HomeMy WebLinkAbout2021-09-28; City Council; ; Evaluation of the Accounting Treatment of the General Fund’s Advance to the Golf Course Enterprise Fund Meeting Date: Sept. 28, 2021
To: Mayor and City Council
Chair and Board Members
From: Scott Chadwick, City Manager/Executive Director
Staff Contact: Ryan Green, Finance Director
ryan.green@carlsbadca.gov, 760-602-2414
Laura Rocha, Deputy City Manager, Administrative Services
laura.rocha@carlsbadca.gov, 760-602-2415
Subject: Evaluation of the Accounting Treatment of the General Fund’s Advance
to the Golf Course Enterprise Fund
District: All
Recommended Action
Adopt resolutions allowing the city to satisfy mandated financial reporting requirements by
authorizing a $47,031,506 transfer from the General Fund to the Golf Course Enterprise Fund.
Executive Summary
The city’s internal auditor presented an internal audit report on Aug. 25, 2020, with a
recommendation for city management to evaluate the balance of the General Fund’s
advance balance to the city’s municipal golf course, The Crossings at Carlsbad Golf Course.
Management evaluated the balance and determined that the repayment of this advance is
not scheduled to happen in the near and foreseeable future. Because of this, the relevant
financial reporting requirements dictate that the loan must be reclassified as a “Transfer In”
to the Golf Course Enterprise Fund and a “Transfer Out” of the General Fund.
The city will not have formally forgiven the loans or interest by taking this action, and the
advance will be disclosed annually in the Consolidated Annual Financial Report as a
contingent liability of the Golf Course Enterprise Fund. The Golf Course Enterprise Fund will
begin repaying this loan if and when there is enough money in the Golf Course Enterprise
Fund. Those payments would be recorded at that time as a transfer from the Golf Course
Enterprise Fund to the General Fund.
Staff recommend the City Council and Board of Directors adopt resolutions that authorize a
$47,031,506 transfer from the General Fund to the Golf Course Enterprise Fund to satisfy
mandated financial reporting requirements.
J O I N T C I T Y C O U N C I L A N D
Sept. 28, 2021 Item #11 Page 1 of 10
Discussion
The city built the Crossings golf course using funds from both revenue bonds and the city’s
General Fund. The city has contributed funds from the General Fund to the Golf Course
Enterprise Fund numerous times over the years since the golf course’s initial construction.
The city’s General Fund contributions to the Golf Course Enterprise Fund have come in two
forms: an advance or a transfer. An advance is similar to a loan of money from one fund to
another with the expectation of repayment. In more recent years, the city transferred money
from the General Fund to the Golf Course Enterprise Fund, permanently moving money from
one fund to the other.
The city stopped treating General Fund subsidies to the Golf Course Enterprise Fund as loans
in 2012. Instead of recording these subsidies as advances, the city recorded them as transfers
to the Golf Course Enterprise Fund.
The table below provides a comprehensive picture of these transactions. As of the end of
fiscal year 2019-20, the city’s General Fund has advanced and transferred approximately
$76.6 million from the General Fund to the Golf Course Enterprise Fund for the golf course’s
construction, debt service and defeasance payments, and for a portion of its operating costs.
