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HomeMy WebLinkAbout1982-01-19; City Council; 6865; 1981 financial report supplemental informationCW - OF CARLSBAD - AGEND- BILL AB#*- MTG. 3-19-82 DEPT.n Supplemental Information - 1981 Financial Report TITLE No action required - Information only. ITEM EXPLANATION The attached memos address the auditors management letter and some of the questions raised by the City Manager and City Council on the 1981 financial report. FISCAL IMPACT The fiscal impact of complying with all findings in the auditors management letter would be substantial. The cost or benefit of some of the proceeduraI changes will be minimal. The cost of project requiring an outlay of funds will be brought to the Manager and Council as necessary. EXHIBITS Memo to City Manager - management letter - 1980-81 audit report Memo to City Manager - supplemental yata - annual financial report '&/ qw\ I MEMORANDUM DATE : December 9, 1981 TO : City Manager FROM: Finance Director RE : Management Letter - 1980-81 Audit Report We have reviewed the independent certified public accountant's management letter accompanying the 1980-81 financial report. We are in general agreement with the auditor's findings and have taken steps to modify our systems and practices to comply wth the auditor's recommendations. Our detailed responses to their letter are below. Purchasing, Accounts Payable, and Cash Disbursement System The auditor has listed several concerns in this area: 1. Bank reconciliations are performed by individuals closely related to the cash disbursement function. 2. Lack of documentation on accounts payable invoices showing verification of clerical accuracy or receipt of goods. 3. Safeguarding of blank warrants is insufficient. We recognize the need for controls in this area and agree with these findings. In response we have taken the following act ions: 1. The bank reconciliation function has been reassigned to a staff member divorced from cash disbursements. The reconciliations were assigned to the disbursing clerk only during a period of low staffing levels in the Finance Department. Upon return to full staff this function was reassigned. We will also begin a system of closer review of staff work in the area of bank reconciliations. processed for payment includes all checks for accuracy required by the auditor. The audit staff however, can- not prove that these checks were done since initials or check marks are not presently required. We have discussed this with the auditor and have ordered a rubber stamp that wll indicate the clerical audit steps performed. This will be used on all paperwork processed for payment. 2. The present system for clerical reviewing of invoices 3. We strongly support this finding relating to security of blank warrants, We had requested funds in the 1981- 82 budget to modify the storage room by installing a filing system that included lockable storage cabinets. These funds would have also allowed the modification of the room to improve computer security. We will come to the City Manager with a plan to improve these conditions within the next three months so that the implementation of the plan can be included in the 82-83 budget. In addition, the auditor recommends several adjustments to procedures that, for the most part, will be accepted. Included is the recommendation that the City establish a central receiving point and a receiving process to control all goods coming to the City. Our plans are to include a central receiving warehouse function at the new City operations center. EDP Access Control and Protection of Important Files The Management letter states that the Finance Department must more effectively control access and availability of the computer room. The storage of computer tapes and documentation should also be improved to help protect the City data base. General security must also be improved. There are three actions the Finance Department is taking to improve this situation: 1. Off site storage of Data for the new computer system has already begun. Tapes are made on a regular basis and are stored both on and off the site. A back-up procedure is also in place on the Singer computer system. Off-site storage has been more difficult here due to the use of disk packs instead of tape. However, arrangements have been made with the City Clerk to store the most recent copy of data from the Singer system in the City vault until conversion can be accomplished to the new computer system. 