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HomeMy WebLinkAbout1980-12-09; City Council; N/A; Results of Annual Audit and First Quarter ReportC�J TO: City Manager tr 1: FROM: Finance Director <7_ _,, SUBJECT: 1979-80 Audit and 198 -81 First Quarter Report DATE: December 5, 1980 The attached reports summarize the results of the 1979-80 Annual Audit and the 1980-81 first quarter report. I will be available to present these reports to the City Council on December 9, 1980. Of particular interest to the Council will be the City's fiscal position as of June 30, 1980 and the projections for the rest of 1980-81. The City's position at the end of 1979-80 was relatively good. No serious problems exist that affect the present fiscal condi- tion. The Audit shows that, financially speaking, the City has been operating within the budget estimates. General Fund revenues were 1.9% above the final estimates and General Fund expenditures were 7.3% below the budget. A further description of the Audit is in the attached report. The quarterly report for the first quarter of 1980-81 reflects a cautious -assessment of our current fiscal position. it appears, based on the data presently available, that we can expect to experience a small savings in salary expenses that can be used to offset increased utility and maintenance costs. The total expenditure estimate appears to be acceptable at this time. The revenues are flowing slightly ahead of the anticipated rate, however no adjustments are recommended at this time due to the uncertain economic conditions facing the City in the second and third quarters of this year. Further information is contained in the attached report. JE/pt Referenced Audits are on file in the City Clerk's Office. Council Action: 12-9-80 Council took no action, but received the reports presented by staff. r 'TO: CITY COUNCIL and CITY MANAGER , Nt FROM: FINANCE DIRECTOR SUMECT:, 1979-80 AUDIT REPORT the purpose of this letter is to present an analysis of the 1979-80 audit: report prepared by George A. Peterson £; Co. By reviewing the significant points presented in the audit report, the City Council is provided with the opportimity to become better educated on issues dealing with the City's financial function. The purpose of the annual City Audit is to provide information to the City Council and the City i=L-nager on the financial position and results of operations of the City during the preceding fiscal year. The audit report reviews and comments on internal control procedure ' and accounting practices utilized by the Finance Department. The goals and o'ejectives of an audit. report are two fold: 1. To dorermine if the City's financial statements present fairly the financial position and results of operations o� the City on an account- ing basis consistent with the preceding year. 2. to deterinine compzl.<�rice with legal provisions relating to finances - tiie iu7.ari. 4 0 Fiscal operations. The annual City Audit actually consists of two audit reports. One reports on the financial condition and operations of the City Water Department. The other reports on the results of operations for all of the ether City Amds - General fund, Special Revenue funds, Debt Service funds, Construction funds, Trust funds and others. The Waiter Department requires a seperate audit because revenue bonds have been issuad by the Water Department which are special obligations of the Cit.), socured by a lien on the. gross revenues of the Water Department. The City is required to generate each year sufficient: gross revenue from water operation ::o cover water operating expenditures and the a,uival debt service requi Vement on the Water Revenue bonds. A seperate audit: statom at insures to bond holders that •rile annual gross revenue requirements are being met. In effect, the annual City Audit serves as a report card on the financial administration of the City. Utilized properly, the audit , report is an excellant docunent to inform and educate people on both the financial condition and financial administration operations of the city. Page 2 ' � 4 The analysis of the 1979-SC audit report is presented in the following order: 1. Combined Balance Sheet - all funds fiscal year 1979-80 2. Comparat:ilre Statement of Revenues and Expenditures - by fund fiscal year 197S-80 3. Water Enterprise Fund - statement of operations fiscal year 1979-80 4. ScJiedul.e of Trust and Agency Fund Deposits a 5. Schedule,of Investments 6. Schedule of General Fixed Assets a• 7. Schedule of Bonds Payable These, schedules will serve as a basis for a report on the Annual Audit that will be presented to the City Council on December 9th. The Finance Depart- ment will provide, an audit narrative that will .explain the significant high- lights of the audit report. Appropriate graphics will also be utilized to assist in the presentation. FR:pt r 00 00 Ci1 M O .- 0CS $�0 r 00 .:• O O O• C)J r M 0l O U\ O Ol -T O1 -• M m to N h M i.1 w 1 , L j•J C co M M Pl .•-• r W li % M 00 Ci L Ln r -T wi In W w N r Ln •y M i•J •-- Lf �-T N M U1 . m L n a N LA LA 0 O OO f� M O l N M O -T O O li N 00 N aN O N L M r- CO Ol -:l' cn W 00 M 00 M L.n 41 ,-« W r O O r N- z V O C U. U\ n �.o m •U •d 1 W Ln M Ol O O W> O N N CA, co a W -1 W cn to CC •z' W UJ e- d � C� N O r•.+ Is- W Ml —'a J IL M 1-• O W M W •-• Q -7 w+ M •.y' p ca (0 w w In W h •� N w C O Ln r h "x , W w �a O 0 W u i In W J.J N JN•t tW C C 0 W •-• < " E in 41 . JJ "O 4J e0e X i 0 > d N— c a. U. < N � vl •W W C W .- W 'O f5 VI to U -C • c c 41 q u w 0 � ca to h Oo O W al 00 CU w w N •�' r N N -:r N *10 N f� C' 1 s ph 0 Ln M Ln r r �h O C)O OW'1 O 'V N E-41, O 00 00 00 Ln :1 .^- .� LLrN N LA w w w w W N M co > L W tn f-� t7 h Ln Co h ir. LMn C) C) O O. f= O O O N O% O N U1 -:3• 00 Oi O N1 +J h Nl M 00 r Ln U w w � •- r W O L- V) C O U r LA �10 N O m 4-J O N M CA Cif •CL w •�• W .�• �' �• M m -' r. o 00 Co rn v N \0 Nto N M O LL. > M D Ol 'M OML 110 0) r*l CF% w h W M -T N w O r• .7' O h N N N •- h c w w w O r- LA •._ JJ L W a 0 C� O41 m m •_ N G m M W I JWi O to W G �L N V1 U a G O > W X: L � a a v m V) •IA X to E Q VI O) -O O LL. c a -aa w cno c •-- W w C .- I V u > 0 •_ f0 +,J U. C L L ' VI •- W 0 C W •+0 W V! to C •L V W W W JJ W k C a .Ca � p W C I, m W •- v W C O •- �. r .