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AGENDA BILL Agenda Item No. 5(E) Date: May 6, 2014 To: El Cerrito City Council From: Lisa Malek-Zadeh, Finance Director City Treasurer Subject: Transmittal of the Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2013; and of the Memorandum on Internal Control and Required Communications ACTION REQUESTED That the City Council receives and files the Comprehensive Annual Financial Report (CAFR) and the Memorandum on Internal Control and Required Communications (MOIC) for the year ending June 30, 2013. BACKGROUND/ANALYSIS The City’s audit firm, Maze and Associates, has completed its audit of the City’s financial records for the fiscal year ending June 30, 2013. A complete copy of the CAFR is available on the City’s website at www.el-cerrito.org/13cafr. In addition to the audited financial statements, the auditors have completed and provided the required Memorandum on Internal Control and Required Communications (MOIC). DISCUSSION COMPREHENSIVE ANNUAL FINANCIAL REPORT Staff is pleased to report that the City received an unmodified opinion for the FY 2012-13 financial statements. An unmodified opinion by the Auditor indicates that the Financial Statements have been prepared using Generally Accepted Accounting Principles; comply with relevant statutory requirements and regulations; include adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable; and any changes in the accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the Financial Statements. While the City has received a “clean opinion” for FY 2012-13, the Auditors have expressed the following item as Emphasis of Matters. The emphasis of matter does not constitute a modification of the Auditor’s opinion, but is significant or important enough to warrant a mention in their report. ---PAGE BREAK--- Agenda Item No. 5(E) Page 2 Redevelopment Agency Dissolution The City recently filed suit against the Department of Finance (DOF). The City is disputing DOF’s demand of funds and property conveyance made prior to dissolution in addition to challenging DOF’s determination that agreements made between the City and the Municipal Services Corporation are not valid. There is considerable legal uncertainty regarding these matters and a determination may be made at a later date by an appropriate judicial authority that would resolve this issue favorably or unfavorably to the City. No provision for liabilities resulting from the outcome of these uncertain matters has been recorded in the accompanying financial statements. General Fund Cash and Fund Balance As of June 30, 2013, the General Fund's unrestricted cash balance represented less than 5 days of General Fund expenditures, unassigned fund balance represents available fund balance and equates to approximately 16 days of General Fund expenditures, and expenditures in fiscal year 2013 exceeded revenues by $948,104. Although the City continues to issue Tax Revenue Anticipation Notes to supplement cash temporarily during the fiscal year, if deficit spending were to continue, it reduces the likelihood that the City will be able to continue as a going concern. State Board of Equalization Sales Tax Adjustment In October 2013, the State Board of Equalization (BOE) made a new determination regarding the allocation of sales tax revenue shared by El Cerrito and Richmond regarding Home Depot. Based on this new determination, historical sales tax would have been misallocated by $2,499,975 and BOE said they would withhold that amount from the December 2013 remittance to El Cerrito. This amount does not take into account monies already paid to the City of Richmond which would dramatically reduce this number. The City has requested documentation from the BOE to support its calculation and obtained an extension to December 31, 2014 for the opportunity to appeal the decision while management reviews BOE’s methodology and calculations and negotiates a new sales tax sharing agreement with Richmond. The BOE did not withhold the amount from the December remittance, pending the City’s review and potential appeal. Therefore, the demand is not recorded in the accompanying financial statements. Implementation of Governmental Accounting Standards Board Pronouncements Management adopted two new provisions of the following Governmental Accounting Standards Board (GASB) Statements; Statement 63 - Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position and Statement 65 - Items Previously Report as Assets and Liabilities. These statements became effective during the year ending June 30, 2013 and required certain nomenclature and format changes to the financial statements. Restatement of Fund Balance The City restated the Capital Improvement Fund beginning balance during the current fiscal year. The City determined that grant revenue was recognized in fiscal year 2011-12 in the amount of $206,477, but should have to be recorded as unavailable revenue and therefore was restated. This reduced