employee positions, or 5.3% of the VTA workforce. General Counsel has 8 employee positions, or 0.3% of the VTA workforce. The General Manager's office has 37 employee positions, or 1.5% of the VTA workforce. END OF CHART An organizational chart depicts the following: The Organizational Chart above shows that the General Counsel and General Manager report to the Board of Directors. The Board Secretary reports to the General Manager. The Board Assistant and Records Management Document Control report to the Board Secretary. The Chief of Staff reports to the General Manager. Government Relations Transportation Policy report to the Chief of Staff. The Chief Financial Officer in Fiscal Resources reports to the General Manager. Fiscal Resources functions include Budget, Disbursements/Payroll, Financial Accounting, Investment Services, Revenue Services, Contracts & Materials Management and Internal Audit. The Chief Operating Officer in Operations reports to the General Manager. Operations' functions include Transportation, Maintenance, Service Planning, Rail Activation, Protective Services, and Operator Training. The Chief Construction Officer in Construction reports to the General Manager. Construction functions include Rail Construction, Facilities Construction, Highway Construction, Capital Project Construction, and BART Construction. The Chief Development Officer in Development & Congestion Management reports to the General Manager. The Director of Planning reports to the Chief Development Officer. Planning functions include Planning & Programming, Environmental Analysis, Real Estate, Congestion Management Program, and Highway Administration. The Director of Marketing & Customer Service reports to the Chief Development Officer. Marketing & Customer Service functions include Customer Service, Market Development, Community Outreach, and Public Information. The Chief Administrative Officer in Administrative Services reports to the General Manager. Administrative Services functions include Human Resources, Information Systems, and Risk Management. END OF CHART Principal Officials as of June 30, 2003 The General Manager is Peter M. Cipolla The General Counsel is Suzanne Gifford The Board Secretary is Sandra Weymouth The Chief of Staff is Denise Daly The Chief Administrative Officer is Kay Evleth The Chief Construction Officer is Jack Collins The Chief Development Officer is Michael P. Evanhoe The Chief Financial Officer is Scott Buhrer The Chief Technology Officer is George Barlow The Chief Operating Officer is Frank T. Martin The Director of Marketing and Customer Service is Anne-Catherine Vinickas The Director of Planning & Development is James Pierson The Director of Transportation & Maintenance is Matthew Tucker The Controller is Gerald Rosenquist The Deputy Director of Highways is Jeff Funk The Deputy Director Rail Design & Construction is Les Miller The Deputy Director, Congestion Management Program is Carolyn Gonot The Deputy Director, Program & Highway Administration is John Ristow The Deputy Director, Service & Operations Planning is Mike Aro The Government Affairs Manager is Kurt Evans The Transportation Policy & Program Manager is Frank Sharpless A Santa Clara County Bus and Rail Transit Service Area map shows that Caltrain runs from San Francisco to Gilroy down the middle of Santa Clara County. The Existing Light Rail - Tasman West runs from Shoreline Boulevard going east to Tasman Drive and First Street. Tasman East runs from Tasman Drive going east and ends right before Interstate 880. The Guadalupe Corridor runs south from Tasman Drive and First Street through Downtown San Jose to Santa Teresa Boulevard, and a small portion of the line runs to Almaden Valley. It shows Existing Intermodal Stations at Shoreline Boulevard and at Great America on the Tasman West corridor and one at the Tamien Station on the Guadalupe Corridor. END OF MAP The letter below is the Independent Auditor's Report: The Board of Directors Santa Clara Valley Transportation Authority San Jose, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of the business-type activity, the governmental activity, each major fund, and the aggregate remaining fund information of the Santa Clara Valley Transportation Authority (VTA), as of and for the year ended June 30, 2003, which collectively comprise VTA's basic financial statements as listed in the table of contents. These financial statements are the responsibility of VTA's management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statement referred to above present fairly, in all material respects, the respective financial position of the business-type activity, the governmental activity, each major fund, and the aggregate remaining fund information of VTA, as of June 30, 2003, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. As described in Note 7(f) to the basic financial statements, VTA adopted the provisions of Governmental Accounting Standards Board (GASB) Technical Bulletin No. 2003-1, Disclosure Requirements for Derivatives Not Reported at Fair Value on the Statement of Net Assets, as of July 1, 2002. In accordance with Government Auditing Standards, we have also issued our report dated October 31, 2003, on our consideration of VTA's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. The management's discussion and analysis, schedules of funding progress and the budgetary comparison schedule, as listed in the table of contents, are not a required part of the basic financial statements but are supplementary information required by the GASB. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise VTA's basic financial statements. The introductory section, combining and individual fund financial statements and schedules section, and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules section has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the audition procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. Singed by Macias, Gini & Company LLP Certified Public Accountants Walnut Creek, California October 31, 2003, except for Note 21, as to which the date is November 20, 2003 END OF LETTER Management's Discussion and Analysis The purpose of the information presented in the discussion and analysis portion of this report is to provide an overview of the Santa Clara Valley Transportation Authority's (VTA) financial condition as of June 30, 2003. This discussion and analysis should be read in conjunction with the transmittal letter starting on page 1-7, and VTA's financial statements, which begin on page 2-15. Financial Highlights As of June 30, 2003, VTA's assets exceeded liabilities by almost $1.9 billion. Business-type activity (Transit Operations) and Governmental activity (Congestion Management) net assets were $1.85 billion and $1.3 million, respectively. Of the $1.9 billion in net assets, approximately $1.7 billion was invested in capital assets net of related debt which was associated with our capital expansion program. As of June 30, 2003, VTA had issued bonds in the amount of $417.5 million