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Home My WebLink AboutCC 2026-05-26_09c ACFRItem 9.c. MEMORANDUM TO: City Council FROM: Nicole Valentine, Director of Administrative Services BY: Megan Schotborgh, Finance Manager SUBJECT: Acceptance of the Annual Comprehensive Financial Report DATE: May 26, 2026 RECOMMENDATION: 1) Receive and file the Annual Comprehensive Financial Report (ACFR); and 2) Determine that receiving and filing the ACFR is not a project subject to the California Environmental Quality Act (“CEQA”) because it has no potential to result in either a direct, or reasonably foreseeable indirect, physical change in the environment. (State CEQA Guidelines, §§ 15060, subd. (c)(2)-(3), 15378.) IMPACT ON FINANCIAL AND PERSONNEL RESOURCES: Preparation of the City’s financial reports requires approximately 250 hours per year of personnel resources and auditing services costing approximately $35,800 annually. BACKGROUND: State law requires that every general-purpose local government publish an annual comprehensive financial report (the “ACFR”) on its financial position and activity, and that the report be audited by an independent firm of certified public accountants. The goal of the independent audit is to provide a reasonable assurance that the City’s financial statements are free of material misstatements. In addition, the auditing firm is responsible for providing an independent review of the City’s internal financial controls. Th e City’s financial statements, internal documents, and financial controls have been audited by the certified public accountant firm of Moss, Levy & Hartzheim, LLP for the fiscal year ending June 30, 2025. A link to the City’s ACFR is included herein as Attachment 1. ANALYSIS OF ISSUES: Generally accepted accounting principles (GAAP) provide the criteria for judging whether a financial report is presented fairly. In defining the minimum standard of acceptable basic financial reporting for state and local governments, GAAP mandates a complete set of basic financial statements, including accompanying note disclosures, as well as the Page 27 of 466 Item 9.c. City Council Acceptance of the Annual Comprehensive Financial Report May 26, 2026 Page 2 presentation of certain required supplementary information. GAAP encourages government agencies to present this information within the ACFR. The ACFR provides a more detailed financial report beyond the basic financial statements. The ACFR is made up of three sections:  The Introductory Section: provides general information on the City, which includes the letter of transmittal, list of principal officials, and organizational chart.  The Financial Section: provides the overall financial information of the City, which includes the report of the independent auditor, management’s discussion a nd analysis (a narrative of the City finances), the basic financial statements, required supplementary information and other supplementary schedules and statements.  The Statistical Section: provides a broad range of operational, economic, and historical data that provides a context for assessing the City’s economic condition. This section provides information about the City’s general financial trends, revenue capacity, debt capacity, economic and demographic trends, and operating information. The City’s external auditors at Moss, Levy & Hartzheim, LLP conducted testing of the City’s internal financial controls in October 2025, and December 2025. The testing included reviewing the City’s procedures for receiving and disbursing cash, the accounting methodology used to record transactions, the separation of duties to avert collusion, and the City’s asset securities. As a result of this testing, there were no internal control issues/events noted by the auditors. An audit was also conducted on the net position of the City for the financial period ending June 30, 2025. Documentation in support of the assets, liabilities, and fund balance of all the funds in the City were examined and verified. This process assures an impartial review and substantiation of the City’s net position. The result of this review is documented in the City’s ACFR. The City’s ACFR complies with newly effective Government Accounting Standards Board pronouncements, as detailed in the Notes to the Financial Statements (see Page B-46 of Attachment 1). Auditors may issue three different types of opinions at the conclusion of an audit; an unmodified, modified, or adverse opinion. An unmodified opinion assures the reader that the information presented in the ACFR fairly represents the financial p osition of the City. A modified opinion states that the information is fairly presented except for a particular issue. An adverse opinion indicates that the agency has major accounting and/or internal control issues and no reliance may be placed on the financial statements. The Administrative Services Department staff is proud to report that for the fiscal year ended June 30, 2025, the City of Arroyo Grande received an unmodified opinion, reflecting that