HomeMy WebLinkAbout2020-12-15; City Council; ; City of Carlsbad Fiscal Year 2019-20 Annual Financial Audit ResultsCA Review CKM
Meeting Date: Dec. 15, 2020
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Ryan Green, Assistant Finance Director
ryan.green@carlsbadca.gov, 760-602-2414
Subject: City of Carlsbad Fiscal Year 2019-20 Annual Financial Audit Results
Recommended Action
Receive a presentation on the city’s fiscal year 2019-20 annual financial audit results.
Executive Summary
The City of Carlsbad is required by the State of California to be audited by a certified public
accountant or public accountant, licensed by, and in good standing with, the California Board of
Accountancy. The city’s annual financial audit resulted in an unmodified opinion (defined
below) and there were not any material weaknesses in internal controls nor any material
instances of noncompliance identified. This presentation will provide a summary of the city’s
annual fiscal year financial audit results, including the auditor’s opinion, any auditor findings
and highlights from the city’s Comprehensive Annual Financial Report for fiscal year 2019-20.
Discussion
The Finance Department is responsible for the stewardship of the city’s assets and liabilities,
helping to ensure information is provided in an effective and timely manner so that the best
financial decisions can be made. An important component of this stewardship is the completion
of the city’s annual financial audit by a CPA firm.
Results of the Fiscal Year 2019-20 Audit
In May 2017, city staff selected and issued a five-year contract to Davis Farr LLP, a certified
public accountant firm, to perform the city’s annual financial audit. The role of the external
auditor is to express an opinion on the city’s financial statements on whether they are
materially misstated or not. The external auditors follow Government Auditing Standards that
have been created by the American Institute of Certified Public Accountants.
The fiscal year 2019-20 audit began in May 2020 with the external auditors conducting interim
fieldwork, and the audit concluded on November 19, 2020, when the auditors issued their
opinion on the city’s financial statements. The city received an “unmodified” opinion, which
means that it is the auditor’s judgment that the city’s financial statements and footnotes are
fairly stated, without any material exceptions, and in compliance with generally accepted
accounting principles.
Dec. 15, 2020 Item #12 Page 1 of 6
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The auditor did not identify any material weaknesses in internal controls, nor any material
instances of noncompliance.
Citywide financial results
The city’s revenues were significantly impacted by the COVID-19 emergency, most of the city’s
hotels were closed or partially shutdown beginning in March 2020 and the shelter-in-place
order restricted many local businesses, particularly restaurants and tourism. The city’s “big
three” revenue sources are property, sales, and transient occupancy tax.
• Property tax revenues were relatively sheltered from the COVID-19 emergency, with the
impacts of the pandemic lagging compared to those that reduced sales and transient
occupancy tax revenues. In the most recent five fiscal years, property taxes have shown
significant growth. An increase in fiscal year 2019-20 of 6.2% in total assessed values,
including residential, commercial and industrial properties, led to higher property tax
revenue.
• Sales tax revenues were poised to have the highest level since incorporation until the
COVID-19 emergency stifled many local businesses and, instead, sales tax finished lower
than the prior fiscal year by 5%.
• A majority of the city’s hotels were closed for a portion of March, all of April and began
opening back up in May. However, most of the larger hotels continued to be closed for
the fourth quarter of the fiscal year. Transient occupancy tax finished 28% lower than
the prior fiscal year.
Other taxes include business license renewals, where volumes increased because various
federal COVID-19 business assistance programs required businesses to have active and valid
business licenses to receive assistance.
Charges for services were down due to the strains of COVID-19. The Wastewater Fund saw a
significant decrease in revenues because of declined commercial water use, the driver of
wastewater revenues for commercial and industrial customers.
The city’s recreation-related revenue decreased significantly due to the COVID-19 restrictions
on in-person activities.
Development, impacted less by COVID-19 because of its exempted status, slowed down during
FY 2019-20, but remained relatively strong against forecasted revenues. The city experienced
infill residential development, especially in the Village area of the city, as well as some of the
last remaining master planned community development. There was very little commercial and
industrial development during the year, which was similar to the prior fiscal year.