compared to the $343.3 million the previous fiscal year. The increase was due to the issuance of the 2002 Grant and Bond Anticipation Note of $82 million. The Statement of Revenues, Expenses and Changes in Fund Net Assets reports that VTA had a net operating loss of $301.4 million. Even with an addition of $223.2 million in non-operating revenues, there still was a $78.1 million dollar decrease in net assets before Capital contributions of $317 million. Net Assets increased by $239 million. This can be seen on the Statement of Revenues, Expenses and Changes in Fund Net Assets, page 2-19. Sales tax revenue continued to decrease significantly during FY03, declining over $11.5 million (8%) compared to last fiscal year. There was a $287.7 thousand decrease in net assets for Congestion Management due primarily to an increase in operations and operating project expenses. Overview of the Financial Statements VTA's basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. In addition to the basic financial statements, this report also contains required and other supplementary information. Government-wide financial statements. The government-wide financial statements provide a top-level view of VTA's financial picture in a format resembling that of a private-sector company. The statement of net assets presents information on all of VTA's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of VTA is improving or deteriorating. The statement of activities presents information showing how VTA's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Both activities of the government-wide statements distinguish functions of VTA that are principally supported by sales tax and intergovernmental revenues. Although the transit operation's primary function is intended to recover its costs through charges for services (business-type activities), the recovery is not significant. The governmental activity of VTA is congestion management, which includes planning, programming, and construction of highway projects. The business-type activity of VTA is transit, which includes bus and light rail operations and capital project activity. Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. VTA, like local and state governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of VTA can be divided into three categories: governmental funds, proprietary funds (i.e. the enterprise fund), and fiduciary funds. The fund financial statements can be found on pages 2-15 to 2-25 of this report. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near-term financial requirements. VTA maintains four individual governmental funds and uses the governmental funds to account for the Congestion Management Program, the Traffic Authority, the Congestion Management Highway and the1996 Measure B Highway Capital Project programs. Information, on miscellaneous funds, is presented in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances. Proprietary (Enterprise) Funds. VTA maintains one type of proprietary fund: an enterprise fund. The enterprise fund is used to report the same function presented as "business-type activity" in the government-wide financial statements. VTA uses the enterprise fund to account for its transit operation and capital activities, 1996 Measure B Transit projects and 2000 Measure A transit and operating activities. The enterprise fund provides the same type of information as the government-wide financial statements, only in more detail. Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside VTA. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support VTA's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The activities of the Amalgamated Transit Union (ATU) Pension Plan, the ATU Spousal Medical Trust, and the Retiree Vision and Dental Trust are accounted for in pension trust funds. Pension trust funds are used to account for assets held by VTA as a trustee for individuals and other organizations, such as ATU. The Bay Area Air Quality Management District (BAAQMD) program and the 1996 Measure B Ancillary Programs, which includes the Pavement Management and Bicycle Programs, are accounted for in an agency fund. Agency funds are used to account for assets held solely in a custodial capacity. Notes to the financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 2-26 to 2-59 of this report. Other information. In addition to the basic financial statements and notes, required supplementary information is also being presented. The required supplementary information shows VTA's progress in funding its obligation to provide employees with pension benefits and it also shows the Congestion Management Program Budgetary Schedule. These schedules can be found on pages 2-60 to 2-63. There is also a section including other supplementary information such as combining statements and other individual schedules found immediately following the required supplementary information. The supplementary data presents individual fund statements and schedules for the Enterprise and Fiduciary Funds. Government-wide Financial Analysis The Statement of Net Assets and the Statement of Activities report a total increase in net assets of $238.6 million, resulting primarily from a net loss of $78.1 million and capital contributions of $317 million. The inclusion of $317 million in capital contributions (revenue) has no corresponding expenses associated with it within the statements which is likely to be misconstrued. During FY03, VTA acquired capital assets and completed construction in progress (CIP) projects of approximately $553 million. These capital assets were funded by the capital contributions as well as existing budgetary reserves. The operating loss was covered by budgetary reserves as well. A table shows VTA's Condensed Statement of Net Assets: Current and other assets for Business-type activity was $389,726,000 in 2003 and $424,209,000 in 2002 Current and other assets for Governmental activity was $82,819,000 in 2003 and $40,082,000 in 2002 Current and other assets Total for both activity types was $472,545,000 in 2003 and $464,291,000 in 2002. Capital assets, net for Business-type activity was $2,126,091,000 in 2003, and $1,740,912,000 in 2002 Capital assets, net for Governmental activity was $0 in 2003 and 2002 Capital assets, net Total for both activity types $2,126,091,000 in 2003 and $1,740,912,000 in 2002 Total Assets for Business-type activity was $2,515,817,000 in 2003 and $2,165,121,000 in 2002 Total Assets for Governmental activity was $82,819,000 in 2003 and $40,082,000 in 2002 Total Assets for Total for both activity types was $2,598,636,000 in 2003 and $2,205,203,000 in 2002 Current Liabilities for Business-type activity was $249,390,000 in 2003 and $105,776,000 in 2002 Current Liabilities for Governmental activity was $81,217,000 in 2003 and $38,251,000 in 2002 Current Liabilities for both activity types was $330,607,000 in 2003 and $144,027,000 in 2002 Long term liabilities outstanding for Business-type activity was $417,470,000 in 2003 and $449,245,000 in 2002 Long term liabilities