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ACCEPT THE SINGLE AUDIT AND INDEPENDENT AUDITORS’ REPORTS AND THE REPORT ON INTERNAL CONTROLS FOR THE YEAR ENDED JUNE 30, 2023
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RECOMMENDATION
It is recommended the Audit Committee accept by motion the Single Audit and Independent Auditors’ Reports and the Report on Internal Control Related Matters Identified in the Audit for the year ended June 30, 2023 and submit to the City Council for acceptance.
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Summary
Presented for the Audit Committee’s review is the City of Stockton’s Single Audit and Independent Auditors’ Reports (Attachment A) for the year ended June 30, 2023. The report includes the auditor’s opinion that the City complied, in all material respects, with the types of compliance requirements referred to in the report that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2023. The Report on Internal Control Related Matters Identified in the Audit previously issued separately from the Single Audit report is now included as part of the Single Audit report. The Single Audit report identifies six (6) new findings or questioned costs.
DISCUSSION
The Single Audit and Independent Auditors’ Reports (Attachment A) is an annual audit of federal awards or pass-through of federal awards to the City. The auditors have issued an unmodified opinion that the City complied, in all material respects, with the compliance requirements of the grants.
Additionally, there were no questioned costs related to the compliance findings.
The Report on Internal Controls provides a review of the City’s financial reporting systems and procedures that are used to ensure accurate financial statements. An internal control is designed to provide reasonable assurance that the City meets its objectives regarding the reliability of financial reporting, effectiveness, and efficiency of operations and compliance with applicable laws and regulations. The auditor considers the City’s internal control over financial reporting during the design of audit procedures for financial statements. The auditors do not express any opinion on the effectiveness of the City’s internal controls.
Present Situation
With an influx of COVID-19 related Federal stimulus funds, the City’s expenditures of federal awards increased significantly by $136.7 million in Fiscal Year (FY) 2021-22 to $145.6 million in FY 2022-23. Program and administrative staff have not increased sufficiently to properly administer the increase in federal awards and the variety of new programs. Each new program has a separate set of regulations to be followed. Examples of new programs include American Rescue Plan Act Coronavirus State and Local Fiscal Recovery Funds, Water Infrastructure Finance and Innovation (WIFIA), California Wastewater and Water Arrearage Payment Programs, and Emergency Rental Assistance passed through the State of California.
The Single Audit report identifies six (6) new findings or questioned costs summarized below:
2023-001 Internal Control Over Financial Reporting - Prior Year Adjustments, Year-End Closing, Reconciliation, and Delay in Issuance of the Single Audit
Condition:
During the year ended June 30, 2023, the City reported several corrections impacting the Net Position and Fund Balances:
1. The Governmental Activities Net Position was adjusted by $(34,536,104) due to corrections on unavailable revenue and unearned revenue.
2. The Special Revenue Fund Balance was adjusted by $(38,524,453) due to corrections on unavailable revenue, unearned revenue, and revenue recognition.
3. The Other Governmental Fund Balance was adjusted by $621,346 due to corrections on revenue recognition. During the audit, we noted stale receivables and payables to be reconciled from the subsidiary ledgers to the general ledgers.
The City has experienced significant delays in the preparation and issuance of the Single Audit required under Uniform Guidance. Due to the delay in issuance of the Single Audit report, the Data Collection Form was not submitted in a timely manner.
City’s Corrective Actions:
The City has experienced significant turnover in key positions over the last fiscal year. Also, the City went through an accounting software change; the City is in the process of reconciling stale accounts and identifying how the issues occurred. The grants identified in the above finding were passed through from State agencies. The City has expended these funds in compliance with the State grant requirements. The City has hired a grant manager to assist with the periodic reconciliation of grants to the general ledger as well as establishing policies and procedures to cover this annual process.
2023-002 Internal Control Over Preparation of Schedule of Expenditures of Federal Awards
Condition:
During the audit, the City provided multiple rounds of revisions to the Schedule of Expenditures of Federal Awards (“Schedule”). One significant revision included adding the Homekey Program Round 1, which was passed through the State of California, amounting to $2,779,929. This program had been excluded from the Schedule in previous years.
City’s Corrective Actions:
The City has experienced significant turnover in key positions over the last fiscal year. The City has hired a grant manager to assist with the periodic reconciliation of grants to the general ledger as well as establishing policies and procedures over the annual process. In addition, the grant manager will review for pass through funding from the state to ensure proper reporting. Finance staff can review this as part of the grant master workflow.