Income from investments were heavily impacted by a required accounting adjustment1 and a
loss on the early disposal of the Maerkle Reservoir cover. Offsetting those decreases were the
sale of Fire Station No. 3, and slight increases in the average yield on the treasurer’s portfolio
1 Government accounting standards require investments to be adjusted to fair market value as of June 30, 2020.
Investment markets were extremely volatile throughout the year and ended with bonds (a large portion of the
city’s investments) valued higher than when initially purchased; however, the recognition of the gains in fiscal year
2019-20 are artificial because of the city’s Investment Policy to hold investments to maturity.
Dec. 15, 2020 Item #12 Page 2 of 6
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for the year and average daily cash balance. These factors combined created a decrease in
income from investments.
An increase in the donation of developer-constructed assets – such as roads, pipelines,
sidewalks, etc. – which was partially offset by a reduction in developer impact fees because of
a lower level of development throughout the city, led to an overall increase in capital grants
and contributions.
The total cost of all programs and services was approximately $284.5 million in FY 2019-20,
moderately higher (6.6 percent) than FY 2018-19. The majority of the increase in program costs
came from the salary, benefit and retirement costs related to the citywide addition of
approximately 55 staff members. In addition, the costs associated with hiring the additional
staff members, such as vehicles and computers, added to the increase.
The increase in expenses would have been much higher for the year, but when the COVID-19
pandemic hit in March, new positions and programs were put on hold and departments were
asked to curtail spending. Departments eliminated non-essential travel, postponed trainings,
delayed new programs and were consistently prudent in their spending of city funds. At the
same time, the city embarked on a major program to close out older purchase orders. This
program enabled the city to unencumber $3 million in funds set aside for purchase orders that
were no longer needed.
Several other factors that influenced the change in expenses during the fiscal year:
• An additional CalPERS payment was made in the prior fiscal year and not repeated in FY
2019-20. This additional payment helped to stabilize retirement costs in FY 2019-20.
• The city’s municipal golf course and restaurant were fully or partially closed beginning in
March 2020.
• The costs to operate the wastewater plant and depreciation expenses on recently added
capital assets increased.
• Normal salary and benefit increases combined with inflationary impacts on
maintenance, operations and capital expenses played a predominant role in higher
business-type activities expenses for the year.
General Fund highlights
The General Fund is the main operating fund of the city, and at the end of the fiscal year had a
total fund balance of $190.8 million, an increase of $5.2 million. The unassigned fund balance
portion of the General Fund was $110.2 million, an increase of $8.5 million from last fiscal year.
This information is useful in assessing the city’s financing requirements. In particular,
unassigned fund balances may serve as a measure of a government’s net resources available for
spending at the end of the fiscal year. The major drivers of this change were revenues
exceeding expectations, a heightened fiscal awareness caused by the pandemic, the closing out
of old purchase orders and the impact of additional CalPERS pension fund payments made in
previous fiscal years on FY 2019-20 retirement costs. These savings completely offset the
addition of 34 new full-time positions and 11.37 part-time positions that were added across all
departments during the fiscal year.
Dec. 15, 2020 Item #12 Page 3 of 6
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As with its sales tax revenues, the city’s overall revenues had also been projected to be at their
highest levels since incorporation, but the impacts of the COVID-19 pandemic and the related
shelter-in-place orders took a toll on transient occupancy tax, sales tax, parks and recreation
revenues, and lease revenues. A majority of the city’s hotels were closed for a portion of
March, all of April and started opening up in May. However, most of the larger hotels continued
to be closed for the fourth quarter of the fiscal year. Additionally, small businesses in the State
of California were given additional time to remit their second calendar quarter 2020 sales tax
payments. As a result, there were steep decreases in transient occupancy tax and sales tax
revenues for the fiscal year.