outstanding for Governmental activity was $266,000 in 2003 and $207,000 in 2002 Long term liabilities outstanding for both activity types was $417,736,000 in 2003 and $449,452,000 in 2002 Total Liabilities for Business-type activity was $666,860,000 for 2003 and $555,021,000 in 2002 Total Liabilities for Governmental activity was $81,483,000 for 2003 and $38,458,000 in 2002 Total Liabilities for both activity types was $748,343,000 in 2003 and $593,479,000 in 2002 Net assets Invested in capital assets, net of related debt for Business-type activity was $1,686,313,000 in 2003 and $1,367,401,000 in 2002 Net assets Invested in capital assets, net of related debt for Governmental activity was $0 in 2003 and 2002 Net assets Invested in capital assets, net of related debt for both activity types was $1,686,313,000 in 2003 and $1,367,401,000 in 2002 Unrestricted Net assets for Business-type activity was $162,644,000 in 2003 and $242,699,000 in 2002 Unrestricted Net assets for Governmental-type activity was $1,336,000 in 2003 and $1,624,000 in 2002 Unrestricted Net assets for both activity types was $163,980,000 in 2003 and $244,323,000 in 2002 Total Net Assets for Business-type activity was $1,848,957,000 for 2003 and $1,610,100,000 in 2002 Total Net Assets for Governmental activity was $1,336,000 for 2003 and $1,624,000 in 2002 Total Net Assets for both activity types was $1,850,293,000 in 2003 and $1,611,724,000 in 2002 END OF TABLE By far the largest portion of the VTA's net assets (approximately 91.2%) reflects its investment in capital assets (e.g., land, buildings, infrastructure, machinery and equipment), less any related outstanding debt used to acquire those assets. VTA uses these capital assets to provide services to customers. Consequently, these assets are not available for future spending. Although VTA's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources since the capital assets themselves cannot reasonably be used to liquidate these liabilities. The reduction in unrestricted net assets resulted primarily to the increase in investments in capital assets, which led VTA to utilize other unrestricted sources of funds to meet its obligations. A table shows VTA's Statement of Activities: Operations and operating projects expenses for Business-type activity were $335,760,000 in 2003 and $340,885,000 in 2002; Operations and operating projects expenses for Governmental activity were $3,582,000 in 2003 and $2,740,000 in 2002; Total Operations and operating projects expenses for both activity types were $339,342,000 in 2003 and $343,625,000 in 2002. Caltrain subsidy and capital contribution expenses for Business-type activity were $22,298,000 in 2003 and $25,315,000 in 2002; Caltrain subsidy and capital contribution expenses for Governmental activity were $0 in 2003 and 2002; Total Caltrain subsidy and capital contribution expenses for both activity types were $22,298,000 in 2003 and $25,315,000 in 2002; Altamont commuter express subsidy expenses for Business-type activity were $2,715,000 in 2003 and $1,740,000 in 2002; Altamont commuter express subsidy expenses for Governmental activity were $0 in 2003 and 2002; Total Altamont commuter express subsidy expenses for both type activities were $2,715,000 in 2003 and $1,740,000 in 2002; Interest expenses for Business-type activity were $14,222,000 in 2003 and $14,717,000 in 2002; Interest expenses for Governmental activity were $0 in 2003 and $0 in 2002; Total Interest expenses for both-type activities were $14,222,000 in 2003 and $14,717,000 in 2002. Other non-operating expenses for Business-type activity were $4,858,000 in 2003 and $3,163,000 in 2002; Other non-operating expenses for Governmental activity were $0 in 2003 and 2002; Total Other non-operating expenses for both-type activities were $4,858,000 in 2003 and $3,163,000 in 2002. Capital projects for the benefit of other agencies expenses for Business-type activity were $0 in 2003 and 2002; Capital projects for the benefit of other agencies expenses for Governmental activity were $141,271,000 in 2003 and $112,697,000 in 2002; Total Capital projects for the benefit of other agencies expenses for both type activities were $141,271,000 in 2003 and $112,697,000 in 2002. Total expenses for Business-type activity were $379,853,000 in 2003 and $385,820,000 in 2002; Total expenses for Governmental activity were $144,853,000 in 2003 and $115,437,000 in 2002; Total expenses for both activity types were $524,706,000 in 2003 and $501,257,000 in 2002. Charges for services program revenues for Business-type activity were $34,376,000 in 2003 and $37,122,000 in 2002; Charges for services program revenues for Governmental activity were $2,177,000 in 2003 and $1,686,000 in 2002; Total Charges for services program revenues for both activity types were $36,563,000 in 2003 and $38,808,000 in 2002. Operating grants program revenues for Business-type activity were $104,132,000 in 2003 and $127,373,000 in 2002; Operating grants program revenues for Governmental activity were $852,000 in 2003 and $2,405,000 in 2002; Total Operating grants program revenues for both activity types were $104,984,000 in 2003 and $129,778,000 in 2002. Capital grants program revenues for Business-type activity were $316,997,000 in 2003 and $226,125,000 in 2002; Capital grants program revenues for Governmental activity were $141,364,000 in 2003 and $112,668,000 in 2002; Total Capital grants program revenues for both activity types were $458,361,000 in 2003 and $338,793,000 in 2002. Total program revenues for Business-type activity were $455,505,000 in 2003 and $390,620,000 in 2002; Total program revenues for Governmental activity were $144,393,000 in 2003 and $116,759,000 in 2002; Total program revenues for both activity types were $599,898,000 in 2003 and $507,379,000 in 2002. Net program revenues less expense for Business-type activity were $75,652,000 in 2003 and $4,800,000 in 2002; Net program revenues less expense for Governmental activity were $(460,000) in 2003 and $1,322,000 in 2002; Total Net program revenues less expense for both activity types were $75,192,000 in 2003 and $6,122,000 in 2002. Sales tax general revenue for Business-type activity was $132,632,000 in 2003 and $144,218,000 in 2002; Sales tax general revenue for Governmental activity was $61,000 in 2003 and $0 in 2002; Total Sales tax general revenue for both activity types were $132,693,000 in 2003 and $144,218,000 in 2002. Investment income for general revenues for Business-type activity was $14,245,000 in 2003 and $24,512,000 in 2002; Investment income for general revenues for Governmental activity was $99,000 in 2003 and $30,000 in 2002; Total Investment income for general revenues for both activity types was $14,344,000 in 2003 and $24,542,000 in 2002. Other income for general revenues for Business-type activity was $4,104,000 in 2003 and $2,883,000 in 2002; Other income for general revenues for Governmental activity was $12,000 in 2003 and $8,000 in 2002; TotalOther income for general revenues for both