the information presented in the ACFR fairly represents the financial position of the City. Page 28 of 466 Item 9.c. City Council Acceptance of the Annual Comprehensive Financial Report May 26, 2026 Page 3 As presented in the ACFR, the City’s combined net position on June 30, 2025, increased by $2.3 million or 2.35% from $98.7 million to $101 million. This overall increase is due to an increase in governmental activities ($1.2 million) and an increase in business-type activities ($1.1 million). The largest portion of the City’s net position, $86.1 million, reflects investments in capital assets net of depreciation (e.g. land, buildings, infrastructu re, and machinery & equipment). The City uses these capital assets to provide services to the public; consequently, these assets are not available for future spending. Chart 1: Net Position The description of the City’s net position of all funds reflec ts all the assets and liabilities of the City. It includes the City’s investment in capital assets such as parks, bridges, and roads as well as the liabilities or obligations to pay vendors, employees, and debt service payments. The net position is the mathematical difference between assets and liabilities, but it does not necessarily reflect the economic health of an organization. In the City’s case, about 85% of the total net position reflects capital assets. While these assets are important, they cannot be used to fund the day-to-day operations of the City and, therefore, may not be the most useful measure of the City’s liquidity. For financial reporting purposes, the half percent Measure O-06 Local Sales Tax revenue, the one percent Measure E-24 Local Sales Tax revenue, and Other Post-Employee Benefits funds (OPEB) are combined with the General Fund in the ACFR. However, the City’s quarterly and year-end reporting is based on the General Fund exclusively and does not include the OPEB funds. The combined funds, as shown in Table 1, report total Page 29 of 466 Item 9.c. City Council Acceptance of the Annual Comprehensive Financial Report May 26, 2026 Page 4 revenues of $28 million and expenditures of $28.4 million. As a result, there was an overall decrease in the fund balance of $2 million during the 2024 -25 fiscal year. Table 1: Change in Fund Balance The ACFR reports a General Fund total fund balance of $15.9 million. However, a small amount of the fund balance is considered non -spendable because it is held as inventory and lease receivable ($1,063,999). Additionally, $4.8 million is designated for completing capital projects or meeting other commitments in the future, including post -employment benefits. This leaves an unassigned balance of $8.6 million in the General Fund and $169,261 in the Measure O-06 Local Sales Tax fund. The City’s Fiscal Policy establishes the maintenance of a fund balance reserve goal of 20% of expenditures with a minimum of 15% in the General Fund. At the conclusion of Fiscal Year 2024-25, the reserve, based on available General Funds, was 37.3% and exceeded the City’s reserve goal. ALTERNATIVES: The following alternatives are provided for the Council’s consideration: 1. Staff’s recommendation; or 2. Provide other direction to staff. ADVANTAGES: By receiving and filing this report, the City will be accepting the auditors’ unmodified opinion. As discussed above, an unmodified opinion assures the reader that the information presented in the reports fairly represents the financial position of the City. DISADVANTAGES: There are no disadvantages in relation to the recommended action. ENVIRONMENTAL REVIEW: Receiving and filing the ACFR is not a project subject to the California Environmental Quality Act (“CEQA”) because it has no potential to result in either a direct, or reasonably General Fund Measure O-06 Local Sales Tax Fund Measure E-24 Local Sales Tax Fund OPEB Total Beginning Fund Balance 7/1/24 11,604,740$ 5,017,872$ -$ 1,288,901$ 17,911,513$ Revenues 23,227,799 3,191,022 1,412,063 169,234 28,000,118 Expenditures (25,365,466) (4,633,451) (3,035) - (30,001,952) Net Change in Fund Balance (2,137,667)$ (1,442,429)$ 1,409,028$ 169,234$ (2,001,834)$ Fund Balance: Nonspendable 1,063,999$ -$ -$ -$ 1,063,999$ Assigned for capital projects - 3,406,182 1,409,028 - 4,815,210 Assigned for post employment benefits - - - 1,458,135 1,458,135 Unassigned 8,403,074 169,261 - - 8,572,335 Ending Fund Balance, 6/30/25 9,467,073$ 3,575,443$ 1,409,028$ 1,458,135$ 15,909,679$ Page 30 of 466 Item 9.c. City Council Acceptance of the Annual Comprehensive Financial Report May 26, 2026 Page 5 foreseeable indirect, physical change in the environment. (State CEQA Guidelines, §§ 15060, subd. (c)(2)-(3), 15378.) PUBLIC NOTIFICATION AND COMMENTS: The Agenda was posted at City Hall and on the City’s website in accordance with Government Code Section 54954.2. ATTACHMENTS: 1. Annual Comprehensive Financial Report for the Fiscal Year Ending June 30, 2025 Page 31 of 466 ATTACHMENT 1 Attachment 1 is available as a link: FY 2024-25 Annual Comprehensive Financial Report (PDF) Page 32 of 466