2023-003 Allowable Costs/Cost Principles - Internal Controls Over Payroll Expenditures
Condition:
Emergency Solutions Grant Program:
The City was unable to locate and provide the timesheets for (2) out of eleven (11) samples tested with Payroll Cost allocated to the Program. Within the overall population of a hundred and five (105) lines of ESG and ESGCV payroll charges, the City also had four (4) unsupported employee benefits charged to the program.
Community Development Block Grants-Entitlement Grants Cluster:
Payroll costs for eighteen (18) out of forty (40) samples tested were allocated to programs not supported by approved time samples or updated cost allocation methods/plan, nor were they reconciled to actual time spent on the various programs.
City’s Corrective Actions:
The City of Stockton has performed a review of the data for payroll and performed isolated testing in fiscal year 2023-24 that concludes the issues have been corrected. The City has hired a grant manager to assist with the periodic reconciliation of grants to the general ledger as well as establishing policies and procedures over the annual process. Finance, Budget and Payroll staff will communicate and work with the grant contacts to ensure proper documentation is maintained and allocation of salaries charged by program are approved and documented.
2023-004 Eligibility - Internal Control over Eligibility
Condition:
During our audit, we noted five (5) samples out of nine (9) samples selected for the eligibility requirement testing with internal control deficiency related to the income eligibility verification. The city failed to collect the zero-income attestation document from applicant. The amount of income shown in documents uploaded by applicant was different from the amount shown in application/system, check box for income verification was not ticked off by supervisor though the verification was completed. However, we recalculated those five applicants’ income based on the income verification support provided and those applicants were eligible to receive the grant subsidy based on the income limit.
City’s Corrective Actions:
At the time of Emergency Rental Assistance Program (ERAP) implementation, the guidance provided by U.S. Treasury was continuously evolving and the ERAP team was navigating a complex social and economic crisis. Residents became unemployed, had income reductions as a direct result of the pandemic, and/or had limited access to technology to complete application documents. Prior to official guidance recommending the use of an attestation form, some applicants provided written statements that they did not have any income. Furthermore, these applications were accompanied by eviction notices. These households were clearly at risk of experiencing homelessness or housing instability, which constitutes an “eligible household” as defined by 15 USC 9058a (k)(3)(A)(ii). This section of the U.S. Code states that a “household can demonstrate a risk of experiencing homelessness or housing instability” by providing a “past due utility or rent notice or eviction notice.”
While the portal used to intake, review, and approve applications shows occasional inconsistencies with income verification boxes not checked off, all of the sampled cases were verified to be under the income threshold, provided an eviction notice, past due rent notice, and/or signed a written statement that they had zero income. Although certain boxes were not checked within the portal, all cases were verified through diligent and compassionate coordination with households requesting support. Furthermore, a risk assessment by the State's Housing & Community Development for the 2021 Program Year evaluated the City's risk profile as Low Risk.
All program expenditures were concluded in fiscal year 2022-23. This was one-time funding. There will be some administrative costs related to the grant in fiscal year 2023-24, but no additional funding was received, therefore eligibility requirements will not be direct material in fiscal year 2023-24.
2023-005 Reporting - Internal Control and Compliance over reporting
Condition:
As a result of our test work, we noted that the City did not submit any of the four (4) quarterly Section 15011 Reports for the year ended June 30, 2023.
City’s Corrective Actions:
This is pandemic-related funding with limited guidance on reporting requirements. However, the City has tracked all expenditures and retained documentation for allowable costs. The City will maintain supporting documentation when a federal or grantor agency allows for an extension or removes any reporting requirement. The City will centralize reporting requirements to assist in verifying compliance is met.
2023-006 Special Tests and Provisions - Internal Control and Compliance Over Obligations, Expenditures, and Payment Requirements
Condition:
During our audit, we noted that the ESG Grant Fund obligated to sub-recipients under obligation testing were outside of the obligation timeframe of 180 days in case of ESG and 240 days in case of ESG CV without further justifications.
In addition, we noted two (2) out of seven (7) samples selected for payment requirements testing were outside of 30 days window without further justifications.
City’s Corrective Actions:
The City concurs that during the height of the pandemic there were multiple sources of funds that needed to be expended at a rapid pace. The City's subrecipients were overwhelmed with providing services and the City at times did not enter into contracts within the 180 days or pay out on invoices within 30 days. Since this occurrence, the City has implemented policies and procedures to provide award letters and process payments within 30 days or document why the payment cannot be made given the documentation provided.
FINANCIAL SUMMARY
There is no financial impact associated with accepting these reports.
Attachment A - 2023 Single Audit and Independent Auditors’ Reports