activities was $4,116,000 in 2003 and $2,891,000 in 2002. Total general revenues for Business type activity were $150,981,000 in 2003 and $171,613,000 in 2002; Total general revenues for Governmental activity were $172,000 in 2003 and $38,000 in 2002; Total general revenues for both activity types was $151,153,000 in 2003 and $171,651,000 in 2002. Special item - gain on sale of land for Business-type activity was $12,224,000 in 2003. Change in net assets for Business-type activity was $238,857 in 2003 and $176,413,000 in 2002; Change in net assets for Governmental activity was $(288,000) in 2003 and $1,360,000 in 2002; Total Change in net assets for both activity types was $238,569,000 in 2003 and $177,774,000 in 2002 Net assets, beginning of year for Business-type activity was $1,610,100,000 in 2003 and $1,433,685,000 in 2002; Net assets, beginning of year for Governmental activity was $1,624,000 in 2003 and $264,000 in 2002; Total Net assets, beginning of year for both activity types was $1,611,724,000 in 2003 and $1,433,949,000 in 2002. Net assets, end of year for Business-type activity was $1,848,957,000 in 2003 and $1,610,100,000 in 2002 Net assets, end of year for Governmental activity was 1,336,000 in 2003 and $1,624,000 in 2002; Total Net assets, end of year for both activity types was $1,850,293,000 in 2003 and $1,611,724,000 in 2002. END OF TABLE Business-type activity. In FY 03, expenses decreased by 1.5% compared to FY 02. Although the Statement of Activities reports VTA's Business-type activity having increased by $238.9 million, VTA had a $78.1 million decrease in net assets before capital contributions. Business-type activity (Transit Operations) net assets were $1.85 billion. Approximately $1.7 billion of the net assets is invested in capital assets net of related debt. Capital grants increased by $90.9 million (40.2%) compared to FY 02. This increase is a result of VTA's aggressive capital projects funding program. Federal grant project revenue was $94.1 million, State capital grants were $32 million, 1996 Measure B funding consisted of $122 million in revenue, and Local contributions totaled $68.9 million. Sales tax revenue decreased by $11.5 million or (8%) in FY03. This is the second continuous year VTA experienced a lag in sales tax dollars compared to the prior year due to the significant decline in taxable sales within the County (primarily business-to-business transactions). The decrease in sales tax is a contributing factor to VTA's continuous reevaluation of operations. Investment income decreased by $10.3 million, or (41.9%), due to a reduction in investment principal. Funds earmarked to underwrite operating deficits were withdrawn in FY03 and used for operations and local capital projects. There was also a decrease due to the continuous decline in interest rates. Special items amounting to $12.2 million resulted from the gain on the sale of three land parcels: the Guadalupe Corridor Parcel, the North Yard Parcel, and the Evans Lane Parcel. A pie chart shows Revenues By Source - Business-type Activity: Capital Grants made up 51.24% of Business-type activity revenues Sales tax made up 21.44% of Business type activity revenues Operating grants made up 16.83% of Business type activity revenues Charges for services made up 5.56% of Business-type activity revenues Investment income made up 2.30% of Business-type activity revenues Special item - sale of land made up 2.30% of Business-type activity revenues Other income made up 0.29% of Business-type activity revenues END OF CHART A table sows the comparison of Business-Type Activity Revenue for Fiscal Years 2003 and 2002: Charges for service revenue was $34,376,000 in 2003 and $37,122,000 in 2002, a change of $(2,746,000), (7.4) percent. Operating grants revenue was $104,132,000 in 2003 and $127,373,000 in 2002, a change of $(23,241,000), (18.2) percent. Capital grants revenue was $316,997,000 in 2003 and $226,125,000 in 2002, a change of $90,872,000, 40.2 percent. Sales tax revenue was $132,632,000 in 2003 and $144,218,000 in 2002, a change of $(11,586,000), (8.0) percent. Investment income was $14,245,000 in 2003 and $24,512,000 in 2002, a change of $(10,267,000), (41.9) percent. Other income including special item revenue was $16,328,000 in 2002 and $2,883,000 in 2002, a change of $13,445,000, 466.4 percent. Total Business-type activity revenue was $618,710,000 in 2003 and $562,233,000 in 2002, a change of $56,477,000, 10.0 percent. END OF TABLE Charges for services are derived from the sale of monthly passes (including Eco Pass), tokens, bus fare box receipts, light rail ticket vending machine receipts and the sale of advertising space. Operating grants include the one-quarter of one percent California Transportation Development Act (TDA), State Transit Assistance (STA) funding, Federal grants converted to operating assistance under the Federal Transit Administration Preventative Maintenance Program, State license fees (AB434), investment and interest, and federal planning grants. Sales tax revenue is the one-half of one percent local sales tax. There was a total increase in revenues of 10% over FY02. The half-cent local sales tax and the quarter-cent state sales tax (TDA) are driven by the local economy and are the two most important income sources to VTA for funding operations. During FY03, half-cent sales tax revenue decreased by 8%, primarily as a result of declined business-to-business transactions. Fortunately, the negative growth in sales tax revenue is not expected to carry through FY04, but VTA is only projecting a 1.7% increase in the revenue source during the next fiscal year. TDA funds dropped by $36.5 million (38.3%) to $58.9 million in FY03. Due to the fact that TDA funds are derived from the same tax base as the half-cent sales tax, VTA experienced a decline in these funds as well. In addition, VTA received TDA funds in FY02 that pertained to FY03. These funds are projected to make a small gain in FY04 to $63.4 million. In addition, STA funds decreased by over $600 thousand (8.2%). Fifty percent of STA apportionments to regional planning agencies are distributed on a basis proportional to operator revenues in the region for the prior year. MTC's most recent estimate predicts STA funds to only reach $4.3 million in FY04. A decrease in ridership and the decline in advertising revenue contributed to the cumulative drop in operating revenue. Other income increased substantially (466.4%), due primarily to the gain from the sale of three land parcels totaling $12.2 million (special items): Evans Lane $7.4 million; North Yard portion $4.2 million; and Guadalupe Corridor $.6 million. A table sows the comparison of Business-Type Activity Expenses for Fiscal Years 2003 and 2002: Operations and operating projects expenses were $335,760,000 in 2003 and $340,885,000 in 2002, a change of $(5,125,000), (1.5) percent. Caltrain subsidy and capital contribution expenses were $22,298,000 in 2003 and $25,315,000 in 2002, a change of $(3,017,000), (11.9) percent. Altamount Commuter