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ACCEPT BY MOTION THE INDEPENDENT AUDIT OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2017
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RECOMMENDATION
It is recommended the City Council accept by motion the independent audit of the Comprehensive Annual Financial Report for the year ended June 30, 2017.
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Summary
This report transmits the final audited Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2017 (Attachment A). A link to the electronic version of the CAFR 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, 2017. The CAFR reflects the City’s improving financial condition that has been achieved through rigorous financial planning and use of its Long-Range Financial Plan. On February 5, 2018, the Council Audit Committee received, reviewed and took action to accept the independent audit of the CAFR and to submit it to Council for acceptance.
DISCUSSION
Background
Annual Audit
The City Charter (Section 1910) requires the City to have an annual audit conducted by an independent firm of Certified Public Accountants which have been selected using Audit Committee recommendations and approved by the City Council. 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, 2017.
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) 2016-17 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, 2017. 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 reflects 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 2016-17. Revenues continued to grow slowly, and expenditures were less-than-budgeted. When combined with the Bankruptcy and Fiscal Sustainability Fund and other related funds, the consolidated General Fund balance was $102.7 million. However, the full $102.7 million fund balance includes available and restricted fund balances for the General Fund as well as the Library, Recreation, Boat Launch, Entertainment Venues and Pooled Investment funds. Of the $102.7 million in fund balance, over $13.3 million is set aside for obligations already incurred or is in non-spendable form. The remaining $89.4 million (as of June 30, 2017) was available to allocate in accordance with the Reserve and Fund Balance Policy - General Fund adopted by Council on March 29, 2016. The $89.4 million ending balance was sufficient to set aside $36.2 million as a working capital reserve (unassigned fund balance), restrict $48.2 million for Known Contingencies (committed fund balance) and restrict $5.0 million for Risk-Based reserves (committed fund balance). The working capital reserve of $36.2 million, which is 17% of annual operating expenditures, is the FY 2017-18 beginning available balance. The CAFR financial statements on page 30 reflect the consolidated General Fund balance of $102.7 million in accordance with GASB 34 and include the Council-approved reserves.
Prior Period and Other Adjustments
The governmental activities and business-type activities include a prior period adjustment due to a restatement of pension liabilities of $51.8 million as reflected in Note 18 of the CAFR.
The CAFR reclassifies Internal Service Fund combined balances of $32.8 million from restricted to unrestricted in this CAFR presentation. The Council has restricted the use of these funds for equipment replacement.
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 independent audit firm, The Pun Group, completed its review of the annual Financial Statements for the fiscal year ended June 30, 2017, and has issued an unmodified (or “clean”) audit opinion validating the fair presentation of the City’s financial position as of June 30, 2017. 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. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. This change is implemented at the plan level. The City of Stockton is not affected by this revision.
• GASB Statement No. 77, Tax Abatement Disclosure. This Statement requires governments that enter into tax abatement agreements to disclose certain provisions. The City of Stockton is not affected by this revision.
• GASB Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans. This Statement amends the scope and applicability of Statement 68 to exclude pensions provided to governmental employees through a cost-sharing multiple-employer defined benefit pension plan with certain provisions. The City of Stockton is not affected by this revision.
• GASB Statement No. 80, Blending Requirements for Certain Component Units. The objective of this Statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. The City of Stockton is not affected by this revision.
• GASB Statement No. 82, Pension Issues. The objective of this Statement is to address certain issues that have been raised with respect to Statements No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets. The City of Stockton is not affected by this revision.
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 31 each year. The Single Audit for FY 2016-17 is in progress and will be submitted on-time. The Single Audit report will then be presented to the Audit Committee and City Council.
Filings with the State Controller’s Office
The City prepares a City Financial Transactions Report and is required to submit it to the California State Controller’s Office by January 31, 2018. The FY 2016-17 report was completed and submitted 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, 2017 (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>