�+ > U IA M -a J C V VI ro — N 0 JO•i •— 41 a ..E W cc E u m W ►- G > J•J m CO O •.. O N L, L L N L .a O 'V W O W W 41 •O m m U C X V) .c > C C +J . r V r J < to O C C0 O ti H v Combined Balance Sheet - All Funds An analysis of the Combined Balance Sheet for all funds reveals the following significant data by fund classification: General Fund: Iri order to increase their base year appropriations, Proposition 4 made it advantageous for Cities to -reduce their General Fund balances by transferring General Funds to Reserve Funds. Two Reserve Funds established due to proposition 4, the Capital Construction Reserve Fund and the Maintenance and Operation Reserve Fund, have been included in the General Fund Balance Sheet. The effect of this inclusion has been to increase General Fund Cash and Investments assets and Fund balance equity accounts by 5.5 million. S_ eeccial,Revenue Funds: Special Revenue Funds include such funds as Gas �"a.x, Sewer Construction Sanitation, Street Lighting, Revenue Sharing, Park -in -Lieu, and Housing. Special Revenue Funds are used to account for .the proceeds of specific revenue sources or to finance specified activ- ities as required by law or regulations. 3.6 million is included in the Special Revenue Funds Reserve for Continu- ing Appropriations. 1.4 million in Revenue Sharing Funds (.8 rai.11ion to be utilized for the swimming pool) and 1.9 million in Sewer Construction Funds (Encina Phase Three) comprise the major portion of these continuing appropriations. The recievables and payables are primarily attributable to the Housing and Urban Development Fund. t, Other Funds: Comprised of Debt Service and General Long Term Debt Funds, Trust Vu_n and General Fixed Assets. General Obligation Bonds Outstand- ing, primarily 1962 Sewer Sewer Bonds, at the close of fiscal 79-80 totaled $1,340,000.Payroll, Contractor and Miscellaneous Trust deposits amounted to 1.5 million. General Fixed Assets (land, buildings, improve- ments and equipment) totaled 6.9 million. Future capital lease obligations (Building Authority and Library Equipment) amount to $382,000. The Balance Sheet of the Water Entorprise Fund reflects a total depreciated valuation of the Utility plans in service off.- 5.3 million. Liquid Assets (cash and investments) are at a very sound level of 2.5 million, 300 of total. Water Enterprise assets. Water Revenue Bonds Outstanding, primarily the 1970 Series A issue, total $1,457,000. Contractor contribu- tions to the utility plant in service amounts to 2.2 million. The Water Enterprise Funds retained earnings (Fund Balance) as of 6-30-80 stood at 3.1 million. Retained earnings are particularly high in the Water Enterprise due to past practices of 1. not charging enough General Fund overhead in providing services to the I*iter Department and 2. including the cost of Capital Project Improvements to the Water System in the annual operatijib expenses of the system. i Equity Fund Balance: For all funds, the Unappropriated Fund Balance stood at 7.4 million at the close of fiscal 79-80. This amount is appor- tioned as follows: • General Fund (including Capital and Maintenance and Operation Reserve Funds) - 4.1 million Special Revenue Funds - .1 million Debt Service Funds - .1 million Water Enterprise Fund - 3.1 million These Equity Balances have been applied to funding considerations in the development of the 5 year Capital Improvement Program. l t Audit Narrative - M,.at does the Audit Report mean? The results of fiscal 1979-80 operations are very encouraging and indicate that the City continues to remain financially sound. The major accounting component of the City's financial operations is the General Fund. During 1979-80, General Fund revenues amounted to 9.6 million, exceeding estimated budgeted revenues by $179,000. General Fund operating expenditures totaled 8.8 million, $695,000. less than appropriated. Total 1979-80 General Fund revenues exceeded expenditures by $87S,000. This table of General Fund revenue and expenditures reveals the following trends over the past 5 years. A. M, S:\UES 7.5-76 % - 76-77 % 77-78 % 78-79 % 79-80 % SALES TAX 1.1 (20%) 1.4 (20%) 2.0 (23%) 2.4 (340) 3.0 (31-S) PROPERTY TAX 1.4 (250) 2.8 (39 a) 3.3 (38%) 1. 5 (210) 2. 5 (26 ) INTERGMF. REV. .5 (90) .6 (9%) .9 (100) .8 (11%) 1.0 (10%) OMER 2.6 (46%) 2.3 (32%) 2. S (29%) 2.4 (34o) 3.1 (33%) TOTAL S.6 7.1 8.7 7.1 9.6 EXPMITURES 75-76 % 76-77 % 77-78 % 78-79 % 79-80 % GENERAL GOVT. 1.6 (35%) 2.0 (34%) 2.1 (29%) 2.3 (29%) 2.7 (31%) NON DEPT. .6 (13%) 1.1 (199.) 1.6 (22%) 1.9 (23 Q) 1.8 (20%) PUBLIC SAFETY 1.5 (33%) 1.8 (31%) 2.4 (33%) 2.6 (32a) 2.9 (33%) PUBLIC WORKS .9 (19%) 1.0 (16%) 1.2 (169.) 1.3 (16%) 1.4 (16%) TOTAL 4.6 S.9 i;` 7.3 ^ { . 8.1 8.8 NET RMTMIES 1.0 1.2 1.4 (1.0) " .8 L' ENDITURES FIGURES IN MILLIONS OF DOLLARS 4 Revenues The General Fund is becoming, more dependent upon Sales Tax revenue and ' less reliant upon Property Taxes for its revenue base. This is a natural result of proposition 13 tax limitations. Intergovernmental revenue - (State apportionments) have remained steady while other revenue (charges for services, investment earnings, transient tax) etc.) have become more an increasingly important revenue base. Expenditures Total General Government expenditures have remained a relatively constant 30% of total General Fund expenditures. Expenditures for Public Safety also have remained steady at 330 of total General Fund expenses. Public Works expenditures continue to hold at approximately 10 of General Fund total expenses. Non -Departmental expenses (retirement, insurance, capital improvements) amounts to approximately 20.1 of General Fund expenses. The following graph illustrates the General Fund revenue and expenditure trends during the last 5 years. General Rmd S Year Comparison of Total Operating Revenue and Expenditures 10 wj 8 HILLIO,\1S OF DOLLARS 7 [.1 S Iy� 75-76 76-77 77.78 78-79 79-80 --•------ Revenues ..._ .