2. Computer room security can be greatly improved through the implementation of these changes in current procedures: A. Removal of the mail machine and mail equipment. This will be accomplished as part of the scheduled remodeling of City Hall. Mail services will be located in the present supplies storage room as soon as the modular buildings for City Hall are in place. -2- 3 3. B. Remodeling of the computer room itself to include lockable storage for warrants and closeable storage for computer supplies and other records. This remodeling can be as extensive as necessary. We recommend the division of the computer room in half through the use of an 8' partition. This partition could include a locked door requiring the person entering the room to open a combination lock. Plans for this remodeling will be submitted with the 82-83 budget. Finance Personnel only. This can be accomplished administratively immediately. An "Employees Only" sign has already been ordered for the door to the computer room. C. Limiting access to the present computer room to With the assistance of the City Clerk, unnecessary file storage space will be eliminated by establishing a record retention schedule. Files will be destroyed as the record retention dates are established. This will improve the environment with respect to dust and dirt from paper now stored near the computer. Substantial paper files will still exist in close proximity to the computer system until the room can be remodeled. Cost of Services - Central Stores, Sewer and Sanitation, and Central Garage. The auditors comments under the heading of "Cost of Services" relate to improving the cost accounting and distribution systems that exist. These comments are in line wth the Finance Department efforts to improve cost collection, establish internal service or enterprise funds and charge using departments for overhead costs. In the area of Central Stores, we will follow the auditors recommendation of establishing a Central Stores internal service fund. We will work with Purchasing to improve the cost account- ing for products purchased and charged to departments. This was the first full year operation of a central stores procedure. We find that the stores system has worked relatively well and should be continued. The Sanitation fund should and will be accounted for as an enterprise function. We have had discussions with the City Manager, audit staff and Utlities Director on this subject and all parties agree. There are several steps that must now be taken some of which will involve the expenditure of funds for inventory and accounting services. An action plan will be proposed to the manager as soon as drafted. -3- The auditors comments on the garage system are timely. The recommendation is that the City create an internal service fund for the garage system. This was done in November and is now in opreration. The next step is to establish vehicle usage rates that will recover the cost of maintenance and replacement of the City fleet. The Assistant City Manager for Operations has scheduled a review of this system for January. Construction in Progress The audit staff noted several very old construction projects that, according to the Finance Department books, were still open. We have reviewed these projects and will remove these from the books this month. The auditor recommends that these subsidiary ledgers be reviewed and updated annually. This process generally already exists. The challenge to the Finance Department is to make the other departments involved realize the impotance of responding to our requests for information. We will continue to contact Engineering and the Utlities Department at least annually to up- date our records. General Fixed Assets The auditors comments on fixed assets are: 1. The Finance Department does not keep updated records on all City general fixed assets, more specifically, structures and other improvements. that are not actually attributable to fixed asset acquisitions. 2. Charges to the Capital Outlay Account include costs In response, we agree that the fixed asset system has been the low priority project in the Department. The records are relatively good, however, on equipment and machinery, those items needing closer control. Structures and improvements should be capitalized to properly reflect the value of the City's investment in fixed assets. But the lack of capitalization does not jeopardize the control of non-movable assets. This system will not be improved until several other first priority projects are completed. The Capital accounts generally contain expenditures for fixed asset items. The auditors comments reflect the finding of some expenditures that do not meet our current standards for inclusion as fixed assets. -4 - .