Express subsidy expenses were $2,715,000 in 2003 and $1,740,000 in 2002, a $975,000 change, 56.0 percent. Interest expense was $14,222,000 in 2003 and $14,717,000 in 2002, a change of $(495,000), (3.4) percent. Other non-operating expenses were $4,858,000 in 2003 and $3,163,000 in 2002, a change of $1,695,000, 53.6 percent. Total Business-Type Activity Expenses were $379,853,000 in 2003 and $385,820,000 in 2002, a change of negative $5,967,000, negative 1.5 percent. END OF TABLE Operations and operating projects expenses are incurred for personnel, support services, contracted services, insurance, purchased transportation and other overhead costs related to bus and light rail operations, services, and support programs. The implementation of the goals of VTA's Strategic Plan is set forth in the Short-Range Transit Plan (SRTP). The SRTP adopted by VTA outlined a number of transit service reliability and headway improvements, network expansion, and the expansion of the light rail system. The resulting expenses for the year are representative of the implementation efforts throughout the organization. Total expenses remained fairly constant with a minimal decline of 1.5% in comparison to FY02. The decrease was due to many factors. Purchased Transportation costs decreased compared to last year's figures. Paratransit ridership continues to increase, but the growth in program costs have slowed significantly. Costs fell by 12.3% primarily as a result of the implementation of the Paratransit Service Business Practices Improvement Plan aimed at increasing operational improvements and efficiencies. The change in the casualty and liability costs is attributed to an increase in the provision of claims and claims adjustment expense for workers' compensation. Although there was an increase in fringe benefits due to the rising cost of employee health care premiums, labor costs decreased by $2.7 million due in part to VTA reorganization and streamlining during the year. Traction power expense decreased due to light rail service reduction. There was a $20.2 million dollar reduction in operating costs due to labor, indirect costs, and internal charges which were allocated to capital and other programs. VTA also benefited from sizable savings in professional and special services with the transition away from the prior level of consultant services. Governmental activity. The governmental activity net assets were reduced by $287.7 thousand in FY03, leaving it with a net asset balance of $1.3 million. Elements of this decrease are as follows: There was an increase in the Congestion Management Program's salaries and benefits expense during FY03 of approximately $1.2 million or 87.6%. This contributed to the decrease in governmental activity net assets. Although total grants received increased by 23.6% compared to FY02, the increase in capital grants was not enough to offset both the corresponding amount in capital projects expense for the benefit of other agencies and the operations and operating projects. Operating grants decreased by $1.6 million (64.6%) during the year. The large variation is primarily due to a one-time contribution of the 1996 Measure B Ancillary Program received in FY02. A chart shows Governmental Activity Expenses and Program Revenues: Expenses in the Special Revenue Funds were $3,403,000; Revenues in the Special Revenue Funds were $3,115,000; Expenses in the Capital Project Funds were $141,424,000; Revenues in the Capital Project Funds were $141,424,000. END OF CHART A pie chart shows Revenues by Source - Governmental Activity: Capital grant revenues were 97.79%; Sales tax revenues were 0.04% Investment income revenue was 0.07%; Operating grant revenues were 0.59%; Charges for services revenues were 1.51% Other income was 0.01% END OF CHART Financial Analysis of VTA's Funds VTA uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Proprietary Fund. VTA's Proprietary Fund (Enterprise Fund) is used to account for activities for which a fee is charged to external users for goods or services (a) where the activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity; or (b) where laws or regulations require that the activity's costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues; or (c) where the pricing policies of the activity establish fees and charges designated to recover its costs, including capital costs (such as depreciation or debt service). Governmental funds. The focus of VTA's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the VTA's financing requirements. In particular, unreserved fund balance may serve as a useful measure of VTA's net resources available for spending at the end of the fiscal year. At the end of the current fiscal year, VTA's governmental funds reported a decrease of approximately $288 thousand. Capital Assets and Debt Administration Capital assets. VTA's investment in capital assets for its business-type activity as of June 30, 2003, amounts to $2.1 billion net of accumulated depreciation. VTA has no capital assets invested in the governmental activities. This investment in capital assets includes: Land and Right-of-way, Buildings, Improvements, Equipment & Furniture, Vehicles, the Caltrain-Gilroy Extension, Light Rail Tracks/Electrification, and Other Operating Equipment. The total net increase in VTA's investment in capital assets for the current fiscal year was 22.1%. Some of the significant changes in the capital assets during FY03 are as follows: Receipt of 34 light rail vehicles (28 of which are in revenue service) Acquisition of 106 new buses Increases in Construction In Progress for the Tasman East, Capitol, and Vasona light rail extensions Acquisition of 64 non-revenue vehicles The remainder of the changes in capital assets can be attributed to capital improvements and construction projects. A table compares Capital Assets for Businesss-type activity (net of depreciation) for 2003 and 2002: Capital assets (net of depreciation) in Land and Right of Way were $570,715,000 in 2003 and $572,665,000 in 2002; Capital assets (net of depreciation) in Construction in Progress were $923,872,000 in 2003 and $608,403,000 in 2002; Capital assets (net of depreciation) in Buildings and Improvements - Equipment and Furniture were $132,931,000 in 2003 and $133,282,000 in 2002; Capital assets (net of depreciation) in Vehicles were $218,239,000 in 2003 and $137,211,000 in 2002; Capital assets (net of depreciation) in Caltrain-Gilroy Extension were $43,284,000 in 2003 and $43,806,000 in 2002; Capital assets (net of depreciation) in Light Rail Tracks/Electrification were $219,609,000 in 2003 and 226,142,000 in 2002; Capital assets (net of depreciation) in Other Operating Equipment were $17,441,000 in 2003 and $19,403,000 in 2002; Total Capital assets (net of depreciation) were $2,126,091,000 in 2003 and $1,740,912,000 in 2002. END OF TABLE A table shows VTA's Outstanding Capital Commitments as of June 30, 2003: Capital commitments for Vasona Corridor Projects were $60,922,000; Capital commitments for Tasman Corridor Project