�.._... Rwallditures t A comparison of the revenue and expenditure trends for the other funds in the City's financial operations during the last 5 fiscal years is summarized as follows: FISCAL YEAR 75-76 76-77 77-78 78-79 79-80 SPECIAL RE'iENUE FWDS: REVENUE 1.2 1.2 1.4 1.7 2.8 ,s EMIENDITURES .9' .9 1.2 1.5 , 2.3 NET .3 .3 .2 .2 „...5 SEWBR CONSTRUCTION FUNDS: REVENUE .2 .6 ,.4 .3 .1 10TMITURES -- -- .1 .4 .2 { NET .2 .6 .3 G 1) t.1) BOND REDEWTION FUND",: REVENUE .1 .2 .2 .2 .2 EXPENDITURES .2 .1 .1 .1 .1 NET G 1) .1 .1 .1 .1 ` WATER ENTERPRISE FUNDS: REVENUE 1.3 1.3 1.4 1.5 1.8 EXPENDITURES .9 1.0 1.1 1.4 1.4 NET ,4 .3 .3 .1 .4 ` FIGURES IN MILLIONS 0P DOLLARS Water Enterprise Fund Fiscal 1979-80 operating results for the Water Enterprise Fund are also encouraging. Operating income of $158,000. was generated from operating revenues of 1.49 million and operating expenditures of 1.33 million. C}ty Water Revenue Bond Resolutions require that the {dater Enterprise Fund annually generate sufficient net revenues to insure that the dent service annual requirement for the Water Revenue Bonds are met. During 1979-80, the Water Enterprise Fund generated sufficient net revenues to fulifill the revenue bond debt service requirement. Water operating income of $158,000. was increased by non -operating revenue of $315,000. resulting from investment earnings ($233,000.) and sales of fixed assets ($82,000.). Operating -income was reduced by $77,000. due to non -operating expenses for bond interest and fiscal. agent fees. The net effect of the non -operating revenues and expenses served to increase the Water Enterprise Fund net income during fiscal 1979-80 to $396,000. The following graph summarizes the Water Enterprise Fund Revenues and Expenditures during the last five fiscal years. Water Fnterprise Fund S Year Comparison of Operating Revenues and Expenditures r' 2.0 1.7S i t 1.50 MILL10NS OF DOLL416 1.25 'S a \1.0 FISCAL 75-76 76-77 77-78 78-79 79-80 Yr:AR -Revenues Expenditures FISCAL YMR REVEIdUISS EXI>F1vM URFS 75-76 1•,257,334. 886,233. 76-77 1,271,153. 993,602. 77=78 1,388,195. 1,114,962. 78-79 1,474,138.. 1,406,443. 79-80 1,806,817. 1,411,132. T City of Carlsbad » Schedule of Trust and Agency Fund EMosits June 30, 1980 Sewer Revolving Fund 61,408. Trust Funds - Payroll 150,000. Trust Funds - Miscellaneous 531,345. Trus'c Funds - Contractors 778,335. TOTAL: Trust and Agency Fund Deposits 1,521,088. • 4. IN y. City oof Carlsbad Schedule of Investments June 30, 1980 IWESWENT TYPE AMOUNT % of TOTAL Certificates of Deposit 7,275,000. 55% , Federal Farm Credit Bureau Notes 1,100,000. 8% Bankers Acceptance Notes 2, 444, 271. 18% ' State of California - Local Agency Investment Fund 2,511,998. 19% TOTAL INJESTNIENTS,: June 30; 1980 13,331,269. 100%' Cextific,tes offDDeposit - Typical rates paid by major banks on new issues oTnego —negotiable Cer— ti ates of Deposit. Federal Farm Credit - Government backed instruments utilized to purchase mortgages from b- awn cs - Federal Land Bazflc Bonds. Bankers Acceptances - Negotiable, bank backed business credit instruments typically -financing an import order. State of California - Local A ency Investnknt Fund - Agency agreement with State of Galil6rnza whereby Carlsbad maxim z� es iHbrest return of short term cash float through State pooling of municipalities short term funds. CITY OF CARLSBAD ' SCHEDULE OFCI�:dLRAL FIXED r • Year ended June, 30, .1980 i• Balance Balance June 30, 1.979 Additions Disposals June 30, 1980 Land $ 333,885 $ 100,895 $ $ 434,780 Buildings 689,985 485, 807 �l,i 75, 792 .Other improvements 2,480-,139 267,,820 2,747,959 Furniture and equipment 1,.947, 289 ' 149,521118,13?. 1, 9"78, 678 Lease property - under capital lease (Note ,6) 562,226 _ 562 226 -- --- Total general fixed assets �. - r •s0,013,524 $1,004,043 $17.8, 1.32 $6, 899 431 . , _ 1 11 e t . , I 4 'City of Carlsbad • Schedule of Bonds P_ ayable June 30, 3.980 TYPE AMOUNT % to TOTAL General Obligation Bonds 1962 Sewer Bonds Series A 310,000. 23 , 1962 Sewer Bonds Series B 600,000. 45 1962 Sewer Bonds Series C 240,000. 3.8 1966 Library Bonds 190,000. 14 TOTAL: General Obligation Bonds Payable 1,340,000. 100% • Water Revenue Bonds 1958 Waterworks Revenue Bonds 367,000. 25 1960 Watex<"rorks Revenue Bonds 225,000. i5 1970 Waterworks Revenue Bonds Series A 865,000. 60 TOTAL: Water Revenue Bonds Payable 1,457,000. 100% 0 November 5, 1980 TO: City Manager FROM: Finance Director SUBJECT: Quarterly Report - First Quarter 1980-81 Introduction This report is intended to give an overview of the fiscal operations of the City of Carlsbad during the first quarter of 1980-81. This is done in two sections; Revenues and Expenditures. Both sections show the relationship of current operations (through September 30, 1980) in relation to prior years experience and projected balances for 1980-81. The revenues for 1980-81 appear to be flowing well in comparison to both prior years and current estimates. there are no significant problems in the general fund and most other funds seem to be either keeping pace with or running slightly ahead of estimated year end figures. The rate of expenditure for operating at the end of the first quarter of fiscal i980-81 is slightly below the expenditure rate generated in fiscal 1979-80. Ex- penditures for salaries and maintenance & operation are well within their budgeted appropriations, with the exception of Utility expenditure accounts. The overall E level of expenditure suggests that the City will experience a salary savings of 2 this fiscal year while overall maintenance and operation expenditures will fall within their appropriation limitations. The utility expense accounts will require close monitoring to assess the impact of proposed utility rate increases. ; E REVENUES General Fund The General Fund revenue for the first quarter of 1980-81 is $1,899,150 or about 18%, of the total $10,741,000 estimated in the budget. This compares well with the first quarter of 1979-80 where about 14% of total revenues of $9,586,000 had been received. During the past four years, as the City depends less on property tax and more on other sources of funds, the percentage of total revenue received in the first quarter of each year has grown. Property taxes are disbursed twice a year in relatively large blocks. As the property tax plays a smaller role in the City's financial picture, the quarterly revenues will approach 25% of the annual total revenue (Figure 1). Y FIGURE 1 ' PERCUNT OP TOTAL R1*VPN(1H • wH)'Cl"IVl:D - FIRST OUAR"FUR GOHMAL MIND � E of Total Revenue Received{•`�* �,�' 20 t.+ is 10 _ 1 As the importance of property tax decreases, the quarterly distribution of revenue begins to flatten out. In 1976-77 only 8.4% of the total General Fund Revenue was received in the first quarter. By 1980-81 the percentage has climbed to 17.7%. 