Fiscal
year Advance
Accrued
interest Repayment
Advance
total Transfers In
Total
advances,
interest and transfers
1996-97 $ 1,765,200 $ - $ - $ 1,765,200 $ - $ 1,765,200
1997-98 972,000 - - 2,737,200 - 2,737,200
2002-03 - - 2,737,200 600,000 3,337,200
2004-05 1,400,000 - - 4,137,200 - 4,737,200
2005-06 30,300,000 2,457,101 - 36,894,301 - 37,494,301
2006-07 7,886,174 1,796,143 - 46,576,618 - 47,176,618
2007-08 - 2,070,983 - 48,647,601 - 49,247,601
2008-09 1,766,764 1,837,481 - 52,251,846 - 52,851,846
2009-10 1,370,000 1,332,194 4,229,417 50,724,623 266,390 51,591,013
2010-11 1,640,000 1,062,747 - 53,427,370 - 54,293,760
2011-12 - 881,498 - 54,308,868 1,644,592 56,819,850
2012-13 561,225 622,984 - 55,493,076 409,605 58,413,664
2013-14 545,000 583,647 41,199 56,580,524 998,549 60,499,660
2014-15 - 7,685 229,108 56,359,100 1,031,240 61,309,477
2015-16 - 5,326 251,743 56,112,683 1,049,795 62,112,855
2016-17 - 2,590 480,402 55,634,872 14,811,100 76,446,143
2017-18 - 1,015 108,980 55,526,907 - 76,338,179
2018-19 - - 22,782 55,504,126 - 76,315,397
2019-20 - - 45,257 55,458,869 - 76,270,140
Total $ 48,206,363 $ 12,661,393 $5,408,887 $ 55,458,869 $ 20,811,271 $ 76,270,140
Advances and transfers summary
Sept. 28, 2021 Item #11 Page 2 of 10
Although operating revenues at the golf course have consistently grown over the past ten
years, various factors indicate it may not be reasonable to expect golf course revenues will be
sufficient to repay the city’s General Fund for these advances. Some of these factors are:
• The city’s prior external financial auditor determined in 2011 that repayment of the
advance with continued interest accrual is highly unlikely.
• The city discontinued accruing interest on advances in 2014.
• The golf course has not made a profit, including depreciation, since it opened.
o The golf course has been generating increasing operating revenues in recent
years, but these increases have not been enough to begin repaying the
outstanding advances, aside from two short-term advances for operational
equipment needs.
Conversely, a repayment agreement established by the city in 2006 addressed both existing
advances and any subsequent advances to be made by the city to the Golf Course Enterprise
Fund for the purpose of design, construction, maintenance and operation of the golf course.
However, it did not include a repayment schedule, nor did it include repayment terms on the
General Fund’s existing advances. Instead of containing a repayment schedule, the
agreement stated repayment shall be made from available funds as determined annually.
The Governmental Accounting Standards Board, the independent, private entity that
establishes accounting and financial reporting standards for U.S. state and local governments
that follow generally accepted accounting principles, dictates that interfund balances should
be reduced and the amount that is not expected to be repaid should be reported as a
transfer from one fund to another if repayment is not expected within a reasonable time.1
By taking this action, the city will not have formally forgiven the loans or interest, as noted
above. The advance will be disclosed annually in the Consolidated Annual Financial Report as
a contingent liability of the Golf Course Enterprise Fund.
As noted above, should sufficient resources in the Golf Course Enterprise Fund become
available to make repayments in the future, those repayments of this contingent liability will
take place, and be recorded as a transfer out from the Golf Course Enterprise Fund to the
General Fund at that time.
Long-term golf course forecast
The city’s golf course has historically struggled to produce a net profit and was initially
burdened with high interest payments due to the significant cost of construction. In 2016,
the city opted to pay off the remaining bonds that had been used to pay for a portion of the
construction. These repayments were made through a transfer from the General Fund to the
Golf Course Enterprise Fund.
1 Governmental Accounting Standards Series Standard No. 34, paragraph 112
Sept. 28, 2021 Item #11 Page 3 of 10
Rounds played per fiscal year
Recently, the golf industry has seen a resurgence in demand for the sport and the golf course
has benefited considerably from a spike in rounds played. However, resurgence in the sport
is not considered by market experts to be sustainable and can be attributed partly to the
COVID-19 restrictions, which closed gyms, movie theatres and other recreational venues,
limiting the available leisure activities. Projections of the golf course’s future revenues,
operating expenditures and capital outlays using historical data and industry outlooks
indicate the golf course will sustain its operational profitability. However, as seen in the table
below, repayment of the large loan balance is not projected in the near or foreseeable
future.
