title
ACCEPT BY MOTION THE INDEPENDENT AUDIT OF THE ANNUAL COMPREHENSIVE FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2022
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the independent audit of the Annual Comprehensive Financial Report for the year ended June 30, 2022.
body
Summary
This report transmits the final audited Annual Comprehensive Financial Report (ACFR) for the year ended June 30, 2022 (Attachment A). A link to the electronic version of the ACFR can be found at the end of this staff report. The City received an unmodified (or “clean”) audit opinion validating the fair presentation of its financial position as of June 30, 2022. The ACFR reflects the City’s improved financial condition achieved through rigorous financial planning and use of its Long-Range Financial Plan. The City’s net position (assets compared to liabilities) improved by $217 million or 13.8% from the prior fiscal year. During the audit, the auditor noted one audit finding related to the City’s internal control over financial reporting which is related to the correction in Successor Agency fund regarding cash with fiscal agent and stale balances. On January 30, 2023, the Council Audit Committee received, reviewed, and acted to accept the independent audit of the ACFR and submit it to Council for acceptance.
DISCUSSION
Background
The City Charter (Section 1910) requires the City to have an annual audit conducted by an independent firm of Certified Public Accountants. The Charter further stipulates the audit is to be made in accordance with generally accepted audit standards for audits of public agencies. Federal and State grant agreements and bond indentures also require the City to have an annual audit. To ensure compliance with these requirements, the City contracts with an independent audit firm. The City’s external audit firm, The Pun Group, completed the independent audit and issued the audit report for the fiscal year ended June 30, 2022.
Present Situation
The ACFR is a comprehensive document reflecting the financial position of all City operations and its related component units. The City prepared the Fiscal Year (FY) 2021-22 ACFR in conformance with Generally Accepted Accounting Principles (GAAP) and with the additional requirements of presentation as set forth by the Government Finance Officers Association. The ACFR’s Transmittal Letter and Management’s Discussion and Analysis provide an overview and analysis of the financial activities of the year ended June 30, 2022. While the City’s focus tends to be on the General Fund, the audit includes an examination of all City funds.
General Fund Results
The General Fund continues to reflect the City’s sound management practices and prudent financial decisions as steady growth and improved financial results are evident in the audit report for FY 2021-22. The ACFR financial statements reflect on page 22, the consolidated General Fund balance of $178.6 million in accordance with GASB 34 and include the Council-approved reserves. The full $178.6 million fund balance includes available and restricted fund balances for the General Fund as well as the Library, Recreation, Boat Launch, Entertainment Venues, Emergency Communications, and Pooled Investment funds. The total fund balance as presented is split into five categories: Non-spendable, Restricted, Committed, Assigned, and Unassigned. The City’s General Fund reserve policy calls for the City to maintain a 17% operating reserve (approximately two months of expenditure) and establishes additional reserves for known contingencies, unforeseen revenue changes, infrastructure failures, and catastrophic events. Council action taken to fully fund known contingency reserves at $55.3 million and increase the risk-based reserves to $10.8 million is reflected in the Committed fund balance. Other fund balance commitments include $5.7 million for
Council priority projects, $33.4 million committed to Capital projects, $10.4 million for budgeted commitments, $7.3 million in encumbrances, $5.3 million in restricted balances, and $2.1 million of items in a non-spendable form. The remaining balance of $43.2 million (as of June 30, 2022) is unassigned, consisting of $3.5 million in the Venues fund, a negative $44,000 in the Emergency Communications fund, and $39.7 million in the General Fund excluding related funds.
Deficit Fund Balances
The Internal Service Fund for the Successor Agency to the Redevelopment Agency, and the Parking Authority funds have reported deficit fund balances.
• The Successor Agency to the Redevelopment Agency has a deficit fund balance that is not included in the City’s net position. The fund has a bond payable balance that creates the liability and will be paid back by future tax increment payments.
• The Parking Authority Fund has an accumulated deficit fund balance of approximately $5.4 million as of June 30, 2022. This deficit is due to a long-term bond payable balance and an interfund loan borrowing from the Worker’s Compensation Fund of approximately $8.9 million that was used to refund debt. Annual operating revenues have also been impacted by the COVID-19 pandemic, with reduced parking revenues from special events.
Independent Auditor’s Report on the Financial Statements
The City’s external independent audit firm, The Pun Group, completed its review of the annual Financial Statements for the fiscal year ended June 30, 2022, and has issued an unmodified (or “clean”) audit opinion validating the fair presentation of the City’s financial position as of June 30, 2022. In the Independent Auditor’s Report (page 1 of the ACFR), the auditor has opined that the balances in the financial statements are presented fairly in all material respects and are in conformity with GAAP.
Audit Adjustments
Auditing standards require reporting any adjustments to the financial statements made by the independent auditor. The external auditor did not propose any additional audit adjustments that, in their judgment, could have a significant effect on the City’s financial statements.
Audit Findings
The auditor noted one audit finding related to the City’s internal control over financial reporting with the following two deficiencies during the FY 2021-22 audit:
1. Prior Period Adjustment: The City missed the recording of cash for fiscal agent in FY 2020-21 in the Successor Agency fund in the amount of $1.9 million cash.
2. Stale balances for receivables and payables.
Management Response: The City acknowledges the identified deficiencies and is dedicated to improving in these areas. As part of FY 2021-22 year end review, staff has taken additional measures to develop several reconciliation tools that will enhance their ability to review each fund. With the implementation of the new financial system, staff has not had capacity to perform indepth research on all receivable and payable balances. Many of the balances have been allowed for and do not effect the overall financial picture. Staff will look into whether some of these stale balances are subject to write off in accordance with the City’s Uncollectible Accounts Policy.
The City continues to demonstrate progress towards improving its internal controls by updating financial policies and procedures, resolving old audit findings, and gaining familiarity with the new financial system.
Other Outstanding Audits
The City prepares a separate Single Audit in conformity with the Federal Single Audit Act and guidance from the U.S. Office of Management and Budget regarding Audits of State and Local Governments. This report is required to be filed with the federal clearinghouse on or before March 31st each year. The Single Audit for FY 2021-22 is still in progress and will be submitted on-time.
Filings with the State Controller’s Office
The City prepares a City Financial Transactions Report to be submitted to the California State Controller’s Office by January 31, 2023. The FY 2021-22 report was filed on January 30, 2023.
FINANCIAL SUMMARY
There is no financial impact associated with accepting this report.
Attachment A - The Annual Comprehensive Financial Report for the fiscal year ended June 30, 2022 (can be found on file in the City Clerk’s Office at City Hall) or on the City’s website: <http://www.stocktongov.com/government/departments/adminServices/finRep.html>