1976-77 1977-78 1978-79 1979-80 1980-81 TOTAL 1ST QUAl2TF.R PF.RCHNT 1980-81 10,726,000 1,899,150 17.7• 1979-80 9,S8S,975 1,330,M 13.9 1978-79 7,191,105 92S,314 12.'3 19077,-78 8,7S2,321 791,690 9.0 1976.77 7,109,9SS S96,517 8 A The primary factors in the General Fund Revenue-' il`ture—(Figure 2) are sales tax and property tax. These two sources amount,,to 62% of M the itotaJ1 General Fund Revenue base. _. FIGURE 2 General Fund Revenues Sales Tax 33% Property Tax 29% Other '38% 2 2D M 10 f t S '5 1990-8{ 1979-80 19T8-79 1977-78 1976-77 Sales taxes are very dependent upon the regional economic climate. The current estimate of $3,550,000 for sales tax was based on three factors: the opening of another major store at Plaza Camino Real, inflation of about 10% to 12% and a real increase in dollars spent in Carlsbad of about 10110. If the economic climate in Carlsbad does not satisfy these assumptions, the sales tax revenue will be less than estimated. To date, sales tax revenue has been on target. Compared with previous years we would expect to see approximately 20% of the annual revenue received in the first quarter (Figure 3). This year a total of $772,357 or about 22% of the estimate has been received by September 30. Although this is a good sign, a severe turn down in conditions for sales in the second quarter could reduce sales tax revenue in the third quarter to lower than anticipated levels. These trends are difficult to verify prior to the State Board of Equalization disbursement of tax revenues which takes place two to three months after collection. FIGURE 3 PERCENT OF TOTAL SALES TAX REVERVE RECE1lE0 FIRST QUARTER GENERAL FUND 1976-77 77-78 78.79 79.80 80-81 Total Sales Tax Pcvenur First wrtnr t 3,550.000 (est.) 772,357 21.8 2.959,586 631,100 21.3 2,389,832 474.663 20.0 1,967,968 298,222 15.2 1.402.841 251,109 17.3 $s0o,000 $400,000 $300,000 t200,000 1200,000 3 SAM'S TAX RI'l'1EMIF l"FCM11 11Y ?M! r-MAL WAR 15179-S0 ;, l�riSlt-S! July Aug. Sent. Oct. Nov. Dec. Jan. Feb. Afar. Ann, May Juno Fiscal MAO Fiscal 90.81 i i Property taxes are disbursed by the County in two payments in December and April each year. The estimated revenue of $3,1 million has been based on an assessed value of $361 million for the City of Carlsbad. By the end of next y.,arter we should be able to comment on the accuracy of this estimate. The other General Fund Revenues, on a percentage basis, appear to be tracking slightly ahead of the first quarter of last year by roughly 6% to 7%. This dif- ference appears to be primarily due to interest received from investments maturing during the first quarter of 1980-81. Last fiscal year had relatively few invest- ments maturing during the first quarter and therefore had very little interest revenue received in that time period. This year, interest rates are running 4% to 6% below last year's level. We can assume, then that unless there is a signifi- cant upturn in rates during late 1980-81, this apparent increase in interest revenue will be offset by lower receipts in the next three quarters. On the whole the receipt of General Fund Revenues compare well with past years. The total estimated revenues of $10,741,000 appears to be relatively good based on infor- mation available to date. Additional information is contained in Exhibit 1. Other Funds Revenues in the other City Funds are generally slightly ahead of last year's pace. The funds of major interest at this time are the Gas Tax Fund, Sanitation Fund, Street Lighting Fund, Sewer Construction Fund, Revenue Sharing Fund, Public Facil- ities Fund and the Park -in -Lieu. Gas Tax - During the first quarter of 1980-81 the State distribution of gas tax revenues has been slightly ahead of our projections. This year's estimate of $333,400 was based on data provided by the State reflecting a decrease of about 12% in State Gas Tax Revenue for 1980-81 from the prior year. This decrease may yet be realized if gasoline prices soar during the winter months thereby reducing consumption. The`1980-81 estimate is conservative and should not be amended at this time. Sanitation - The Sanitation Fund is of special interest due to its nature. Sewer rates were set in October 1979 by Council resolution. These rates are the sole support of the sanitation fund and therefore must be watched closely to insure that major under -or overruns do not occur. At present, sewer revenue is running at an annual rate of $567,000 or about 6% ahead of the budget estimate of $533,000. Street Lighting - This is a special fund supported by assessments against property in Carlsbad. The distributions to the City are made by the County as taxes are collected. To date, only minor delinquent payments have been received. The total estimated revenue figure of $290,500 is based on assessments of about $280,100 and City contributions of about $10,400. The major factor in the condition of the Street Lighting Fund at this time will be the S.D.G.& E. rates applicable to street lighting. If these rates increase significantly over the next nine months, further assessments or general fund support will be necessary, , 4 Sewer Construction - The 1980-81 estimated revenue of $700,000 is based on the sale of 700 EDU's at $1,000 each. To date 177 EDU's or about 25% have been sold. In addition, about $20,000 in interest earnings have been recorded in the first quarter. The estimate of 700 EDU's still appears to be reasonable according to the City Engineer. The total revenue, however, should be adjusted upward by about $60,000 to reflect interest earnings in 1980-81. In addition, the City has now implemented a sewer surcharge that will yield approximately $28,500 per month for the rest of 1980-81, or about $256,500. These adjustments will raise the total sewer construction fund revenue to about $1,016,500. Revenue Sharing - The future of the revenue sharing program is presently clouded by the•failure of Congress to pass funding legislation prior to the election recess. The November session must now take up this question. Differences exist in the House and Senate versions of the revenue sharing bill that may cause further delay. The estimate of $530,000 for Fiscal 1980-81 was based on four quarterly payments plus interest earnings. If the payments are not forthcoming, this figure would be reduced to as little as $160,000, one payment plus interest. This will impact the CIP.process by removing as much as $500,000 per year from available funds. Public Facilities Fee - The 1980-81 estimate of $67,500 for Public Facilities Fees was based on the 1979-80 activity plus a small inflation factor. This is obviously not a scientific method for determining revenues and does not reflect planned development for 1980-81. During the next quarter, we will devise a method for forecasting public facilities fees that will take into consideration the development climate. Revenues to date are running slightly ahead of the projection. This estimate will be adjusted next quarter when more useful data will be available. Park -in -Lieu - The Park -in -Lieu Fees are very similar to public facility fees in their rglationship to development. As we create a PFF forecasting model, the PIL fees can also be estimated. To date, the PIL revenue is slightly ahead of the estimate. As with the PFF, the