Property taxes, the city’s largest revenue source and a lagging indicator of the financial health
of the city, did see an increase in revenues due to assessed values increasing by 6.2% in total for
residential, commercial and industrial properties. Development remained relatively strong for
the year, although it expectedly slowed when compared to the prior fiscal year.
Income from property and investments were heavily impacted by three factors: unrealized
gains created by adjusting the city’s investments to their fair market value at June 30, 2020, an
increase in the average yield on the treasurer’s portfolio for the year (up 12 basis points from
last fiscal year to 2.08%), interest payments made to the General Fund on the former
redevelopment agency loan, the sale of Fire Station No. 3, and a 0.5% increase in the average
cash balance in the General Fund. These factors combined to create a significant increase in
income from property and investments.
General Fund expenses finished under budget, but above the prior year. The planned increases
were driven by increases in personnel and new programs. Personnel cost increases were driven
by previously negotiated salary and benefit increases, the net addition of 34 full-time and 11.37
part-time staff, projected retirement increases due to the additional staff, and increases in
workers’ compensation costs. New programs driving the year over year increase in operations
and maintenance costs included the homeless response program, North Beach lifeguard
program, general price increases, costs such as vehicles, computers, and training associated
with the hiring of new employees and general contract increases. Transfers out of the General
Fund were $1.7 million less than the prior fiscal year due primarily to a lack of need to make the
transfer to the Workers’ Compensation Fund that was needed in the prior fiscal year.
Enterprise Funds highlights
Enterprise funds are used to report activities that provide business-type services, generally to
external customers, such as water, wastewater, solid waste, and golf services. The purpose of
the city’s enterprise fund financial sections is to provide short- and long-term financial
information about the city’s business-type activities. The analysis focuses on the determination
of operating income, changes in net position (by virtue of cost recovery), financial position and
cash flows.
Water funds
Water funds had an operating loss of approximately $4.7 million for the year. Operating
revenues were approximately $46.5 million and operating expenses were approximately $51.2
million. One of the larger factors in the operating loss was the decrease in volume of water
sales, which was directly attributable to higher than expected rainfall in the current year and
the impacts of COVID-19 on commercial water consumption. A 1% increase in Carlsbad
Dec. 15, 2020 Item #12 Page 4 of 6
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Municipal Water District’s water rates took effect in January 2020 and partially offset the lower
water consumption. Water purchases and other variable costs decreased, but these decreases
were largely offset by cost increases of water purchased from the Metropolitan Water District
and the San Diego County Water Authority (suppliers of the Carlsbad Municipal Water District’s
potable water) as well as increased depreciation cost of Carlsbad Municipal Water District’s
infrastructure. Nonoperating income from property and investments of $5.0 million and
property taxes of $4.2 million were partially offset by a loss on the early disposal of the Maerkle
reservoir cover. Together, these impacts resulted in $2.0 million of income for the year, before
transfers and capital contributions.
Golf Course Fund
In the thirteenth year of operation, the Golf Course Fund had an operating loss of $3.5 million,
a result of basically break-even operations before accounting for depreciating the enterprise's
assets ($3.6 million). Revenues did fall short of expectations because of partial and complete
closures of operations related to the COVID-19 pandemic. Costs were also curbed during the
closures. This was the third year in a row the General Fund did not make a transfer to the Golf
Course Fund. The General Fund contributes to shortfalls in the Golf Course Fund if golf course
operating revenues are not able to cover golf course operating expenses, excluding
depreciation, and major capital projects.
The Wastewater Fund had an annual operating loss of $3.2 million for the fiscal year. Total
revenues from operations were down from the prior year and budget due primarily to lower
commercial water consumption, the rate determining factor for commercial customers. Higher
operating expenses were primarily the result of increased wastewater plant costs and increased
depreciation expense on recently added capital assets. Nonoperating revenues related to
income from property and investments added $1.5 million to the operating income, resulting in
a net loss of $1.7 million before transfers and capital contributions.