- In our opinion much of this was due to a change in the value of items defined as fixed assets just prior to budget adoption in 1980. This will not be the case in 1981-82. All asset records will be relatively clean in this fiscal year. Fixed Assets in the Water Utilitv The auditors finding indiates that there is an inconsistancy in the Utility records with regard to fixed asset accounting. Our current system accounts for each asset twice during the year, once as an expenditure and once as an addition to fixed assets where depreciation is computed at year end. This duplication is not carried through to the books at year end. All asset acquisitions are removed from the expenditure records to eliminate duplication. We recognize their weakness in the system. The Finance staff has recommended that this procedure be discontinued in years past. We agree with the finding and will amend our processes. We have adopted the auditors recommendations in setting up the new accounting structure under the new computer. Installation Fees This comment relates to the process used by the Water Department to account for the costs and revenues for installation of water meters, services, fire hydrants, etc. The current process collects fees into a deposit account. The deposit is then charged for the cost of time and materials. The balance in the account is refunded after the completion of work. The auditor recommends modifying this process to account for both the expense and revenue side of the transaction rather than using a deposit account. We agree with this finding and have implemented this procedure for 1981-82. -5 - DATE : December 29, 1981 TO : City Manager FROM: Finance Director RE : Supplemental Data - Annual Financial Report This memorandum is meant to provide supplemental information to the 1980-81 financial statements. The following sections will help explain some of the variances between estimated and actual revenues and expenditures shown in the financial report. I. PEVEHUES The 1980-81 financial report shows several revenue sources where actual revenues were significantly above or below the estimates used in the report. Much of this can be explained by understanding that the estimates used in the financial report were original budget estimates. The orignal budget was amended three times during 1980-81; in the first, second, and third quarter. The third quarter estimates were used in preparing the 1981-82 budget and should be used in reviewing the actual revenues for 1980-81. General Fund A) Sales Tax Annual Report Third Quarter Est ima t e Estimated Revenue Actual Revenue Variance % $3,550,000 $3,200,000 3 , 302 , 134 <247,866> 102,134 3 , 302 , 134 <7%> 3% Actual sales tax revenue was $248,000 below the original estimate of $3.5 million. This estimate was revised in late 1980-81 to reflect a slowing in sales tax growth. The revised estimate of $3.2 million was about $102,000 below the actual revenue of $3.3 million, a difference of about 3%. R) Transient Tax Estimated Revenue Actual Revenue Variance % Annual Report Third Quarter Est imat e $600,000 655,172 55,172 9% $600,000 655,172 55,172 9% The orignal estimate for transient tax receipts was not revised during the year due to the general weakness in sales tax revenue and the general economy. This weakness should have reduced the growth of transient tax revenues in the last quarter of 1980-81. The original estimate of $600,000 represented a 4% increase over 1979-80 revenues. The actual 1980-81 revenue of $655,000 is 13% above the 1979-80 figure. C> Vehicle Licenses Estimated Revenues Actual Revenues Variance % Annual Report Third Quarter Est imat e $572,000 698,338 $129,338 22% $620,000 698,338 78,338 12% The original estimte for vehicle licenses was provided by the State of California in April, 1979. The revised estimate of $620,000 was based on higher than anticipated revenues through the third quarter. Obviously, the revised estimate was still conservative, however the margin of error was reduced from 22% to 12%. The actual revenue of $698,000 represents a 10% increase over the 1979-80 revenue of $634,000. D> Plan Checking Estimated Revenue Actual Revenue Variance % Eng ineer ing Fees Estimated Revenue Actual Revenue Variance % Annual Report Third Quarter Estimate $150,000 276,235 126,235 84% $225,000 276,235 51,235 23% Annual Report Third Quarter Estimate $105,000 318,934 213,934 204% $200,000 318,934 118,934 37% Both engineering and plan checking fees exhibited considerable strength in the third and fourth quarter of 1980-81. The revised estimates, although much closer than the original estimates, did not keep pace with construction related revenue in this period of rising interest rates. Developers paid a total of $595,000 for engineering and plan checking services for 1980-81; in spite of record breaking interest rates. -2- In the third quarter of the year interest rates dropped and planning activities picked up. The third quarter estimates represent a conservative stance taken on future development activity for 1980-81. (The 1980-81 revenue of $595,000 represents a 127% increase over 1979-80 revenue of $262,000.) E) Refuse Collection Annual Report Third Ouarter Cor r ec t ed Est imat e Audit Figure Estimated Revenue $350 , 000 $335,000 $335,000 Actual Revenue 306,628 306,628 334, .570 Variance <43,372> <28,372> <430> 0.1% % 12% 8% A review of refuse collection revenue in the third quarter of 1980-81 caused a reduction in estimated income due to a lower than anticipated average monthly revenue. The $335,000 represents twelve monthly billings of about $27,900 each. The actual revenue figure shown in the annual report, however, is the total of only eleven monthly billings. The twelfth billing was erroneously posted to the ambulance billing revenue account. The actual twelve month revenue from refuse collection is $334,570 or about 0.1% less than the adjusted estimate of $335,000. F) Vehicle Code Fines Annual Report Third Quarter Est imat e Estimated Revenue Actual Revenue Variance x $140,000 230,636 90 , 636 65% $190,000 230 , 636 40 , 636 22% The vehicle code fine estimated revenue for 1980-81 was initially based on historical data. The level of receipts for 80-81 was assumed to be the same as 1979-80. The actual experience through the third quarter of 1980-81 indicated that fine revenue was running about 25% above the 1979-80 level. By year end actual revenues had reached 51% above 1979-80. The third quarter estimate of $190,000 was in our opinion optomistic. However, actual revenues maintained the higher level of collection throughout 1980-81 to reach the total of $230,000 by year end. -3- G) Interest Annual Report Third Quarter Estimate Estimated Revenue Actual Revenue Variance % $57 5,000 $1,153,607 578,607 101% $825,000 $1,153,607 328,607 40 % Interest estimates prepared in the late budget stages of 1979-80 were based on a 12% average rate of return on about $4.8 million. The interest revenue for 1980-81 was received based on rates from 9% to 19% or an average pool of about $7.3 million. As the comparison above shows the difference is substantial. The original estimate was revised upward to $825,000 in the third quarter but even the revised estimate was too conservative. The pool of funds available for investment did not drop to the $4.8 million originaly projected due to the lack of activity in some major capital projects. H) Reimbursed ExDend iture s Annual Report Third Quarter Est imate Estimated Revenue Actual Revenue Variance x $45,000 $110,365 65,365 145% $105,000 110,365 4,865 5% Reimbursed expenditures reflect recoveries of prior years expenses. These are often difficult to judge. This year this account includes recoveries from grant revenues earned in the prior year and POST reimbursements. 11, EXPEMDIIUBES The 1980-81 financial report compares estimated wth actual expenditures for each department in the general fund. In several cases estimates are significantly above or below actual expenditures at year end. The following section provides some explanation for those differences. A) General Administration Annual Report Estimated Expenditures $182,774 Actual Expenditures 209,806 Variance <27,302> % 15% The variance is primarily due to increased costs for utilities and telephone expenses for City Hall - $24,955. These costs relate to the general utilities ($12,000) and the first year of operating the Centrex System ($12,000). -4- B) P 1 ann ing Estimated Expenditures Actual Expenditures Variance Annual Report $523,142 408,662 114,480 % 22% The savings generated in the Planning Department are primarily in two areas. Salaries are below budget due to less than full staffing - $20,700. And, professional services are down due to studies that have not been completed - $90,000. C) Insurance Annual Report Estimated Expenditures $660,229 Actual Expenditures 598,490 Variance 61,739 % 9% The savings recorded in the insurance account are primarily due to reduced health, life, unemployment and disability insurance costs related to less than full staffing during 1980-81. In addition, workers compensation costs were lower than budgeted. D) Leases Annual Report Estimated Expenditures Actual Expenditures Variance % $232,000 298 , 7 13 <66,713> 29% The variance in the lease account was caused by costs associated with the new Plaza Camino Real parking lot bond issue. The City's obligation to pay rental payments to the Parking Authority on the parking lot expansion began on February 1, 1981. The 1980-81 budget did not include an amount to cover this payment. E) Retirement Estimated Expenditures Actual Expenditures Variance % Annual Report $969,915 910,803 59,112 6% -5 - The reduced retirement costs for 1980-81 are primarily related salary savings. When salary expenses are reduced due to low levels of staffing or lower average salary levels, related fringe benefits will experience savings in proportion to the salary savings. F) Contingencies Annual Report Estimated Expenditures Actual Expenditures Variance % $1 93,483 -0 - 193,483 100% The contingency account was established in 1980-81 to allow the