PIL estimate will be revised next quarter. OPERATING EXPENDITURES ,General Fund At the close of operations for the first quarter of fiscal 1980-81, General Fund Ex- penditures for Salaries and Maintenance and Operations purposes totalled $2,145,200, amounting to 21% of the fiscal 1980-81 General Fund appropriation for these services. General Fund salary expenditures totalled $1,263,599, 212 of total budget, while General Fund Maintenance and Operations expenditures amounted to $881,601, 20% of total fiscal 1980-81 budget. The rate of expenditure during the first quarter of 1980-81 compared favorably with the rate of expenditure during the first quarter of 1979-80. At the end of the first quarter of fiscal 1979-80, total General Fund expenditures for Salaries and Maintenance and Operations ►vas $1,737,757, or 2200 of the 1979-80 total annual expenditures. r lilt 00 sO The rate of General Fund expenditures at the end of the first quarter 1980-81 needs to be analyzed with the following considerations. The 21% pace,of expend- itures for salaries reflects the recording of six of twenty-six payroll periods during the first quarter. In effect, 23% of the City's total year payroll lia- bility has occurred during the first quarter, while the expenditures have totalled 21% of the fiscal year appropriation. The 2% spread between liability and actual expense indicates that the City is experiencing the same level of turnover and salary savings as occurred in fiscal 1979-80. If the 2% salary savings trend holds consistent throughout 1980-81, total year General Fund salary savings of t�pproximately ,$118,000 would be realized. The rate of expenditures for General Fund Maintenance and Operations purposes at the close of the first quarter stood at 20% of the total fiscal year appropriation. The actual recording of maintenance and operations expenditures lags approximately 5% behind the true expenditure rate. This lag factor is associated with the paper flow process involved in recording expenditure authorizations issued by purchasing onto the expenditures accounts through the accounts payable process in Finance. Eliminating the 5% lag factor in recording expenditures coupled with the 20% rate of Maintenance and Operations expenditures totals a 25% true rate of M & 0 expend- itures for the General Fund through the first quarter of fiscal 1980-81. A com- parison of fiscal year 1979-80 and 1980-81 is shown in Figure 4. FIGURE 4 G11N1:R4L_FIIND OPPRATIONS )MPEN1111'UR11s BY MONTH . - FISCAI. Y-PAR 1979.80 P, 1980-81 July Aug Sept Oct Nov --_,Dee Jan Fob liar Apr flay June 1979-80 1980.81 J j MONTHLY EXPRNPITURE LEVELS - GENERAL FUND w 1 1979-80 r , t 1980-81 July 401,447 July 700,553 Aug 771,349 Au}; 624,192 Sent 618,873 Sept 820,4SS Oct 702,638 ; Nov 820,134 " Dec 654,532 Jan 649,706 Feb 498,226 liar 614,739 Apr 508,785 May 1,077,648 ,111110 804,474 Other Funds The .level of expenditures in the Sanitation & Water Pollution Fv-d totals $109,742, or 21% of the fiscal 1980-81 appropriation at the clos.-of the first quarter operations. These figures are significantly lower than the level of 1979-80 expenditures which stood at $205,266 or 40% of budget as of September 30, 1979. The primary reason for this decrease in the rate of expenditure is the reduced payments in the Water Pollution Professional Services Account associated with the Encina Water Pollution Control Facility Expenses. Expenditures in the Street Ljqj]ting Fund totals $59,335 as of September 30, 1980, or 20% of the total fiscal 1980-81 street lighting appropriation. This figure is significantly higher than the level of 1979-80 expenditures which stood at $33,513 as of September 30, 1979. This increase in expenditures is attributable to sharply increased rates for energy, a topic which is discussed in the next section of this expenditure analysis. Expenditures for Housing and Redevelopment total $156,935, or 25% of the 1980-81 appropriation for that function as of September 30, 1980. The City is accounting for all of the Housing and Redevelopment activities as part of the City's financial statements for,1980-81. During 1979-80, the total Housing and Redevelopment oper- ations were accounted for separately T om the City's financial statements. Utility Expense - Expenditures for utilities, specifically gas, electricity and water, have risen dramatically during the 1st quarter of fiscal 1980-81 as compared to fiscal 1979-80. Recent rate increases granted to S.D.G.&E. of 25% in April, 1980 and 37.6% in July 1980 are indicator., of the increased level of expenditures required of the City to meet its energy needs. Additionally S.D.G.&E. has a 50% rate increase before the P.U.C. scheduled for implementation in January 1981. This increase would add about $250,000 to the City's utility costs by the end of 1980-81. (Figure 5). FIGURE 5 1980-81 Actual and Projected Accumulativ Level of Expenditures for Utilitios-All Funds 600, 1000 200,E Utility ^'- 1980-81 Current Level of Expenditures { `-' ^-- —1980-81 Projected Level of Utility ! Expenditures-50t Fate inc.Jan.81" The current rate of expenditures for utilities at the close of the lst quarter 1980-81 suggests that, even with further rate increases for 1980-81, that the General Government Administration Department will require an additional appro- priation of $12,868, while the library wil"1 require an additional appropriation of $14,424 to cover their 1980-81 utili'ty expenses. Total General Fund expend- itures for utilities during the first quarter of 1980-81 amount to $51,990, an increase of 44% over the level of first quarter 1979-80 utility expenditures. Utility rate increases have significant impact upon expenditures for street lighting. During the first quarter of 1980-81, utility expense for the street lighting.fund amounted to $74,937, or 59% above the level of 1979-80 expenditures for the same period. Based upon first quarter 1980-81 expenditure levels, the street lighting fund will require an additional appropriation of $55,122 to cover its total 1980-81 energy costs. The condition of the utility expenditure account will be monitored very closely during fiscal 1980-81 to assess the impact of pro- posed rate increases upon the departmental expenditure accounts. The Utilities Maintenance Director is aware of this problem and has indicated that either increased assessments or additional General Fund support will be•necessary. The General Government Administration Communication Expense Account is utilized to pay for the telephone expenses of the City Hall Centrex System. At the end of the first quarter of 1980-81, this account was being expended at an annual rate of $45,160 or 139% of its total year budget. This expenditure trend would require an additional appropriation of $12,660 to cover the City Hall communications - -telephone expenses ft.