Solid Waste Fund
Solid waste operations and storm water programs are combined on the city’s financial reports
as our Solid Waste Fund and showed a net operating loss of $0.8 million for the year. Revenues
were slightly higher than the previous fiscal year and expenses increased due to planned
outside professional service costs for solid waste, recycling, and organics management services,
household hazardous waste collection and disposal, and environmental outreach and
education. The operating loss was partially offset by income from investments, which resulted
in a net loss before transfers and capital contributions of $0.3 million.
Net position of all enterprise funds
The unrestricted net position for the Water, Golf Course, Wastewater, and Solid Waste
Operations at the end of the year amounted to $92.5 million, or approximately 19% of the total
enterprise funds net position. Each fund’s respective unrestricted net position may be used for
rate stabilization, fluctuations in operating expenses, and unforeseen repairs and maintenance.
Approximately $41.2 million, or 9%, of the net position of all the proprietary funds is restricted
for future capital construction of new and replacement water and wastewater infrastructure
assets. Since funding for the replacement of infrastructure assets is not restricted, it is reflected
in the Statement of Net Position as unrestricted. The city does, however, account for and
monitor these amounts in separate funds to ensure that water and wastewater assets can be
replaced when needed. The large unrestricted net deficit in the Golf Course Fund represents
Dec. 15, 2020 Item #12 Page 5 of 6
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funds advanced from the city’s General Fund that were used to fund construction, former
operating losses and debt expenses of the municipal golf course.
Fiscal Analysis
This is an informational item with no fiscal impact.
Next Steps
Receive and accept staff presentation.
Environmental Evaluation (CEQA)
This action does not constitute a “project” within the meaning of the California Environmental
Quality Act under California Public Resources Code Section 21065 in that it has no potential to
cause either a direct physical change in the environment or a reasonably foreseeable indirect
physical change in the environment and therefore does not require environmental review.
Public Notification
Public notice of this item was posted in keeping with the Ralph M. Brown Act and it was
available for public viewing and review at least 72 hours before the scheduled meeting date.
Exhibit
None.
Dec. 15, 2020 Item #12 Page 6 of 6
Ryan Green, Assistant Finance Director
Jennifer Farr, Partner, Davis Farr LLP
Dec. 15, 2020
City of Carlsbad Fiscal Year 2019-20
Annual Financial Audit Results
2
FY 2019-20 CAFR
COMPREHENSIVE ANNUAL
FINANCIAL REPORT
(city of
Carlsbad
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Financial Reports
Home » . » Departments " Finance ,, Financial Reports
The City of Carlsbad's Finance Department prepares a month I financial s
focuses on the City of Carlsbad's largest and most discretiona y fun tatus report The maiority of the report
are compared to the previous fiscal year as well as the month~ fi d (thle General Fund). Revenues and expenditures
fmanc1al status of the water and a t t _ y mancia status report expectations. In add1t1on, the
are included. w s ewa er enterprises and the Village Pro1ect Area of the Redevelopment Agency
Comprehensive Annual Financial Report
State law and the city"s Municipal Code require an Annual Financial Re rt conformity with General Accepted Principles (GAAP) and with the finan:I rbe prepared. _it has been prepared in
Governmental Accounting Standards Board (GASS). The information foundeportmg requirements prescribed by the
Report ,s provided by management to the City Council and the ubli m this Comprehensive Annual Fmancial
fiscal condition of the city for each fiscal year. p c to assist those mterested m understanding the
•The city has received the Certificate of Achievement for
Excellence in Financial Reporting for 22 straight years
3
Government Finance Officers Association Award
Government Finance Officers Association
Certificate of
Achievement
for Excellence
in Financial
Reporting
Presented to
City of Carlsbad
Califonlia
For its Comprehensive Annual
Financial Report
For the Fiscal Year Ended
June 30, 2019
~ p. ~
Executive Director/CEO
•Results of the fiscal year 2019-20 audit
•General Fund highlights
•Enterprise funds highlights
•Questions
4
