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COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2016
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RECOMMENDATION
It is recommended that the Audit Committee accept by motion the Comprehensive Annual Financial Report for the year ended June 30, 2016, and submit to the City Council for acceptance.
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Summary
This report transmits the final audited Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2016. A link to the electronic version of the CAFR can be found at the end of this staff report (Attachment A). The City received an unmodified (or “clean”) audit opinion validating the fair presentation of our financial position as of June 30, 2016. Overall, the City’s finances show signs of stability after exiting bankruptcy, a result of the City’s sound management practices and prudent financial decisions.
DISCUSSION
Background
Annual Audit
The City Charter (Section 1911) requires the City to have an annual audit conducted by a firm of Certified Public Accountants. The Charter further stipulates the audit is to be 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, has completed the independent audit and issued the audit report for the fiscal year ended June 30, 2016.
The CAFR is a comprehensive document reflecting the financial position of all City operations and its related component units. The City prepared the Fiscal Year (FY) 2015-16 CAFR 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 CAFR’s Transmittal Letter and Management’s Discussion and Analysis provide an overview and analysis of the financial activities of the year ended June 30, 2016. 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 financial results for the year were significantly better than estimated, due to increased revenues and lower than budgeted expenditures. This combination resulted in an ending balance that is 30% of expenditures compared to the 20% anticipated in the budget approved by City Council in June 2016. When consolidated with the Bankruptcy and Fiscal Sustainability Fund, the General Fund had an ending balance of $70.5 million as of June 30, 2016, to allocate in accordance with the Reserve and Fund Balance Policy - General Fund adopted by Council on March 29, 2016. This ending balance was sufficient to set aside $33.9 million as a working capital reserve (unassigned fund balance), restrict $31.3 million for Known Contingencies (committed fund balance) and restrict $5.0 million for Risk-Based reserves (committed fund balance). The working capital reserve of $33.9 million or 17% of annual operating expenditures is the FY 2016-17 beginning available balance.
Deficit Fund Balances
The Internal Service Fund for Workers’ Compensation Insurance and Transportation Development Act funds have reported deficit fund balances. The deficits are considered a long-term debt obligation of the City, will be funded over time and are planned for in the Long-Range Financial Plan. The timing of receipt of reimbursement and this revenue does not qualify for recognition as they are not yet considered available.
Independent Auditor’s Report on the Financial Statements
The City’s external audit firm, The Pun Group, has completed its review of the annual Financial Statements for the fiscal year ended June 30, 2016, and has issued an unmodified (or “clean”) audit opinion validating the fair presentation of our financial position as of June 30, 2016. In the Independent Auditor’s Report (page 1 of the CAFR), 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.
Implementation of New Accounting Standards
The City implemented the following new accounting standards to conform with Governmental Accounting Standards Board (GASB) Statements, as follows:
• GASB Statement No. 72 - Fair Value Measurement and Application. This Statement requires disclosures to be made to fair value measurements, the level of fair value hierarchy, and valuation techniques. These disclosures should be organized by type of asset or liability reported at fair value. It also requires additional disclosures regarding investments in certain entities that calculate net asset value per share (or its equivalent). The requirements of this Statement were implemented and effective on the financial statements for periods beginning after June 15, 2015. The requirements did not have any measurement impact on the City’s investment portfolio, except for the additional disclosure regarding the measurement input as discussed in Note 2F of the City’s financial statements for the year ended June 30, 2016.
• GASB Statement No. 73 - Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. This Statement establishes requirements for defined benefit pensions that are not within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, as well as for the assets accumulated for purposes of providing those pensions. The Statement also establishes requirements for defined contribution pensions that are not within the scope of Statement No.68. It also amends certain provisions of Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68 for pension plans and pensions that are within their respective scopes. This Statement became effective for periods beginning after June 15, 2015, and did not have a significant impact on the City’s financial statements for the year ended June 30, 2016.
• GASB Statement No. 76 -The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. This Statement establishes standards relating to the hierarchy of generally accepted accounting principles. The “GAAP hierarchy” consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This Statement reduces the GAAP hierarchy to two categories of authoritative principles and addresses the use of authoritative and non-authoritative literature if the accounting treatment for a transaction or other event is not specified within a source of authoritative principles. This statement became effective for periods beginning after June 15, 2015, is applied retroactively, and did not have a significant impact on the City’s financial statements for the year ended June 30, 2016.
• GASB Statement No. 79 - Certain External Investment Pools and Pool Participants. This Statement establishes standards relating to accounting and financial reporting for certain external investment pools and pool participants. This Statement became effective for periods beginning after June 15, 2015, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing. Those provisions are effective for reporting periods beginning after December 15, 2015 and did not have a significant impact on the City’s financial statements for the year ended June 30, 2016.
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 clearing house on or before March 31 each year. The Single Audit for FY 2015-16 is still in progress and will be submitted on-time after being heard by the Audit Committee and City Council.
Filings with the State Controller’s Office
The City prepares a City Financial Transactions Report/Street Report to be submitted to the California State Controller’s Office by January 31, 2017. The FY 2015-16 report is expected to be completed by the due date.
FINANCIAL SUMMARY
There is no financial impact associated with accepting this report.
Attachment A - The Comprehensive Annual Financial Report for the fiscal year ended June 30, 2016 (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>