the beginning fund balance in the Capital Improvement Fund by that amount. ---PAGE BREAK--- Agenda Item No. 5(E) Page 3 FY 2012-3 Year-end Status of the General Fund At the end of the fiscal year, the total fund balance of the General Fund was $2.3 million, a decrease of $948,000 from the prior year. The decrease was primarily the result of a shortfall in sales and use taxes. The General Fund held nonspendable funds of $48,000 for inventory and prepaid items, $1.1 million in restricted funds and $1.2 million in unassigned funds available for additional appropriation. The $1.1 million in restricted funds include an unspent portion of a grant from the MSC and debt proceeds committed to a capital project to be completed in FY 2013-14. MEMORANDUM ON INTERNAL CONTROL COMMUNICATION AND REQUIRED COMMUNICATIONS In the course of performing the audit of the City’s basic financial statements, in accordance with auditing standards generally accepted in the United States of America, the Auditors must consider the City’s internal control system over financial reporting (internal control) for the purpose of expressing their opinion on the financial statements; however, the Auditor expresses no opinion on the effectiveness of the City’s internal control. The objective of the Memorandum on Internal Control Communication and Required Communications (MOIC) is to advise the City Council of any material weaknesses which may result in a material misstatement of the financials and/or any significant deficiencies (less severe than material weakness) in the City’s systems of internal financial controls. The Required Communications may advise the Council of upcoming accounting regulations, which affect the City’s financial record, indicate any difficulties performing the audit or notify Council of disagreements with management. No difficulties in performance of the audit or disagreements with management were indicated. FY 2012-13 Findings The Auditor has noted three items as a material weakness. Below is a brief summary of the findings for FY 2012-2013 and the City’s response. 2012-13-01 & 2012-13-02 Review of Journal Entries and Bank and Investment Reconciliations: Through a sample review of journal entries and bank statements, the Auditors noted the absence of a signature indicating that the entries/statements had been reviewed and or approved by the Finance Director. While the majority of the entries/statements were in months when the department was under the direction of the former Administrative Services Director, the duties were not picked up by the new Finance Director and the review was not completed. Response: Management agreed with the finding and although there was a review of bank activity and discussions about the journal entries prior to completion for the months under the new Director, the statements and entries did not include the proper signature indicating review and approval. This will be better coordinated in the future and will include the correct notation indicating review and approval. 2012-13-03 General Fund Budgets, Cash and Available Fund Balances: After post-closing entries, the General Fund unrestricted cash balances amounted to only $362,000 and General Fund unassigned fund balances amounted to $1.2 million. Unassigned fund balance represents available fund balance and equates to approximately 16 days of General Fund expenditures. This is a very low level of available resources. Unassigned fund balance declined $1.1 million from the prior fiscal year, and the cash balance remained depleted due to short-term cash borrowings from other City funds. The City should address the timely grant billing in the ---PAGE BREAK--- Agenda Item No. 5(E) Page 4 Capital Improvement Fund and any other funds with reimbursement-based funding so there is a clearer picture of the General Fund’s long-term available resources. Lastly, staff should determine a minimum cash balance needed for the “dry spell” and to finance cash flows for the overall City. The City must ensure this minimum cash balance requirement is not depleted. Response: They City shares the concerns expressed by the Auditor and has already implemented several actions that help better monitor and project the timing of expenses and revenues. The importance of restoring reserves is being addressed by ensuring ongoing expenses are supported by recurring revenues. This along with the actions discussed above will increase the availability of funds that can be set aside to build back the reserve. Significant Deficiencies and New GASB Pronouncements Additional items identified as deficiencies are less serious than those indicated as a material weakness, but they are important enough to be noted. Additional findings identified as significant deficiencies along with the new GASB pronouncements affecting future financial statements are discussed in more detail in the MOIC. Reviewed by: Scott Hanin City Manager Attachments: 1. 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