TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY
DATE: FEBRUARY 1, 2005
SUBJECT: FY03-04 COMPREHENSIVE ANNUAL FINANCIAL REPORT, AUDIT MANAGEMENT LETTER AND INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND INTERNAL CONTROL
Staff Coordinator: Kathryn Downs, Accounting Manager
RECOMMENDATION
Receive and file the following: (1) the FY03-04 Comprehensive Annual Financial Report of the City of Rancho Palos Verdes, and (2) Independent Auditors’ Report on Compliance and on Internal Control over Financial Reporting.
BACKGROUND AND DISCUSSION
Comprehensive Annual Financial Report (CAFR)
Each City Council Member has received a copy of the FY03-04 CAFR for the City of Rancho Palos Verdes. Finance Department staff has compiled the information contained within the CAFR, including a Letter of Transmittal or written summary of the City’s accomplishments during the past year, Management’s Discussion and Analysis, the financial statements and statistical information of the City and its component units (Redevelopment Agency and Joint Powers Improvement Authority). A separate set of financial statements for both of the City’s component units (inclusive of a separate audit opinion for each) is expected to be presented to their respective governing boards on February 1, 2005. A copy of the CAFR is currently available for review by the public in the reception area at City Hall. The CAFR has also been posted to the Finance page of the City’s website.
Finance staff has prepared the CAFR, and the City’s auditors, Vavrinek, Trine, Day & Co., LLP, have reviewed the document in its entirety. Staff believes that the FY03-04 CAFR meets the standards and requirements established by the Governmental Accounting Standards Board (GASB) for presentation of financial data, note disclosure and statistical information. The CAFR includes the audited financial statements and accompanying notes for the fiscal year ended June 30, 2004. The scope of the audit examination is limited to Management’s Discussion & Analysis, the financial statements and the accompanying notes, beginning on page 3 of the CAFR. Based upon their independent audit, Vavrinek, Trine, Day & Co., LLP have issued an unqualified opinion (clean opinion). The opinion letter is presented on page 1 of the CAFR.
Management Letter
A management letter is intended to call attention to matters involving the internal controls of the City’s accounting system. The auditors provide suggestions for improving the internal controls and efficiency of the of the City’s financial systems. Test procedures include discussions with staff about the internal control system and the general operating affairs of the City for the past fiscal year, tests of the internal control system, and other audit procedures deemed necessary to render an opinion on the City’s financial statements. For FY03-04, the auditors noted no matters involving the City’s accounting internal controls, and therefore did not issue a management letter.
Independent Auditors’ Report on Compliance and on Internal Control over Financial Reporting
The auditors expressed an opinion that the results of their tests disclosed no instances of noncompliance with certain provisions of laws, regulations, contracts and grants; and the auditors noted no matters involving the internal control over financial reporting and its operation that they consider to be material weaknesses.
Single Audit
A Single Audit of Federal financial assistance is required when local governments spend more than $500,000 for projects funded with Federal monies. The City expended $382,457 on Federal funded projects during FY03-04; therefore, a Single Audit was not required.
General Fund Reserves
In conjunction with the adoption of the FY04-05 budget on June 1, 2004, staff estimated that the ending General fund reserves would be $11,244,191 as of June 30, 2004. Upon the conclusion of the fiscal year ended June 30, 2004, the actual balance of General fund reserves was $14,066,002. Staff has prepared a comparison of estimated vs. actual General fund reserves as of June 30, 2004.
|
General fund |
June 30, 2004 |
|
Estimated reserves |
$11,244,191 |
|
Actual reserves |
14,066,002 |
|
Reserves in excess of estimate |
$2,821,811 |
Total actual revenues exceeded budgeted revenues by $1,978,997. A comparison of actual vs. budgeted revenue in the General fund for FY03-04 is provided below.
