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ACCEPT BY MOTION THE INDEPENDENT AUDIT OF THE ANNUAL COMPREHENSIVE FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2021
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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, 2021.
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Summary
This report transmits the final audited Annual Comprehensive Financial Report (ACFR) for the year ended June 30, 2021 (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, 2021. 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 $115 million or 7.9% from the prior fiscal year. During the audit, the auditor noted one audit finding related to the City’s internal control over financial reporting with three areas of deficiencies associated with the implementation of the new Enterprise Resource Planning (ERP) system. The findings are not unexpected with the conversion from an almost 30-year-old financial system to a new system midway through the fiscal year. The fact that the finding was solely related to implementing the new system reflects the efforts of the City’s Accounting staff and the various City departments to continue providing accurate financial information. On March 14, 2022, 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, 2021.
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) 2020-21 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, 2021. 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 2020-21. The ACFR financial statements reflect on page 21, the consolidated General Fund balance of $130.8 million in accordance with GASB 34 and include the Council-approved reserves. The full $130.8 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 partially fund known contingency reserves at $41.8 million and maintain the risk-based reserves at $5.0 million is reflected in the Committed fund balance. Other fund balance commitments include $22.5 million for Council priority projects, $6.9 million in encumbrances, $5.4 million in restricted balances, and $2.2 million of items in a non-spendable form. The remaining balance of $41.1 million (as of June 30, 2021) is unassigned, consisting of $2.4 million in the Venues fund, a negative $477,000 in the Emergency Communications fund, $1.8 million in fair market value and interest receivable, and the $37.7 million working capital reserve, excluding encumbrances, which is the FY 2021-22 beginning available balance.
Deficit Fund Balances
The Internal Service Fund for Workers’ Compensation, the Successor Agency to the Redevelopment Agency, and the Parking Authority funds have reported deficit fund balances.
• The Workers’ Compensation Insurance fund has an accumulated deficit fund balance of $4.1 million as of June 30, 2021. Contributions to cover claims expenditures are based on a percentage of payroll and city-wide loss experience. The City has historically established contribution rates for the program based on cash paid for claims assuming an “expected” confidence level. The 50 percent expected confidence level for projected claim costs is lower than the 70 percent confidence level assumed in the financial reports. As a result, past contributions have been insufficient to cover the outstanding estimated future claims. On an accrual basis of accounting, the fund has a long-term liability of $45.0 million for claims and judgments, while the cash balance of the fund as of June 30, 2021 is $41.3 million. The City will continue to use actuaries to assist in analyzing claim data and projecting claim costs.
• 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 $5.6 million as of June 30, 2021. 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. The COVID-19 pandemic has also impacted annual operating revenues 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, 2021, and has issued an unmodified (or “clean”) audit opinion validating the fair presentation of the City’s financial position as of June 30, 2021. 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 three deficiencies during the FY 2020-21 audit; these deficiencies are primarily associated with the implementation of the new Enterprise Resource Planning (ERP) system:
1. Bank reconciliation: The City did not reconcile its bank in a timely fashion and was unable to reconcile its operating account. As a result, there was a discrepancy in the amount of $785,277.
2. Capital Assets: Instruction was not clear on the data input and as a result, the depreciation was miscalculated.
3. Reporting: There are less options for reporting and providing details. Therefore, the subledgers do not always agree to the general ledger. During the year end phase of the audit, the accounting team was still resolving the implementation issues and reconciling the differences.
Management Response: The City acknowledges the identified deficiencies and is dedicated to improving in these areas. Cash activity is tracked using an entirely different method in the new ERP system. This change, combined with a mid-year transition to the new system, created additional complications in the bank reconciliation process. To improve the bank reconciliation process, accounting staff are working to automate bank account reconciliation daily with a direct feed from our operating bank. With approximately $800 million in pooled cash holdings, the $785,722 in unidentified reconciliation is 0.087% of the total pooled holdings. The miscalculation in capital asset depreciation was also related to the transition of accumulative depreciation data from the old financial system to the new ERP system. During the last fiscal year audit, reporting abilities were limited, with payroll, accounts receivable, utility billing, and other revenue functions still occurring in the legacy financial system. Additional reporting capabilities will be available as additional functions and subledgers move into the new system. Some growing pains are to be expected with the implementation of a new financial system. Procedures in place for years for reconciling, reporting, calculating depreciation, and many other processes had to be entirely re-written by users with less than a year of experience in the system.
As staff become more comfortable with the new system and its’ capabilities, it is anticipated that discrepancies in cash, capital asset depreciation and reporting will subside in next year’s audit. The City has also arranged for the vendor to provide additional system training focused on the areas needing improvement. 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 2020-21 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, 2022. An extension has been requested since the ACFR needed to be completed first. The FY 2020-21 report is underway and expected to be completed before the end of March 2022.
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, 2021 (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>