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CC 2015-01-13_08c Accept Comprehensive Annual Financial ReportMEMORANDUM TO: CITY COUNCIL FROM: DEBORAH MALICOAT, DIRECTOR OF ADMINISTRATIVE SERVICES¥ BY: RYAN CORNELL, ACCOUNTING SUPERVISOR ~ SUBJECT: CONSIDERATION OF ACCEPTANCE OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT DATE: JANUARY 13, 2015 RECOMMENDATION: It is recommended that the City Council receive and file the Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2014. IMPACT ON FINANCIAL AND PERSONNEL RESOURCES: There 'is no financial impact from this action. BACKGROUND: On April 22, 2014, the City Council awarded an agreement for consultant services to Moss, Levy & Hartzheim, LLP to audit the City's financial records for the fiscal year ended June 30, 2014. Audit services are retained for two reasons: first, to have an independent review of internal control; and secondly, to ensure that the resulting financial reports fairly represent the financial position of the City. ANALYSIS QF ISSUES: Generally accepted accounting principles (GAAP) provide the criteria for judging whether a financial report is fairly presented. In defining the minimum standard of acceptable basic financial reporting for state and local governments, GAAP mandate a complete set of basic financial statements, including accompanying note disclosures, as well as the presentation of certain required supplementary information in connection with the basic financial statements. GAAP encourages government agencies to present this information within the broader framework of a CAFR. The CAFR is a more detailed financial report beyond just the basic financial statements. It is made up of three basic sections: • The introductory section: provides general information of the City which includes the letter of transmittal, list of principal officials, and organizational chart. Item 8.c. - Page 1 CITY COUNCIL ACCEPTANCE OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT JANUARY 13, 2015 PAGE2 • The financial section: provides the overall financial information of the City which includes the r~port of the independent auditor, management's discussion and 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 auditors conducted testing of internal controls in June of 2014. The procedures for receiving and disbursing cash, the accounting methodology used to record transactions, the separation of duties to avert collusion, and asset securities were reviewed. As a result of this testing, there was one internal control issues/events noted. • In some instances, when the City receives payments for the Children in Motion program, the Recreation Services Department batches multiple payments received as one receipt. This batching process creates the inability to trace one individual payment to the bank deposit. Administrative Services staff will work with the Recreation Departments to create an additional report which will itemize all payments received. For further detail, see Attachment No. 2, Independent Auditors' Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with "Government Auditing Standards." In October of 2014, an audit was conducted on net position of the City at June 30, 2014. 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 the City's CAFR. The City's CAFR is in compliance with newly effective Government Accounting Standards Board (GASB) pronouncements. The implementation of GASB Statement No. 65 is the only new accounting pronouncement that had an impact on the City's financial statements. GASB Statement No. 65 reclassifies some amounts previously reported as unearned revenue as deferred inflows of resources. More information is available in Note 1, subsection N of the Notes to the Basic Financial Statements on pages B-44 to B-45. Item 8.c. - Page 2 CITY COUNCIL ACCEPTANCE OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT JANUARY 13, 2015 PAGE3 As presented in the CAFR, the City's combined net position at June 30, 2014 increased by 3% to $91.8 million as follows: Variance % Change FYE 2014 FYE 2013 CY to PY CY to PY Assets: Current and other assets 27, 174,570 24,944,287 2,230,283 9% Capital assets, net 75,413,760 75,216,839 196,921 <1% Total assets 102,588,330 100, 161, 126 2,427,204 2% Liabilities: Long-term liabilities 9, 151,050 9,359,820 (208,770) -2% Other liabilities 1,600,650 1,936,539 {335,889} -17% Total liabilities 10,751,700 11,296,359 {544,659} -5% Net Position: Net investment in capital assets 72,353,944 72,341,886 12,058 <1% Restricted 8,777,469 7,374,485 1,402,984 19% Unrestricted 10,705,217 9,148,396 1,556,821 17% Total net position 91,836,630 88,864,767 2,971,863 3% For financial reporting purposes, the Local Sales Tax Fund is combined with the General Fund. The combined funds, as shown in the table below, reports revenues and other financing sources of $16.8 million, expenditures of $13.7 million, and transfers out of $2.0 million. This resulted in an increase to the fund balance of $1.1 million. The General Fund's total fund balance is $5.0 million or 38% of expenditures (including transfers out). However, some fund balances are considered nonspendable because it is held as inventory ($8,518) or reflects prepaid items ($48,420). Additionally, $1.1 million is designated for completing capital projects or meeting other commitments in the future. Of the remaining $3.9 million fund balance, the City has committed $2.7 million to reserve for economic stabilization. Beginning Fund Balance, 7/1/13 Revenues and other financing sources Expenditures Transfers Out Net Change in Fund Balance General Fund 3,761,044 14,755,547 (13,426, 771) 1,328,776 Local Sales Tax Fund 1,897,349 2,079,242 (246,678) {2,044,406} (211,842) Total 5,658,393 16,834,789 ( 13, 673,449) {2,044,406} 1, 116,934 Item 8.c. - Page 3 CITY COUNCIL