- fiscal 1980-81. O�eratinq Expenditure Summary - All Funds The level of expenditures for all funds at the end of the first quarter of fiscal 1980-81 operations totals $2,475,221 amounting to 20% of the total fiscal year operating appropriations. This expenditure rate is slightly below the total rate of expenditure experienced during the first quarter of fiscal 1979-80, which stood at 22% of total year budget. The rate of 1980-81 expenditures is very acceptable and suggests the following: A 2% salary savings projection will continue to be realized. Maintenance and Operations expenditures are on target for the fiscal year with the exception of utility and Communications expense which are projected to require additional appropriations for all funds totaling $95,074 barring further utility rate in- creases. L tl. co s x IL • I, r I w } O i ut ci CD S <L M N N til .J o U. w y > N W N r~i }^ v r z w >: M 0: 1 O 7 1 i( t t t V I a •r W u al o • a t- +J W oI1 cr- ({ r0 I^ OI r O n S. to Ot tU •r N NM r .-G. 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MEMORANDUM , November 25, 1980 TO: CITY MkNAGER .. FROM: FINWCE DIREOM STTJBJECT: 1979-80 AUDIT MAAG LETTER Each year the City's auditors prepare a management letter commenting on internal control procedures and accounting practices used by the Finance Department. ibis memo is in respa se to this year's management letter. 4 • Prior Yeats Findings Not IMLlemented The auditors commented on four recoimi endations made in previous years that 'have. not been implemented: 1. Checks shall be listed 'individually on the outstanding check lasting (Bank Reconciliations). - Although the :listing of checks individually on bank reconciliation work sheets is much more convenient for the audit staff, it is a time consuming process for the account clerk assigned this tas'_c. However., we can and will comply with this request, 2. 11ater•Perpetual Inventcny Records Sy,tem should be improved. - The Finance and Water Departments are very aware of the past shortcomings of .the water inventory function. The present clerk in the Waiter Department has had experience with these -records and has been able to improve the record keeping function. tie will be .corking with the Water Superintendant to improve the process for purchasing and disbursing items from the water stores inventory. 3. The Encumbrance Records have not been balanced and updated on a regular basis. = This problem is of particular importance at year end. When these records are not reconciled regularly, it significantly increases the effort required of. our Auditors and City Staff during year end closing. This function has been taken over by- the Accountant and Assistant Finance Director. I feel we will have ro furthrr problems with the accounting for oncwnbrances at year and. h. Tile City should consider microfilming old accounting records. - I feel this is one of the most inj)ortant projects the City must undertake. The City Clerk is ready to take over the records management function for the entire city as soon as possib1c. 1111s will include microfilming and record retention standards. i r Page 2 N Current Year Fin!iims The following comments were made by the Audit Staff this year. 1. Contractor Deposits - Deposits are collected from contractors to cover the cost of City services performed by the Building and Engineering Department. The intent is that department's current operating exTenses would be offset by a transfer at the close of the project from the deposit account. We have noted instances where some large deposit balances have remained unchanged for over one year. We recommend that a periodic review of the aging of these deposits bc' made and thata follow-up to the appropriate departments for reasons why the old deposits have not been closed out. Response - I concure with the Auditors in this finding. 'li►ere are many constractors deposit accounts which should be closed and removed from our books. In order to close these accounts it is necessary for Engineering to review their contract files to collect any charges that should be made against these deposits. Although some accounts have been closed, others still e�cist that require attention. A list of all deposits is sent to Engineering each quarter for review. Mien the Engineering staff has had time, they have reviewed these lists and closed several projects. We will work with Engineering to try to eliminate the inactive accounts and -to properly account for the current deposits. 2. Water Department Billing - During May of 1080, the finance Department discovered that approximately four hundred customers were not being billed for sewer service charges. Investigation by the City's staff revealed that these customers were part of the Costa Real Municipal Water District (MMID) in South Carlsbad and that then were new customers of that district. Procedures in effect at that tine were that the CMNAM was to notify the City of Carlsbad of new water service hook-ups on a periodic report. Based upon what transpired, it was evident this was not done. Considering that the sewer moratorium has been lifted in the area and the increased level of new development that will result, we'recoimnend the following procedures. The existing periodic report could have merits if the City makes follow-up coilaunication with CIUM when the report is not received when due. 'Me City should clarify it's understanding with C121.1M of the reporting schedule. '111e City should review all building permits for the involved areas and compare them to the report received from ClhtiM for possible missing items. Wage 3 ti Response - This is.a point the Manager, Utilities Maintenance Director M, and Finance Director have commented on for sometime. There is, at this point, no free flow of information from CR'%SVD to the City when new residents move into the southern section of Carlsbad. '11iis makes it very difficult for the City to properly bill this area. Tiiis-particular problem was discovered by the sanitation services supervisor and the water billing staff when information concerning occupied homes and billing accounts were compared. The Auditors are assuming that CPmffl and the City had an established procedure whereby CR,viiVD notified the City on a monthly' basis of all service starts and stops. This system, however, does not exist and has never been established on a regular basis. Several years ago the water billing staff had received information from 0%'RVD or had requested such information but, to my knowledge, no data sharing has taken place. In my opinion there are three possible solutions. First, the ideal situ - anion would be to have one entity responsible for yZ1 utility g in the entire ethi.srresul t Second, data could be shared betcaeen. the d in an. action that ti•�ould achieveve C14VD and the City, as suggested— y--tTe Auditors. I can raise this question with the C&AVD aka a eri )7 a i.c idaddressesector appearotodbeccasionoccupied ally run ,through the to and which - ppear to be vacant. I prefer options one or two. I will consult M rMeadows to discuss the agency possibility of sharing information untilquestion responsibility can be settled. 