Extensions - West, were $557,000; Capital commitments for Tasman Corridor Project Extensions - East, were $26,200,000; Capital commitments for Facilities Modifications were $24,859,000; Capital commitments for New Rail Vehicles were $90,256,000 Capital commitments for Capitol Corridor Projects were $25,635,000; Capital commitments for Guadalupe Corridor were $2,213,000; Capital commitments for Software Development, were$110,000; Capital commitments for Silicon Valley Rapid Transit Corridor were $10,665,000; Capital commitments for Study Projects were $1,969,000; Capital commitments for Coach & Vehicles Replacement were $8,049,000; Capital commitments for Caltrain Service Improvements were $9,433,000; Total Outstanding Capital Commitments were $260,888,000. END OF TABLE Additional information on VTA's capital assets can be found in Note 6 on page 2-37 of this report. Long-term debt. At the end of the current fiscal year, the Authority had total bonded debt outstanding of $417,469,961. Of this amount, $417,433,077 represents bonds secured solely by sales tax revenues and $36,884 is a special assessment relating to Improvement District 78-153SJ River Oaks Bond Series 22R and Maintenance District 6 River Oaks Landscape Maintenance. In FY03 VTA issued the 2002 Bond and Grant Anticipation Notes of $81,500,000, which will mature December 4, 2003. The notes were issued to finance the purchase of BART to San Jose right-of way from Union Pacific Railroad. The source of funds for the new debt will be the 2000 Measure A sales tax. A table shows Outstanding Debt in Business-type activity: Jr. Lien Sales Tax Revenue Bonds were $84,635,000 in 2003 and $86,795,000 in 2002; Sr. Lien Sales Tax Revenue Bonds were $221,048,000 in 2003 and $226,775,000 in 2002; 2002 Grant and Bond Anticipation Note were $82,090,000 in 2003 and $0 in 2002; Equipment Trust Certificates were $29,660,000 in 2003 and $29,660,000 in 2002; Special Assessment with Governmental Commitment were $37,000 in 2003 and $71,000 in 2002; Total Outstanding Debt was $417,470,000 in 2003 and $343,301,000 in 2002. END OF TABLE The Santa Clara Valley Transportation Authority maintains an "AA" rating from Standard & Poor's and an "Aa3" rating from Moody's for its Sr. Lien Sales Revenue Bonds. On September 3, 2003, Fitch Ratings downgraded VTA's outstanding 2001 series A and 1997 series A sales tax revenue bonds to 'A+' from their prior 'AA' rating. The Equipment Trust Certificates have a rating of Aaa/VMIG-1 from Moody's and AAA from Standard & Poor's. The 2002 Bond and Grant Anticipation Notes are rated M IG-1 by Moody's and SP1+ by Standard & Poor's. Additional information on the VTA's long-term debt can be found in note 7 starting on page 2-39 of this report. Economic Factors and Next Year's Budgets and Rates The following factors were considered in preparing VTA's budget for the 2004 fiscal year: Additional staffing eliminations Increased costs for benefits of over $1 million due to an increase in health care costs for employees and retires, as well as increased pension plan contribution costs A 1.5% inflation rate Minimal half-cent sales tax growth of 1.7% A fare increase in August 2003 A ridership loss of 5.8% due to the fare increase. A high level of scrutiny was paid to requests for new projects and augmentations to existing projects in fiscal year 2003-04. As a result, the budget proposes the smallest locally funded VTA Capital Program in eight years. The budget also initiates twelve new projects and augmented two previously approved projects, for an additional new commitment of $4,717,000. There are 71 active projects, excluding the 1996 Measure B Program, being carried forward from prior capital budgets. The following are major capital programs: Information Technology Infrastructure Replacement Information Technology Disaster Recovery Site Infrastructure Non-Revenue Vehicle Procurement Facilities and Equipment Emergency Repair Allowance Maintenance Equipment Replacement Program Cerone Complex Safety, Communication & Security Equipment Pavement Management Program Painting Management Program Roofing Management Program Bus Stop Improvement Program Palo Alto Depot Station Renovation Light Rail T-Signal Retrofit. Requests for Information Please address all questions or requests for additional information to Financial Accounting Department, Office of the Fiscal Resources Manager, Santa Clara Valley Transportation Authority, 3331 North First Street Building C, Second Floor, San Jose, CA 95134-1906. Statement of Net Assets, June 30, 2003: Assets - Cash and investments for Business-type activity was $26,322,203 and for Governmental Activity was $2,2924,798 for a total of $29,247,001 Assets - Receivables, net for Business-Type Activity was $2,388,261 and for Governmental Activity was $0 for a total of $2,388,261. Assets - Due from other governmental agencies for Business-Type Activity was $35,124,025 and for Governmental Activity was $222,956 for a total of $35,346,981. Assets - Inventories for Business-Type Activity was $21,950,963 and for Governmental Activity was $0 for a total of $21,950,963. Assets - Other Current Assets for Business-Type Activity was $10,240,169 and for Governmental Activity was $0 for a total of $10,240,169. Assets - Restricted Assets - Cash and Investments for Business-Type Activity was $264,147,676 and for Governmental Activity was $40,880,288 for a total of $305,027,964. Assets - Restricted Assets - Receivables, net for Business-Type Activity was $704,929 and for Governmental Activity was $0 for a total of $704,929. Assets - Restricted Assets - Internal Balances for Business-Type Activity was $(8,063,015) and for Governmental Activity was $8,063,015 for a total of $0. Assets - Restricted Assets - Due from other Governmental Agencies for Business-Type Activity was $35,068,354 and for Governmental Activity was $30,728,254 for a total of $65,796,608. Assets - Deferred Bond Issuance costs for Business-Type Activity was $1,841,885 and for Governmental Activity was $0 for a total of $1,841,885. Assets - Capital Assets - Nondepreciable for Business-Type Activity was $1,494,586,976 and for Governmental Activity was $0 for a total of $1,494,586,976. Assets - Capital Assets - Depreciable, net of accumulated depreciation for Business-Type Activity was $631,504,170 and for Governmental Activity was $0 for a total of $631,504,170. Assets - Total Assets for Business-Type Activity was $2,518,816,596 and for Governmental Activity was $82,819,311 for a total of $2,598,635,907. Liabilities - Accounts Payable for Business-Type Activity was $21,787,661 and for Governmental Activity was $57,487 for a total of $21,845,148. Liabilities - Other accrued liabilities for Business-Type Activity was $9,180,738 and for Governmental Activity was $80,302 for a total of $9,261,040. Liabilities - Due to other governmental agencies for Business-Type Activity was $4,307,280 and for Governmental Activity was $1,408,016 for a total of $5,715,296. Liabilities - Liabilities payable from restricted assets - Accounts