Agenda
Results of the Fiscal Year 2019-20 audit
•Auditor is engaged to express an opinion
Are the financial statements materially misstated or not
•Audit fieldwork started in May 2020 –concluded on Nov. 19
•No new accounting standards were implemented
•City received an “unmodified” opinion
In the auditor’s judgement, financial statements and footnotes are
fairly stated, without any material exceptions, and in compliance
with GAAP
5
Results on compliance and internal control
•Auditor is required to determine compliance with certain laws and regulations the auditor believes are direct and material to the financial statements
No purchasing compliance issues identified
No investment compliance issues identified
No debt compliance issues identified
No successor agency compliance issues identified
•Compliance testing of federal grants is delayed until January 2021 due to pending CARES Act audit guidelines
•No significant deficiencies or material weaknesses in internal controls identified
6
General Fund highlights
•Main operating fund of the city
•For financial statement reporting purposes, combined with the Community Activity Grants Fund
•COVID-19 and the shelter-in-place order’s biggest impacts:
•Transient occupancy tax revenue, sales tax revenue, parks and recreation, business license and operating expenses
•Change in unassigned fund balance +$16.4 million to $99.0 million or 59% of the prior year’s budget
7
General Fund highlights -fund balance
8
(in millions)
Unassigned fund balance at July 1, 2019 $82.6
Revenues and transfers in 169.1
Expenditures, encumbrances and transfers out (163.9)
Changes in:
Nonspendable balances 0.6
Assigned balances 2.6
Economic uncertainty designation 8.0
Unassigned fund balance at June 30, 2020 $99.0
General Fund highlights -revenues
9
$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
Property tax Sales tax Transient
occupancy tax
Other taxes Income from
inv. and
property
Development
related
revenue
Other revenue
FY 2018-19
FY 2019-20
General Fund highlights -revenues
•Property tax revenues
increase primarily
driven by assessed
values which
increased by 6.2%
10
$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
General Fund highlights -revenues
•Sales tax revenues
experienced an 8%
decrease from the
prior year, driven by
economic impacts of
COVID-19
11
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
General Fund highlights -revenues
•Transient occupancy
tax revenues finished
28% lower than the
prior year due to
COVID-19 shelter-in-
place orders and other
related restrictions
12
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
General Fund highlights -revenues
•Other taxes include
franchise taxes which
decreased and
business license fees
which partially offset
the decrease
13
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
General Fund highlights -revenues
•Revenues from
property and
investments were
impacted by:
•The sale of former
Fire Station No. 3
•Flat interest income
year over year
14
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
General Fund highlights -revenues
•Expected slowdown in
development
occurred, but still
relatively strong year
on the residential side
15
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
General Fund highlights -revenues
•Other income includes
ambulance fees,
recreation fees, mutual
aid response, fines,
reimbursements,
intergovernmental
revenues (grants), and
all other smaller
revenues
16
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
General Fund highlights -expenditures
•Expenditures decreased year over year and finished significantly under budget due to:
•Impact of prior years’ additional CalPERS payments
•The closing out of old purchase orders
•Heightened fiscal awareness resulting from the pandemic
•Lower programmatic costs
•Less travel costs
•Managed personnel costs
•Fewer office costs
•The city added 34 new full-time and 11 part-time positions 17
Enterprise Funds highlights
18
$55.7M
$15.5M
$6.7M $4.5M
$53.7M
$17.2M
$10.3M
$4.5M
$0.0M
$10.0M
$20.0M
$30.0M
$40.0M
$50.0M
$60.0M
Water Wastewater Golf Course Solid Waste
Revenues
Expenses
Enterprise funds highlights
•COVID-19 impacts
Shift in water consumption from commercial to residential
No water shutoffs or late fees
Shut down or partial shutdown of golf course
•Rate increases for water and wastewater took effect in January 2020
•Rate increases for solid waste and golf took effect in July 2019
•Much of the operating losses in wastewater and solid waste were offset by income from investments
19
Questions
20