|
|
|
|
Actual vs. |
|
|
FY03-04 |
FY03-04 |
Budget |
|
Revenue Type |
Budget |
Actual |
Variance |
|
Property taxes |
$ 3,982,650 |
$ 4,243,546 |
$ 260,896 |
|
Property transfer tax |
303,800 |
409,532 |
105,732 |
|
Sales and use tax |
1,165,758 |
1,205,347 |
39,589 |
|
Transient occupancy tax |
10,100 |
31,286 |
21,186 |
|
Franchise taxes |
1,198,027 |
1,275,030 |
77,003 |
|
Utility user taxes |
1,794,145 |
1,850,877 |
56,732 |
|
Business license tax |
408,734 |
396,599 |
(12,135) |
|
Golf tax |
175,000 |
131,278 |
(43,722) |
|
Planning, building & safety, and other permits |
1,146,039 |
1,309,732 |
163,693 |
|
Fines and forfeitures |
78,500 |
101,788 |
23,288 |
|
Rental revenue |
253,065 |
291,376 |
38,311 |
|
Interest revenue |
163,000 |
191,369 |
28,369 |
|
Charges for services |
113,000 |
110,071 |
(2,929) |
|
Motor vehicle license fees |
816,100 |
2,029,877 |
1,213,777 |
|
Grant income |
90,538 |
96,484 |
5,946 |
|
Other revenue |
2,113,700 |
2,116,961 |
3,261 |
|
Total General fund revenues |
$ 13,812,156 |
$ 15,791,153 |
$ 1,978,997 |
A brief explanation of the reasons for significant variances of actual vs. estimated revenue during FY03-04 in the General fund follows:
- Actual property tax revenue was $260,896 more than the amount budgeted for FY03-04. Additionally, property transfer tax was $105,732 more than the amount budgeted for FY03-04. The favorable variances were probably due to the continued strength of property values throughout the City.
- Residential remodeling activities contributed to the City to receipt of $163,693 more licenses and permit revenue than the amounts budgeted for FY03-04.
- The City received $1,213,777 more vehicle license fee revenue than the FY03-04 budgeted amount. The budget was conservatively prepared with no backfill amounts due to the State budget crisis.
Actual expenditures were $754,649 less than budgeted appropriations. City staff continued to conservatively manage expenditures, resulting in favorable variances in most every General fund program. Therefore, the positive net variance of the General fund reserves was $2,821,811 for FY03-04 (a positive revenue variance of $1,978,997 plus a positive expenditure variance of $754,649).
Redevelopment Agency (RDA) Deferred Interest Debt
On November 1, 1997, the County and RDA entered into a Memorandum of Understanding to restructure the $10,000,000 debt owed to the County as part of the Horan Agreement. The accrued and deferred interest on the restructured $10,000,000 debt was retroactively calculated at a rate of 5 percent versus 7.7654 percent per the original debt agreement. Since 1998, the recalculated deferred interest debt of $3,111,400 has been reported in the Notes to Financial Statements section of the CAFR, but has not been recorded as a liability in the financial statements. This reporting treatment was employed due to the uncertainty regarding whether or not future RDA tax increment would be sufficient to repay the deferred interest debt owed to the County.
Recent RDA tax increment projections, last presented to City Council on September 7, 2004, indicate that sufficient tax increment may become available in future years to repay the debt owed to the County. Therefore, the $3.1 million deferred interest debt has been included in the City’s Statement of Net Assets. The change in reporting the deferred interest debt does not affect the budget or financial position of the City. The only financial statements affected by the change are the government-wide Statement of Net Assets and Statement of Activities (pages 11 and 12 of the CAFR).
FISCAL IMPACT
The FY04-05 Statement of Estimated General Fund Reserves (see Attachment A) has been updated to reflect the results of closing FY03-04.
Staff expects to present the FY04-05 Midyear Review to City Council in February 2005. At that time, staff will present a revised estimate of June 30, 2005 General fund reserves.
Respectfully submitted,
Dennis McLean
Director of Finance & Information Technology
Reviewed:
Les Evans
City Manager