3. Cash - pensation bank During our exambiation of tileawarrant accounts, Ave noticed a c amount�of timeswasmrequired by the The reason cashier to reconcile these accowits to the bank statements. for this is because the bank doesnot have chk thechecks numearelpxoperly isted oil the included bank statement and thatfrequently in that statement. It is care p practice today intthebankcck numbers tatement.listed Based up nthat the City's checks are properly included large cash dealings and balances with Bank of America we recommend that the City request better service from that bank. Response - I have contacted the bank and have arranged to have all check numbers listed on the stateale • Page 4 N 4. General Ledger. Control Accounts The proof listing prepared by the payable clerk periodically is changed by the general ledger accountant for required adjustments before the general ledger control figures for expenditures are entered. The control figure must equal the detail as between prior and current year expenditures. Currently, there is no established procedures for correcting the detail accounts as the control accounts are adjusted. We recommend that this area be evaluated and a standard accotuiting procedure be implemented. Response The Auditors have brought the problem of unbalanced entries to detail and control accounts to my attention. I have discussed this with the Finance Department staff and believe we have corrected the problem. S. Donated Water Equipment - Engineering Department is supposed to receive "as built plans" with cost schedules from developers so they can compute the total cost of donated water equipment and transmission lines. This information is added to the City's cost records for Seater Department fixed assets. This year no total costs figures were compiled by the 1:1ater Department. Ile recommend that during the ensuing year when increased building is expected, the Water Department insure adequate records are maintained to calculate total costs of donated equipment and transmission lines. i Response - The Engineering Department is responsible for providing an ` annual list of all donated improvements to the water system (subdivisions ' and other developments). I have asked my staff to work with Engineering to inform them of what is needed and when the data should be prepared. G; hater Department Cost Accumulated fL r Projects in Progress - +. All costs of constn-uction of transmission and distribution lines, booster pumps, etc. where the City staff performs the labor and supplies the equipment must be accianulated by project. At. the end of this year, the Finance Department had considerable difficulty determining the status of projects in progress. We recommend that the Water Department and the Finance Department jointly determine the format and information necessary to control the projects in progress. Response - The Water and Finance staff members are aware of: this problem. Many of the problems that now exist have come about through turnover in • Water staff and insufficient training offered by the Finance staff. I feel tliat we have the problem identified although not yet solved. We must now -properly train, the water and Accounting, staff in the proper use of the work in progress accounting proceeduros. I believe our auditors would be willing to assist us in establishen,(; the proper system. Jr.:pt GEORGE A,PETERSON & CO CERTIFIED PUBLIC ACCOUNTANTS OCORGE A,PCTCRSON,C.P.A, 7916 IVANHOE AVENUE RICHARO C,CVANS,C.PA, LA JOLLA, CALIFORNIA 92037 THOMAS J. ORADY,A, P.0 ,C.P A, TELEPHONE (714) 454.6176 OCNC A.NONRAD,C. P.A. Honorable City Council City of Carlsbad MCMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS We have -examined the financial statements of the City of Carlsbad for the year ended June 30, 1980, and have issued our report thereon dated October 12, 1980. As part of our examination, we made a study and evaluation of the City's system of internal accounting control to the extent we considered necessary to evaluate the system as required by generally accepted auditing standards. Under these standards, the purposes of such evaluation are to establish a basis for reliance on the system of internal accounting control in determining the nature, timing, and extent of other auditing F. procedures that are necessary for expressing an opinion on the financial statements and to assist the auditor in planning and performing his examination of the financial statements. The objective of internal accounting control is to provide reasonable, but not absolute, assurance as to the safeguarding of assets against loss fron unauthorized use or disposition, and the reliability of financial records for preparing financial statements and maintaining account- ability for assets. The concept of reasonable assurance recognizes that the cost of a system of internal accounting control should not exceed the benefits derived and also recognizes that the evaluation of these factors necessarily requires estimates and judgments by management. There are inherent limitations that should be recognized in considering the potential effectiveness of any system of internal accounting control. In the performance of most control procedures, errors can result from misunderstanding of instructions, mistakes of judgment, carelessness, or other personal factors. Control procedures whose effectiveness depends upon segregation of duties can be circumvented inten- tionally by management either with respect to the execution and recording of transactions or with respect to the estimates and judgments required in the preparation of financial state- ments. Further, projection of any evaluation of internal accounting control to future periods is subject to the