Payable for Business-Type Activity was $35,677,503 and for Governmental Activity was $24,791,460 for a total of $60,468,963. Liabilities - Liabilities payable from restricted assets - Other accrued liabilities for Business-Type Activity was $136,947,764 and for Governmental Activity was $0 for a total of $136,947,764. Liabilities - Liabilities payable from restricted assets - Due to other governmental agencies for Business-Type Activity was $41,488,686 and for Governmental Activity was $54,880,097 for a total of $96,368,783. Liabilities - Long-term liabilities - Due within one year for Business-Type Activity was $8,541,884 and for Governmental Activity was $3,972 for a total of $8,545,856. Liabilities - Long-term liabilities - Due in more than one year for Business-Type Activity was $408,928,077 and for Governmental Activity was $261,823 for a total of $409,189,900. Liabilities - Total Liabilities for Business-Type Activity was $666,859,593 and for Governmental Activity was $81,483,157 for a total of $748,342,750. Net Assets - Invested in capital assets, net of related debt for Business-Type Activity was $1,686,312,966 and for Governmental Activity was $0 for a total of $1,686,312,966. Net Assets - Unrestricted for Business-Type Activity was $162,644,037 and for Governmental Activity was $1,336,154 for a total of $1,850,293,157. END OF STATEMENT Statement of Activities, For the Year Ended June 30, 2003 Expenses - Operations and operating projects for Business-type activity in Transit was $335,760,206 and for Governmental Activity in Congestion Management was $3,581,701 for a total of $339,341,907 Expenses - Caltrain subsidy & capital contribution for Business-type activity in Transit was $22,297,937 and for Governmental Activity in Congestion Management was $0 for a total of $22,297,937 Expenses - Altamont Commuter Express subsidy for Business-type activity in Transit was $2,715,183 and for Governmental Activity in Congestion Management was $0 for a total of $2,715,183 Expenses - Interest expense for Business-type activity in Transit was $14,222,072 and for Governmental Activity in Congestion Management was $0 for a total of $14,222,072 Expenses - Other non-operating expenses for Business-type activity in Transit was $4,857,574 and for Governmental Activity in Congestion Management was $0 for a total of $4,857,574 Expenses - Capital projects for the benefit of other agencies for Business-type activity in Transit was $0 and for Governmental Activity in Congestion Management was $141,271,006 for a total of $141,271,006 Expenses - Total Expenses for Business-type activity in Transit was $379,852,972 and for Governmental Activity in Congestion Management was $144,852,707 for a total of $524,705,679 Program revenues - Charges for services for Business-type activity in Transit was $34,375,744 and for Governmental Activity in Congestion Management was $2,176,935 for a total of $36,552,679 Program revenues - Operating grants for Business-type activity in Transit was $104,132,239 and for Governmental Activity in Congestion Management was $852,451 for a total of $104,984,690 Program revenues - Capital grants for Business-type activity in Transit was $316,996,725 and for Governmental Activity in Congestion Management was $141,363,650 for a total of $458,360,375 Program revenues - Total Program Revenues for Business-type activity in Transit was $455,504,708 and for Governmental Activity in Congestion Management was $144,393,036 for a total of $599,897,744 Program revenues - Net Program Revenues for Business-type activity in Transit was $75,651,736 and for Governmental Activity in Congestion Management was $(459,671) for a total of $75,192,065 General revenues - Sales tax revenue for Business-type activity in Transit was $132,632,377 and for Governmental Activity in Congestion Management was $60,424 for a total of $132,692,801 General revenues - Investment income for Business-type activity in Transit was $14,244,891 and for Governmental Activity in Congestion Management was $99,268 for a total of $14,344,159 General revenues - Other income for Business-type activity in Transit was $4,103,722 and for Governmental Activity in Congestion Management was $12,276 for a total of $4,115,998 General revenues - Total general revenues for Business-type activity in Transit was $150,980,990 and for Governmental Activity in Congestion Management was $171,968 for a total of $151,152,958 Special item - Gain on sale of land for Business-type activity in Transit was $12,224,277 and for Governmental Activity in Congestion Management was $0 for a total of $12,224,277 Change in Net Assets for Business-type activity in Transit was $238,857,003 and for Governmental Activity in Congestion Management was $(287,703) for a total of $238,569,300 Net assets, beginning of year for Business-type activity in Transit was $1,610,100,000 and for Governmental Activity in Congestion Management was $1,623,857 for a total of $1,611,723,857 Net assets, end of year for Business-type activity in Transit was $1,848,957,003 and for Governmental Activity in Congestion Management was $1,336,154 for a total of $1,850,293,157 END OF STATMENT Statement of Fund Net Assets, Enterprise Fund (Business-type Activity) June 30, 2003 Assets - Current Assets - Cash and cash equivalents is $1,168,034 Assets - Current Assets - Investments is $25,154,169 Assets - Current Assets - Receivables, net is $2,388,261 Assets - Current Assets - Due from other governmental agencies is $35,124,025 Assets - Current Assets - Inventories is $21,950,963 Assets - Current Assets - Other current assets were $10,240,169 Assets - Total Current Assets is $96,025,621 Assets - Restricted Assets - Cash and cash equivalents is $45,938,808 Assets - Restricted Assets - Cash and investments with fiscal agent is $31,406,103 Assets - Restricted Assets - Investments is $186,802,765 Assets - Restricted Assets - Receivables, net is $704,929 Assets - Restricted Assets - Due from other funds is $117,082 Assets - Restricted Assets - Due from other governmental agencies is $35,068,354 Assets - Total Restricted Assets were $300,038,041 Assets - Noncurrent Assets - Deferred bond issuance costs is $1,841,885 Assets - Noncurrent Assets - Capital Assets - Non-depreciable - Land and right of way is $570,714,935 Assets - Noncurrent Assets - Capital Assets - Non-depreciable - Construction in progress is $923,872,041 Assets - Noncurrent Assets - Capital Assets - Depreciable - CalTrain-Gilroy extension is $48,962,184 Assets - Noncurrent Assets - Capital Assets - Depreciable - Buildings, improvements, furniture, and fixtures is $237,238,946 Assets - Noncurrent Assets - Capital Assets - Depreciable - Vehicles is $306,338,319 Assets - Noncurrent Assets - Capital Assets - Depreciable - Light-rail tracks and electrification is $281,182,310 Capital Assets - Assets - Noncurrent Assets - Capital Assets - Depreciable - Less accumulated depreciation is $(270,293,736) Assets - Noncurrent Assets - Capital Assets - Net capital assets is $2,126,091,146 Assets - Total Assets is $2,523,996,693 Liabilities - Current Liabilities - Current portion of long-term debt is $8,541,884 Liabilities - Current Liabilities - Accounts payable is $21,787,661 Liabilities - Current Liabilities - Other accrued liabilities is $9,147,902 Liabilities - Current Liabilities - Due to other governmental agencies is $4,307,280 Liabilities - Total Current Liabilities is $43,784,727 Liabilities - Liabilities payable from restricted assets - Accounts payable is $35,677,503 Liabilities - Liabilities payable from restricted assets - Other accrued liabilities-current is $7,874,533 Liabilities - Liabilities payable from restricted assets - Due to other funds is $8,180,097 Liabilities - Liabilities payable from restricted assets - Due to other governmental agencies is $41,488,686 Liabilities - Liabilities payable from restricted assets - Long-term debt, excluding current portion is $15,079,901 Liabilities - Liabilities payable from restricted assets - Other accrued liabilities - non-current is $129,073,231 Liabilities - Total Liabilities payable from restricted assets is $237,373,951 Liabilities - Non-current liabilities - Long-term debt, excluding current portion and amounts payable from restricted assets is $393,848,176 Liabilities - Non-current liabilities - Other accrued liabilities is $32,836 Liabilities - Total non-current liabilities is $393,881,012 Total Liabilities is $675,039,690 NET ASSETS - Invested in capital assets, net of related debt is $1,686,312,966 NET ASSETS - Unrestricted is $162,644,037 Total net assets is $1,848,957,003 END OF STATEMENT Statement of Revenues, Expenses and Changes in Fund Net Assets, Enterprise Fund (Business-type Activity), For the Year Ended June 30, 2003 Operating revenues - Passenger fares is $30,959,394 Operating revenues - Advertising and other is $3,416,350 Total operating revenues is $34,375,744 Operating expenses - Labor is $134,524,401 Operating expenses - Fringe benefits is $92,001,274 Operating expenses - Materials and supplies is $20,698,044 Operating expenses - Services is $22,055,307 Operating expenses - Utilities is $5,734,599 Operating expenses - Casualty and liability is $4,118,733 Operating expenses - Purchased transportation is $31,553,403 Operating expenses - Leases and rentals is $605,447 Operating expenses - Miscellaneous is $3,154,396 Operating expenses - Depreciation expense is $41,516,009 Operating expenses - Costs allocated to capital and other programs is $(20,201,407) Total operating expenses is $335,760,206 Operating loss is $(301,384,462) Non-operating revenues (expenses) - Sales tax revenue is $132,632,377 Non-operating revenues (expenses) - Federal operating assistance grants is $33,176,056 Non-operating revenues (expenses) - State and local operating assistance grants is $70,956,183 Non-operating revenues (expenses) - CalTrain subsidy is $(14,104,840) Non-operating revenues (expenses) - CalTrain capital contribution is $(8,193,097) Non-operating revenues (expenses) - Altamont Commuter Express subsidy is $(2,715,183) Non-operating revenues (expenses) - Investment earnings are $14,244,891 Non-operating revenues (expenses) - Interest expense is $(14,222,072) Non-operating revenues (expenses) - Other income is $4,103,722 Non-operating revenues (expenses) - Other expense is $(4,857,574) Non-operating revenues net is $211,020,463 Change in net assets before capital contributions and special item is $(90,363,999) Capital contributions is $316,996,725 Special item - gain on sale of land is $12,224,277 Change in net assets is $238,857,003 Net assets, beginning of year is $1,610,100,000 Net assets, end of year is $1,848,957,003 END OF STATEMENT Statement of Cash Flows - Enterprise fund (Business-type activity), For the Year Ended June 30,2003 Cash flows from operating activities - Cash received from passenger fares was $30,856,421 Cash flows from operating activities - Cash received from advertising is $3,416,350 Cash flows from operating activities - Cash paid to employees is $(196,728,258) Cash flows from operating activities - Cash paid to suppliers is $(61,877,582) Cash flows from operating activities - Cash paid for purchased transportation is $(31,553,403) Cash flows from operating activities - Net cash used in operating activities is $(255,886,472) Cash flows from noncapital financing activities - Operating grants received is $125,088,506 Cash flows from noncapital financing activities - Sales tax received is $132,596,836 Cash flows from noncapital financing activities - Caltrain subsidy is $(14,104,840) Cash flows from noncapital financing activities -Altamont Commuter Express subsidy ($2,715,183) Cash flows from noncapital financing activities -Other noncapital receipts is $15,956,496 Cash flows from noncapital financing activities - Other noncapital payments is $(1,168,192) Cash flows from noncapital financing activities - Net cash provided by noncapital financing activities is $255,653,623 Cash flows from capital and related financing activities - Payment of long-term debt is $(8,159,007) Cash flows from capital and related financing activities - Proceeds from Bond and Grant Application Notes is $82,090,346 Cash flows from capital and related financing activities - Interest paid on long-term debt is $(13,866,495) Cash flows from capital and related financing activities - Cost of bond issuance is $(206,117) Cash flows from capital and related financing activities - Acquisition and construction of capital assets is $(441,043,932) Cash flows from capital and related financing activities - Capital contribution from other governments is $316,996,725 Cash flows from capital and related financing activities - Proceeds from sale of capital assets is $14,847,164 Cash flows from capital and related financing activities - Net cash used in capital and related financing activities is $(49,341,316) Cash flows from investing activities - Proceeds from sale of investments is $1,647,021,434 Cash flows from investing activities - Purchases in investments is $(1,623,409,418) Cash flows from investing activities - Interest income received is $16,150,943) Cash flows from investing activities - Net cash provided by investing activities is $39,762,959 NET DECREASE IN CASH AND CASH EQUIVALENTS is $(9,811,206) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR is $88,324,151 CASH AND CASH EQUIVALENTS, END OF YEAR is $78,512,945 Reconciliation of operating loss to net cash used in operating activities - Operating loss is $(301,384,462) Reconciliation of operating loss to net cash used in operating activities - Adjustments to reconcile operating loss to net cash used in operating activities - Depreciation is $41,516,009 Reconciliation of operating loss to net cash used in operating activities - Changes in operating assets and liabilities - Receivables is $(168,807) Reconciliation of operating loss to net cash used in operating activities - Changes in operating assets and liabilities - Due from other governmental agencies is $65,834 Reconciliation of operating loss to net cash used in operating activities - Changes