ACCEPTANCE OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT JANUARY 13, 2015 PAGE4 Local Sales General Fund Tax Fund Total Fund Balance: Nonspendable 56,938 56,938 Committed for capital projects 1,486,938 1,486,938 Committed for economic stabilization (reserves) 2,719,699 2,719,699 Assigned 1, 158,301 198,569 1,356,870 Unassigned 1, 154,882 1, 154,882 Ending Fund Balance, 6/30/14 5,089,820 1,685,507 6,775,327 Auditors may issue three different types of opinions at the conclusion of an audit; an unqualified, qualified, or adverse opinion. An unqualified opinion assures the reader that the information presented in the CAFR fairly represents the financial position of the City. A qualified 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, 2014, the City of Arroyo Grande received an unqualified opinion. ALTERNATIVES: The following alternatives are provided for City Council consideration: -Approve staff recommendations and receive and file the Comprehensive Annual Financial Report; Do not approve staff recommendations; Modify staff recommendations and approve; Provide direction to staff. ADVANTAGES: By receiving and filing the Comprehensive Annual Financial Report, the City will be accepting the auditors' unqualified opinion. As mentioned above, an unqualified opinion assures the reader that the information presented in the CAFR fairly represents the financial position of the City. DISADVANTAGES: There are no disadvantages in relation to the recommended action. ENVIRONMENTAL REVIEW: No environmental review is required for this item. Item 8.c. - Page 4 CITY COUNCIL ACCEPTANCE OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT JANUARY 13, 2015 PAGES PUBLIC NOTIFICATION AND COMMENTS: The Agenda was posted in front of City Hall on Thursday, January 8, 2015. The Agenda and report were posted on the City's website on Friday, January 9, 2015. No public comments were received. Attachments: 1) Comprehensive Annual Financial Report (on file in the Administrative Services and Legislative and Information Services Departments for public review, as well as on the City's website at www.arroyogrande.org) 2) Independent Auditors' Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards. Item 8.c. - Page 5 ATTACHMENT 1 Comprehensive Annual Financial Report (on file in the Administrative Services and Legislative and Information Services Departments for public review, as well as on the City's website at www.arroyogrande.org) Item 8.c. - Page 6 .1\hit MOSS, LEVY HARTZHEIM UP PARTNERS 2400 PROFESSIONAL PARKWAY, STE 205 RONALD A LEVY, CPA SANTA MARIA, CA 93455 CRAIG A HARTZHEIM, CPA TEL: 805.925.2579 HADLEY Y HUI, CPA FAX: 805.925.2147 vvww.mIhcpas.com INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS City Council of the City of Arroyo Grande Arroyo Grande, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Arroyo Grande (the City), as of and for the fiscal year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the City's basic financial statements, and have issued our report thereon dated November 13, 2014. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify a deficiency in internal control, described in the accompanying schedule of findings and questions costs that we consider to be a significant deficiency, see Finding 2014-1. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 1 OFFICES: BEVERLY HILLS • CULVER CITY • SANTA MARIA MEMBER AMERICAN INSTITUTE OF CPAs • CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS • CALIFORNIA ASSOCIATION OF SCHOOL BUSINESS OFFICIALS CERTIFIED PUBLIC ACCOUNTANTS ATTACHMENT 2 Item 8.c. - Page 7 City of Arroyo Grande's Response to Findings City of Arroyo Grande's response to the findings identified in our audit described in the accompanying schedule of findings and questioned costs. City of Arroyo Grande's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. w/o-id, ZAy. fii-/a-agiw:it, La Santa Maria, California November 13, 2014 2 Item 8.c. - Page 8 City of Arroyo Grande Findings and Recommendations June 30, 2014 FINDING 2014-1 CASH RECEIPTS 30000 Criteria: Adequate internal control procedures for cash receipt transactions require the collection and retention of sufficient documentation to allow for recalculation of any receipt. In addition, to ensure the correct accounting for cash received, the City should retain the ability to trace a receipt from the time it is billed and/or collected to the time it is deposited into the City's bank account and vice-versa. Condition: Receipts tested in the Recreation Department's Children in Motion program did not have adequate documentation to trace receipts received to the daily deposit. Effect: The lack of supporting documentation for cash receipts prohibited verification that all cash received was deposited into the local bank account and accounted for appropriately in the general ledger. Cause: In some circumstances, when the City receives payments for the Children in Motion program, the Recreation Department "batches" multiple payments received as one receipt into the cash register system. This batching process creates the inability to trace one individual payment to the bank deposit. Recommendation: Obtain and retain supporting documentation that provides what payments are included in each bank deposit for programs in order to reconcile cash receipts to cash deposited in the bank to protect against a misappropriation of cash that may go undetected. Corrective Action Plan: The City will update its internal control procedures to include and produce an additional report(s) so that the Children in Motion program receipt collection can continue to utilize batch processing. This additional report will itemize the payments received (i.e. payee, amount, etc.). 3 Item 8.c. - Page 9 THIS PAGE INTENTIONALLY LEFT BLANK Item 8.c. - Page 10