manager and council flexibility in meeting demands for new projects, emergencies or other unforseen needs. This account will never have expenses charged directly against it. Funds are transferred from this account to other accounts where the need for funds exists. During 1980-81 transfers of $673,194 were made for various purposes. G) Capital Improvements Annual Report Estimated Expenditures $69 3,424 Actual Expenditures 164,315 Variance 524,109 % 76% The question of capital expenditures has been addressed several times in the process of reviewing the 1982-86 CIP. The savings" reflected here represent those projects that, as of June 30, 1981, had not reached the purchase order stage. All of these projects have been continued into 1981-82 with the adoption of the 1981-82 operating budget. 11 H) Fire Protection Annual Report Estimated Expenditures Actual Expenditures Variance $ $1,497,373 1,349 , 764 147,604 10 % The apparent savings in the Fire Department is primarily due to the timing of the payment for the new fire truck. A purchase oder for $129,000 had been issued in 1980-81 for a new fire truck. This however, will not be recorded as an expenditure (under the new accounting standards) until the payment is made in 1981-82. The addition of $129,000 to the actual expenditures for the Fire Department brings the total to $1,488,764. This is $8,609 or 0.6% below the budget amount. I) Police Annual Report Estimated Expenditures $1,876,554 Actual Expenditures 1,784,153 Variance 92,401 x 5% Over half of the $98,000 variance in the Police nepartment is due to the timing of delivery of police vehicles ordered in 1980- 81 but not received until 1981-82. A purchase order for $48,000 was on the books as of June 30, 1981 for police fleet vehicles. As explained previously this cannot be recorded as an expenditure in 1980-81 unless the goods have been received in that period. The remaining difference of $44,000 is primarily due to salary savings and associated reductions in activity. J) Eng ineer ing Annual Report Estimated Expenditures $515,236 Actual Expenditure 318,038 Variance 197,198 % 38% The Engineering Department experienced substantial salary savings in 1980-81 due to reduced staffing levels. This amounts to about $94,000 of the variance listed above. In addition, several consulting contracts planned at the onset of 1980-81 did not materialize amounting to a savings of about $65,000. Finally, Engineering was able to recoup costs for work performed on capital projects and for other departments of $45,000 in excess of original estimates. K) Streets Annual Report Estimated Expenditures $692,688 Ac tu a1 Expenditures 618,614 Variance 74,674 x 11% The major changes in the Streets Department were recorded in salary savings of $40,000. As with other departments this is due to less than maximum staffing for 1980-81. The department also recorded savings in vehicle maintenance and equipment rental costs of about $19,000. Also as with Police and Fire, the Streets Department had an outstanding $17,000 encumbrance for equipment ordered by not received in 1980-81. -7- L) Mechanical Maintenance Annual Report Estimated Expenditures Actual Expenditures Variance % $10,947 53,741 <4 2,7 94> 391% This variance reflects an error in the accounting system for Mechanical Maintenance. All costs in excess of basic capital outlay expenditures were to be charged to other departments. The year end variance of $43,000 should have been distributed to using departments. M) Sanitation Services Annual Report Estimated Expenditures $325,062 Actual Expenditures 355,350 Variance <30,288 > % 9% This is the activity which records the payments to Coast Waste Management. Actual collections are passed through the City to Coast Waste Management on a monthly basis. The $355,000 total expenditures for 1980-81 reflect the amount actually collected and passed through to the contractor and services provided by City staff relating to trash collection. Although this is $30,000 greater than the original estimate, the City bears no additional cost. N) Parks and Recreation Annual Report Estimated Expenditure Actual Expenditure Variance % $1,049,755 907,137 142,618 14% The Parks and Recreation Department recorded a $31,000 salary savings in 1980-81 from all acctivities. In addition, $33,000 of professional services in the aquatics area was saved due to delays in the opening of the swimming pool. Aquatics also posted savings of about $27,000 in the equipment area due to the change in accounting for encumbrances. Parks Maintenance recorded a $18,000 savings in equipment also due to the accounting change. Parks Maintenance accounts show a savings of about $11,300 (15% of the utility budget) for 1980-81. The remaining savings of about $23,000 is spread through out the Parks and Recreation Department in almost all accounts. -8 -