risk that the procedures may become inadequare because of changes in conditions and that the degree of compliance with the pro- cedures may deteriorate. Our examination of the financial statements was made in accordance with generally accepted auditing standards, inclu- ding the study and evaluation of the City's system of internal accounting control for the year ended June 30, 1980, that was made for the purposes set forth in the first paragraph of this report, would not necessarily disclose all weaknesses in the system because it was based on selective tests of accounting records and related data. The foregoing conditions were considered in determining the nature, timing, and extent of audit tests to be applied in our examination of the financial statements, and this report of such conditions does not modify our report dated October 12, 1980 on such financial statements. For your convenience and reference, the topics presented in this letter are summarized as follows: Contractor Deposits Water Department Billing Cash (Continued) Ma General Ledger Control Accounts Donated Water Equipment Water Department Cost Accumulations for Projects in Progress Previous Recommendations We reviewed the disposition of recommendations included with out letter of September 4, 1979. The following is a summary of prior year's recommendations and their status at October 12, 1980. A. Adopted and Implemented 1. Computer Output. 2. Fixed Assets Inventory. 3. Year end Cutoff of Check Register. t B. Adopted and implementation in Process 1. Computer Operations and Controls The City is now in the process of contracting for new computer equipment and software programs. The City is considering a data processing manager. C. Not Adopted or Implemented i 1. Checks Listed Individually on Outstanding Check List, 2. Water Department Perpetual Inventory Records. 3. Balancing and updating encumbrance records. 4. Microfilming of Old Accounting Records. We again want to emphasize the importance we feel in the above unadopted comments. This year, as in the previous year, many hours were required by us and the City Staff to reconcile the encumbrance balance at year end to the outstanding purchase (Continued) -3- orders and to reconcile the prior year expenditures to the change in the prior year encumbrance balance. The Water Department perpetual inventory records did not reflect the purchases and issues of the equipment stock. It is important to have good records on this expensive equip- ment. Current Recommendations Contractor Deposits Deposits are collected from contractors to cover the j cost of City services performed by the building and engi- neering department. The intent is that department's current operating expenses would be offset by a transfer at the close r of the project from the deposit account. tie have noted instances where some large deposit balances have remained 3 unchanged for over one year. i We recommend that a periodic review of the aging of these deposits be made and that a follow-up to the appro- priate departments for reasons why the old deposits have not been closed out. Water Department Billing During May of 1980, the finance department discovered that approximately four hundred customers were not being billed for sewer service charges. Investigation by the City's staff revealed that these customers were part of the Costa Real Municipal Water District (CRMWD) in South Carlsbad and that they were new customers of that district. Procedures in effect at that time were that ti.a. CRM6rp was to notify the City of Carlsbad of new water service hook-ups on a periodic report. Based upon what transpired, it was evident this was not done. Considering that the sewer moratorium has been lifted in the area and the increased level of new development that will result, we recommend the following procedures. The (Continued) i ti existing periodic report could have merits if the City makes follow-up communication with CRMWD when the report is not received when due. The City should clarify it's understanding with CRMWD of the reporting schedule. The City should review all building permits for the involved areas and compare them to the report received from CRMWD for possible missing items. Cash During our examination of the warrant and workmen's compensation bank accounts, we noticed a considerable amount of time was required by the cashier to reconcile these accounts to the bank statements. The reason for this is because the bank does not have check numbers listed on the bank statement and that frequently not all the checks are properly included in that statement. It is common practice today that check numbers are listed and that all checks are properly included in the bank statement. Based upon the City's large cash dealings and balances with Bank of America, we recommend that the City request better service from that bank. General Ledger Control Accounts The proof listing prepared by the payable clerk periodically is changed by the general ledger accountant for required adjustments before the general ledger control figures for expenditures are entered. The control figure must equal the detail as between prior and current year expenditures. Currently, there is no established procedures for correcting the detail accounts as the control accounts are adjusted. We recommend that this area be evaluated and a standard accounting procedure be implemented. (Continued) -5- ti s Donated Water Equipment Engineering department is supposed to receive "as built plans" with cost schedules from developers so they can compute the total cost of donated water equipment and transmission lines. This information is added to the City's cost records for water department fixed assets. This year no total costs figures were compiled by the Water Department. We recommend that during the ensuing year when increased building is expected, the Water Department insure adequate records are maintained to calculate total costs of donated equipment and transmission lines. Water Department Cost Accumulated For Projects in Proqress All costs of construction of transmission and distri- bution lines, booster pumps, etc. where the City staff per- forms the labor and supplies the equipment must be accumulated t by project. At the end of this year, the Finance Department had considerable difficulty determining the status of projects in progress. We recommend that the Water Department and the Finance Department jointly determine the format and information necessary to control the projects in progress. GEORGE A. PETERSON & CO. ichard E. Evans, Partner -G-