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ACCEPT BY MOTION THE INDEPENDENT AUDIT OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2018, AND APPROVE A RESOLUTION AUTHORIZING A DEPOSIT INTO THE CITY OF STOCKTON PUBLIC AGENCY POST EMPLOYMENT BENEFITS TRUST
recommended action
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, 2018, and approve a resolution authorizing a remittance to Public Agency Retirement Services (PARS) for deposit to the City of Stockton Public Agency Post Employment Benefits Trust (Trust).
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Summary
This report transmits the final audited Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2018 (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, 2018. The CAFR reflects the City’s improved financial condition achieved through rigorous financial planning and use of its Long-Range Financial Plan. On January 22, 2019, the Council Audit Committee received, reviewed and acted to accept the independent audit of the CAFR and to submit it to Council for acceptance.
In November 2017, Council authorized the creation of Public Agency Post-Employment Benefits Trust to help address the City’s increasing pension costs. Council approved the General Fund reserves on November 6, 2018, and now that the 2017-18 fiscal year is completely closed, staff recommends an $8.8 million deposit into the Trust ($4.8 million from General Fund reserves and $4.0 million from the Retirement Internal Service Fund).
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 that has 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, 2018.
Present Situation
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) 2017-18 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, 2018. 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 2017-18. 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 $90.5 million. However, the full $90.5 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. Of the $90.5 million in fund balance, over $11.5 million is set aside for obligations already incurred or is in non-spendable form. The remaining balance of $79.0 million (as of June 30, 2018) was available to allocate in accordance with the Reserve and Fund Balance Policy - General Fund, adopted by Council on March 29, 2016. The $79.0 million ending balance was sufficient to set aside $36.8 million as a working capital reserve (unassigned fund balance), restrict $37.2 million for Known Contingencies (committed fund balance) and restrict $5.0 million for Risk-Based Reserves (committed fund balance). The working capital reserve of $36.7 million, which is 17% of annual operating expenditures, is the FY 2018-19 beginning available balance. The CAFR financial statements reflect on page 30, the consolidated General Fund balance of $90.5 million in accordance with GASB 34 and include the Council-approved reserves.
Deficit Fund Balances
The Internal Service Fund for Workers’ Compensation Insurance and Successor Agency to the Redevelopment Agency funds have reported deficit fund balances. The Workers’ Compensation fund deficit is considered a long-term debt obligation of the City, will be funded over time and is 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. 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 causes the liability and will be paid back by future tax increments.
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, 2018, and issued an unmodified (or “clean”) audit opinion validating the fair presentation of the City’s financial position as of June 30, 2018. In the Independent Auditor’s Report (page 1 of the CAFR), the auditor 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 several new accounting standards to conform with the following Governmental Accounting Standards Board (GASB) Statements:
• GASB Statement No. 81 Irrevocable Split-Interest Agreements. This Statement requires that a government that receives resources pursuant to an irrevocable split-interest agreement recognize assets, liabilities, and deferred inflows of resources at the inception of the agreement. Application of this statement did not have a significant effect on the City’s financial statements.
• GASB Statement No. 85 Omnibus 2017. This Statement addresses a variety of topics that have been identified during the implementation and application of certain GASB Statements. Application of this statement did not have a significant effect on the City’s financial statements.
• GASB Statement No. 86 Certain Debt Extinguishment Issues. This Statement improves consistency in accounting and financial reporting for in-substance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources-resources other than the proceeds of refunding debt-are placed in an irrevocable trust for the sole purpose of extinguishing debt. Application of this statement did not have a significant effect on the City’s financial statements.
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 2017-18 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, 2019. The FY 2017-18 report was completed and submitted by the due date.
Public Agency Post-Employment Benefits Trust
In November 2017, Council authorized the creation of a post-employment benefits trust to help address the City’s increasing pension costs. Council also authorized an initial deposit into the Trust of $21.2 million. Council approved the General Fund reserves on November 6, 2018, and now that the 2017-18 fiscal year is completely closed, staff recommends the deposit of $8.8 million into the Trust consistent with the adopted reserves ($4.8 million from the General Fund reserves and $4.0 million from the Retirement Internal Service Fund).
FINANCIAL SUMMARY
There is no financial impact associated with accepting the CAFR.
Council approved the General Fund reserves on November 6, 2018, which included $37.2 million in Known Contingencies reserves. The recommended $4.8 million transfer to the Trust is part of those reserves.
The Retirement Internal Service Fund had an available balance of $6.9 million as of June 30, 2018. After the recommended transfer of $4.0 million, the fund should have sufficient resources to cover administrative expenses, survivor benefit expenses, potential CalPERS payment adjustments, and the scheduled retirement payment of one pay period.
Attachment A - The Comprehensive Annual Financial Report for the fiscal year ended June 30, 2018 (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>