Fiscal year Operating
Income/(loss)2 Depreciation
Nonoperating
revenues/
(expenses)
Change in net
position
Cash balance/
reserve1
*2017-18* $ 981,263 $ (3,566,933) $ 49,001 $ (2,536,669) $ 2,304,518
*2018-19* 471,834 (3,527,563) 229,821 (2,825,908) 2,539,295
*2019-20* (97,435) (3,554,007) 116,268 (3,535,174) 1,562,152
*2020-21* 1,309,011 (3,369,426) 119,469 (1,940,946) 2,823,407
*2021-22* 297,315 (3,601,000) 120,000 (3,183,685) 2,290,722
*2022-23* 306,234 (3,619,005) 123,600 (3,189,171) 2,270,556
*2023-24* 315,421 (700,000) 127,308 (257,271) 2,263,285
*2024-25* $ 324,884 $ (703,500) $ 131,127 $ (247,489) $ 2,269,296
1 Balance at the end of the fiscal year. Balance fluctuates based on operating income/(loss), nonoperating
revenues/(expenses) and other changes in balance sheet accounts.
2 Excludes depreciation, a non-cash item
* Projected balances
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Golf course financial history and forecast
Sept. 28, 2021 Item #11 Page 4 of 10
Public benefit
The city owns and provides, and, in some cases, operates, many amenities for its residents
and visitors, such as its community center, community parks, the Leo Carrillo Historic Park,
and open space and trails. The golf course serves the community in many ways:
• Recreational activities
o Averages +53,000 rounds per year of golf played by residents and visitors
o Home course for Carlsbad High School and Sage Creek High School Golf Teams
o Holds tournament events such as the Carlsbad City Amateur Golf
Championship
o Hosts Summer Junior Golf Camp Program
• Food and beverage (fiscal year 2018-19 statistics)
o Served more than 6,000 local guests at Sunday brunches and held many other
events
o Hosted 53 weddings
o Held local events for local schools, clubs and companies
Options
Staff provide the following options for the City Council’s and Board’s consideration:
1. Adopt resolutions authorizing a transfer from the General Fund to the Golf Course
Enterprise Fund.
Pros
• The city’s Consolidated Annual Financial Report will conform with the required
financial reporting requirements.
Cons
• None identified
2. Do not adopt resolutions authorizing a transfer from the General Fund to the Golf
Course Enterprise Fund.
Pros
• None identified.
Cons
• The city’s Consolidated Annual Financial Report will not conform with the
required financial reporting requirements.
o The city’s external auditor may issue a comment on the reporting
discrepancy or modify its opinion on the city’s Consolidated Annual
Financial Report, and the city’s credit rating would likely suffer.
Fiscal analysis
The current balance of advances from the General Fund to the Golf Course Enterprise Fund is
$55,458,869 and includes $47,031,506 of principal and $8,427,363 of interest. This does not
include transfers, or subsidies, of $20,811,271. Staff is requesting authority to transfer
$47,031,506 out of the General Fund to the Golf Course Enterprise Fund, as required by
governmental accounting standards.
The transfer will not result in a cash impact to the General Fund or Golf Course Enterprise
Fund. However, on the city’s financial statements for the fiscal year ended June 30, 2021, the
General Fund and Golf Course Enterprise Fund balance sheets will have the loan receivable
Sept. 28, 2021 Item #11 Page 5 of 10
and payable removed which would reduce the non-spendable2 General Fund Balance by
$47,031,506, and an extraordinary gain of $8,427,363 will be reported in the Golf Course
Enterprise Fund. The loan balance will continue to be reported in the notes to the financial
statements as a contingent liability of the Golf Course Enterprise Fund totaling $55,458,869.
Next steps
The Finance Department will continue to track all advances and transfers made from the
General Fund to the Golf Course Enterprise Fund and the current loan will be disclosed
annually as a contingent liability in the city’s Consolidated Annual Financial Report. Also, the
Finance Department will analyze the balance of funds held by the golf course during the
annual budget process. If excess funds are available, staff will propose to transfer funds from
the Golf Course Enterprise Fund to the General Fund.
