TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY

DATE: FEBRUARY 21, 2006

SUBJECT: FY04-05 COMPREHENSIVE ANNUAL FINANCIAL REPORT AND INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND INTERNAL CONTROL

Staff Coordinator: Kathryn Downs, Deputy Director of Finance and Information Technology

RECOMMENDATION

1. Receive and file the following: the FY04-05 Comprehensive Annual Financial Report of the City of Rancho Palos Verdes, and the Independent Auditors’ Report on Compliance and on Internal Control over Financial Reporting.

2. ADOPT RESOLUTION NO. 2006- , AMENDING RESOLUTION 2005-53, THE BUDGET APPROPRIATION FOR FY05-06, TO INCREASE BUDGETED REVENUE IN THE GENERAL FUND.

BACKGROUND AND DISCUSSION

Comprehensive Annual Financial Report (CAFR)

Each City Council Member has received a copy of the FY04-05 CAFR for the City of Rancho Palos Verdes. 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 March 7, 2006. A copy of the CAFR is currently available for review by the public in the reception area at City Hall.

Staff believes that the FY04-05 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, 2005. 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 FY04-05, 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. A copy of this internal control report is attached (Attachment B).

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 $1,780,918 on federal funded projects during FY04-05, as follows:

- Community Development Block Grant (CDBG) elevator project ($458,908);
- Other CDBG projects ($142,147);
- Federal Emergency Management Agency (FEMA) and California Office of Emergency Services (OES) winter storm infrastructure repairs and clean-up ($634,194);
- Natural Community Conservation Planning ($16,068); and
- Transportation Efficiency Act (TEA) funded Crest Road overlay ($529,600).

The Single Audit is currently in process. Staff will report the results of the audit upon completion and issuance of the Single Audit report, which will occur before March 31, 2006.

In addition to the Single Audit, FEMA will perform a compliance audit in the future. FEMA may determine that grant monies paid the City should not have been obligated to the City. In light of the damage caused by Hurricane Katrina in 2005, Staff is concerned that FEMA is highly motivated to pursue any technicality when reviewing the City’s claims. If FEMA were to determine that grant monies should not have been obligated to the City, the City would be required to return some or all of the monies received. However if the City were to return grant monies to FEMA, the City would pursue reimbursement rights from other agencies for amounts paid to repair Western Avenue facilities, including Caltrans and the Federal Highway Administration. As mentioned previously, the City received $634,194 of FEMA and OES grant revenue during FY04-05.

General Fund Reserves
In conjunction with the adoption of the FY05-06 budget on May 31, 2005, staff estimated that the ending General fund reserves would be $11,179,791 as of June 30, 2005. Upon the conclusion of the fiscal year ended June 30, 2005, the actual balance of General fund reserves was $14,209,435. Staff has prepared a comparison of estimated vs. actual General fund reserves as of June 30, 2005.

A comparison of actual and budgeted revenue in the General fund for FY04-05 is provided below.

Total actual revenues exceeded budgeted revenues by $1,457,376. A brief explanation of the reasons for significant variances of actual vs. estimated revenue during FY04-05 in the General fund follows:

- Actual property tax revenue was $226,021 more than the amount budgeted for FY04-05. Additionally, property transfer tax was $92,326 more than the amount budgeted for FY04-05. The favorable variances were likely due to the continued strength of property values throughout the City.
- On January 24, 2005, City Council approved an adjustment to the Vehicle License Fee (VLF) revenue budget by more than $1.5 million after adoption of the FY04-05 State Budget, which provided Property Tax In-Lieu of VLF in replacement of the VLF backfill. Actual total VLF revenue (VLF and Property Tax In Lieu of VLF) received by the City was $506,193 more than the adjusted budgeted amount, which was based on a conservative estimate provided by the League of California Cities.
- As part of Proposition 57 approved by voters on March 2, 2004, one-quarter of the City’s FY04-05 Sales Tax was replaced with Property Tax In-Lieu of Sales Tax. The net favorable sales tax variance, including Property Tax In-Lieu of Sales Tax, was $62,575 or 5% of the budgeted amount.
- As reported to City Council on September 6, 2005, Building and Safety permit activity exceeded budgeted expectations. At that time, City Council approved a budget adjustment for Building & Safety expenditures in the amount of $36,000. The increased activity was offset with positive fee revenue variance of $174,781, which almost completely accounts for the total $179,292 permit variance.
- Interest revenue exceeded the budget estimate by $196,776 due to rising interest rates. The average investment earnings rate during the prior fiscal year was 1.535%, and the average earnings rate during FY04-05 was 2.233%.

Staff analyzed these positive revenue variances, determined the effect on FY05-06 revenues, and proposes one adjustment to the FY05-06 revenue budget. The City has received an estimate from the State Controller’s Office for FY05-06 Property Tax In-Lieu of VLF in the amount of $2,792,544. The current FY05-06 budget amount of $2,124,700 was also based on information provided by the League of California Cities. Staff proposes an adjustment of $667,844 to increase the Property Tax In-Lieu of VLF budget amount.

Actual expenditures were $978,612 less than budgeted appropriations. City staff continued to conservatively manage expenditures, resulting in favorable variances in most every General fund program. The most notable expenditure savings follow:

- Litigation efforts required $250,556 less than previously estimated by Staff;
- The general liability insurance deposit was approximately $76,000 less than budgeted; and
- As a result of the view restoration mediation process, view restoration expenditures were approximately $118,000 less than budgeted.
Estimated June 30, 2006 General fund reserves have been revised to include the positive FY04-05 variances (see Attachment A) and the increase of the Property Tax In-Lieu of VLF budget in the amount of $667,844. Staff has presented a revised estimate of June 30, 2006 General fund reserves within the staff report titled “FY05-06 Midyear Financial Report” dated February 21, 2006.

Respectfully submitted,

Dennis McLean
Director of Finance & Information Technology

Reviewed:

Les Evans
City Manager

RESOLUTION NO. 2006 -

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO PALOS
VERDES, AMENDING RESOLUTION 2005-53, THE BUDGET APPROPRIATION
FOR FY05-06, TO AMEND THE GENERAL FUND REVENUE BUDGET

WHEREAS, on May 31, 2005, the City Council of the City of Rancho Palos Verdes adopted Resolution 2005-53, approving the City’s budget for FY05-06: and

WHEREAS, The California State Controller’s Office has provided a FY05-06 estimate of Property Tax In-Lieu of Vehicle License Fees for the City totaling $2,792,544;

BE IT, THEREFORE, RESOLVED BY THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES:

The following adjustment be made to FY05-06 budgeted revenue:

Increase the General fund revenue budget as follows:

Property Tax In-Lieu of VLF #101-6000-312-30-00 $667,844

PASSED, APPROVED, AND ADOPTED THE 21st DAY OF FEBRUARY 2006.

___________________________
MAYOR
ATTEST:

______________________
CITY CLERK

State of California )
County of Los Angeles )ss
City of Rancho Palos Verdes )

I, CAROLYNN PETRU, City Clerk of The City of Rancho Palos Verdes, hereby certify that the above Resolution No. 2006- was duly and regularly passed and adopted by the said City Council at regular meeting thereof held on February 21, 2006.
_____________________________
CITY CLERK
CITY OF RANCHO PALOS VERDES