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(Proposition 4 Limit). Article XIIIB of the California Constitution limits the amount that governmental agencies can annually appropriate from proceeds of taxes. An annual calculation, factoring in population and inflation changes, is performed each year to determine the new appropriation limit. For the 2009/10FY the Proposition 4 Limit was $384,141,392 and the City received taxes subject to the Proposition 4 Limit of $68,101,459. Therefore, the City's spending of tax revenues was well within the Proposition 4 Limit. • The City of Pleasanton Auditors' Communication with Those Charged with Governance report includes the auditors' letter, addressed to the City, communicating their responsibilities in performing the audit and significant findings and issues detected during the course of the audit. The report also includes the City of Pleasanton Management Representation Letter, addressed to the auditors, communicating management's opinion of the City's financial condition, internal controls, and adherence with laws and regulations. • The City of Pleasanton Single Audit Report is the audit report required by the Single Audit Act of 1984. This report contains a schedule of Federal Financial Assistance that summarizes Federal grant activity in the City of Pleasanton for the fiscal year ending June 30, 2010. • The Pleasanton Joint Powers Financing Authority Basic Financial Statements and Independent Auditors' Report is the financial report prepared by the City and audited by independent auditors to provide reasonable assurance the financial staternents are fairly presented in accordance with generally accepted accounting principles in the United States. The Pleasanton Joint Powers Financing Authority (Authority) is a blended component unit of the City; accordingly, the Authority's financial statements are also included in the basic financial statements of the City. The Authority was established in 1993 for the purpose of providing assistance to the City and the Housing Authority of the City in the financing and refinancing of public capital improvements. DISCUSSION The Audit Committee (Cornmittee) met on January 20, 2011 to review the 2009/10FY CAFR and related audit reports. Councilmembers Cheryl Cook- Kallio and Jerry Thorne serve on the Audit Committee along with the City Manager and the Director of Finance. The Committee discussed the audit reports and an audit adjustment that occurred subsequent to Council's acceptance on December 7, 2010, of the 2009/10FY Year -End Operating Report. In order for the City to be in compliance with its bond covenant for the 2004 Water Revenue Refunding Bonds (Bonds), the City had to reduce the 2009/10FY General Fund overhead charges to the Water Operations and Maintenance Fund (Water Fund) from $839,083 to $274,349. The City had not raised its water rates for ten years and during that time it had been using reserves to supplement annual operating revenues (fees and charges from water customers) to fund annual operations. Staff knew that the growth in expenditures (mainly Zone 7 water costs) was outpacing the growth in water revenues and a rate increase was necessary; hence the rate Page 3 of 4