Environmental Evaluation (CEQA)
In keeping with California Public Resources Code Section 21065, this action of making a transfer
from the General Fund to the Golf Course Enterprise Fund to satisfy mandated financial
reporting requirements does not constitute a “project” within the meaning of the California
Environmental Quality Act 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
This item was noticed in accordance with the Ralph M. Brown Act and it was available for
public viewing and review at least 72 hours prior to the scheduled meeting date.
Exhibits
1. City Council resolution
2. Carlsbad Public Financing Authority resolution
2 Non-spendable refers to money owed, assets and other items in a fund balance that cannot be readily spent, as is
the case here.
Sept. 28, 2021 Item #11 Page 6 of 10
RESOLUTION NO. 2021-224
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, AUTHORIZING A $47,031,506 TRANSFER FROM THE GENERAL
FUND TO THE GOLF COURSE ENTERPRISE FUND
EXHIBIT 1
WHEREAS, on Aug. 25, 2020, the city's internal auditor presented an internal audit report with
a recommendation for city management to evaluate the balance of the General Fund's advance
balance to the city's Golf Course Enterprise Fund; and
WHEREAS, management evaluated the balance and determined that the repayment of the
advance is not scheduled to happen in the near and foreseeable future; and
WHEREAS, the relevant financial reporting requirements dictate that the loan must be
reclassified as a "Transfer In" to the Golf Course Enterprise Fund and a "Transfer Out" of the General
Fu,nd; and
WHEREAS, the city will not have formally forgiven the loans or interest by taking this action; and
WHEREAS, the advance will be disclosed annually in accordance with the accounting rules; and
WHEREAS, the Golf Course Enterprise Fund will begin repaying this loan if and when there are
sufficient funds in the Golf Course Enterprise Fund.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1. That the above recitations are true and correct.
2. That the Deputy City Manager, Administrative Services or designee is authorized to
allocate $47,031,506 of nonspendable General Fund balance and transfer out of the
General Fund and into the Golf Course Enterprise Fund an equivalent amount in the
fiscal year 2020-21 accounting records.
Sept. 28, 2021 Item #11 Page 7 of 10
RESOLUTION NO. 86
A RESOLUTION OF THE BOARD OF DIRECTORS OF THE CARLSBAD PUBLIC
FINANCING AUTHORITY OF THE CITY OF CARLSBAD, CALIFORNIA AUTHORIZING
A $47,031,506 TRANSFER FROM THE GENERAL FUND TO THE GOLF COURSE
ENTERPRISE FUND
EXHIBIT 2
WHEREAS, on Aug. 25, 2020, the city's internal auditor presented an internal audit report with a
recommendation for city management to evaluate the balance of the General Fund's advance balance to
the city's Golf Course Enterprise Fund; and
WHEREAS, management evaluated the balance and determined that the repayment of the advance
is not scheduled to happen in the near and foreseeable future; and
WHEREAS, the relevant financial reporting requirements dictate that the loan must be reclassified
as a "Transfer In" to the Golf Course Enterprise Fund and a "Transfer Out" of the General Fund; and
WHEREAS, the city will not have formally forgiven the loans or interest by taking this action; and
WHEREAS, the advance will be disclosed annually in accordance with the accounting rules; and
WHEREAS, the Golf Course Enterprise Fund will begin repaying this loan if and when there are
sufficient funds in the Golf Course Enterprise Fund.
NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Carlsbad Public Financing
Authority as follows:
1. That the above recitations are true and correct.
2. That the Deputy City Manager, Administrative Services or designee is authorized to allocate
$47,031,506 of nonspendable General Fund balance and transfer out of the General Fund
and into the Golf Course Enterprise Fund an equivalent amount in the fiscal year 2020-21
accounting records.
Sept. 28, 2021 Item #11 Page 9 of 10