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ACCEPT BY MOTION THE INDEPENDENT AUDIT OF THE ANNUAL COMPREHENSIVE FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2023
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RECOMMENDATION
It is recommended the Council Audit Committee accept by motion the independent audit of the Annual Comprehensive Financial Report for the year ended June 30, 2023.
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Summary
This report transmits the final audited Annual Comprehensive Financial Report (ACFR) for the year ended June 30, 2023 (Attachment A). The City received an unmodified (or “clean”) audit opinion validating the fair presentation of its financial position as of June 30, 2023. 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 $134 million or 7.7% 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 a correction to the recording of grant revenues and stale balances.
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, 2023.
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) 2022-23 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, 2023. 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 2022-23. The ACFR financial statements reflect on page 23 the consolidated General Fund balance of $212.4 million in accordance with GASB 34 and include the Council-approved reserves. The full $212.4 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 fund known contingency reserves at $68.0 million and maintain the risk-based reserves at $10.8 million is reflected in the Committed fund balance. Other fund balance commitments include $21.5 million for new Council priority projects, $43.3 million for carryforward activities, $10.2 million in encumbrances, $5.2 million in restricted balances, and $2.4 million of items in a non-spendable form. The remaining balance of $48.5 million (as of June 30, 2023) is unassigned, representing the Working Capital reserve for the General Fund.
Deficit Fund Balances
• The Special Grants Fund has an accumulated deficit fund balance of $1,344,162 as of June 30, 2023. The deficit was recovered from the grant revenue.
• The Parking Authority Fund has an accumulated deficit fund balance of $5,132,205 as of June 30,2023. This is due to an interfund loan borrowing from the Worker’s Compensation Fund for $8,915,000. It is in relation to the payoff of the 2006 Series A ESB bonds previously held in the City’s Debt Service Fund. The loan terms are set at 2%, biannual payments with anticipated payoff date of February 1, 2032.
• The Successor Agency to the Redevelopment Agency Private Purpose Trust Fund has an accumulated deficit fund balance of $56,816,846 as of June 30, 2023. This is an Agency Private Purpose Trust fund and not included in the City’s net position. The fund has a bonds payable balance that causes the fund balance deficit.
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, 2023, and has issued an unmodified (or “clean”) audit opinion validating the fair presentation of the City’s financial position as of June 30, 2023. 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 deficiencies during the FY 2021-22 audit:
1. Prior Period Adjustment: The City incorrectly recognized grant revenues in the Special Grants Special Revenue Fund and Other Governmental Funds in FY 2021-22.
2. Stale balances for receivables and payables.
Management Response: The City acknowledges the identified deficiencies and is dedicated to improving in these areas. Since 2020, the City has experienced a significant increase in grant funding and many of the grants are prepaid rather than reimbursement based. This distinction changes how the grant revenues should be recorded. When booking these entries for the year ended June 30, 2023, the City based the entries on the individual grants at the project level, whereas the prior year entries were booked at the account level and not specific to each grant. Continuing this more detailed calculation will ensure accurate reporting of grant revenues in the future. With the implementation of the new financial system, staff has not had capacity to perform in-depth research on all receivable and payable balances. Many of the balances have been allowed for and do not affect the overall financial picture. Additional resources have been put in place to assist with researching these balances and determining 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.
Prior Period Adjustments
As discussed in Note 19 to the basic financial statements, the City recorded restatements due to GASB 96, Subscription-Based Information Technology Arrangements implementation for the governmental activities and internal service funds
in the amount of $66,143 and $47,312, respectively. In addition, the City also recorded prior period adjustments in the Special Grants Special Revenue Fund and Other Governmental Funds in the amount of $(38,524,453) and $621,346 due to correction of revenue recognition.
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 due to the federal clearinghouse on or before March 31st each year. The Single Audit for FY 2022-23 is still in progress and is not expected to be submitted on-time due to the volume of federal grant funds currently being managed by the City.
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, 2024. An extension was requested for the FY 2022-23 report. Preparation of the report is underway, and it is expected to be completed by the March 20, 2024 extension date.
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, 2023