HomeMy WebLinkAbout2020-01-21; City Council; ; City of Carlsbad Fiscal Year 2018-19 Annual Financial Audit Results~ CITY COUNCIL
~ Staff Report
Meeting Date:
To:
From:
Staff Contact:
Jan. 21, 2020
Mayor and City Council
Scott Chadwick, City Manager
Kevin Branca, Finance Director
kevin.branca@carlsbadca.gov, 760-602-2430
CA Review v-,C-
Subject: City of Carlsbad Fiscal Year 2018-19 Annual Financial Audit Results
Recommended Action
Receive a presentation on the city's fiscal year 2018-19 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 (CPA) or public accountant, licensed by, and in good standing with, the California
Board of Accountancy. This presentation will provide a summary of the city's fiscal year annual
financial audit results, including the auditor's opinion, any auditor findings, and highlights from
the city's Comprehensive Annual Financial Report (CAFR) for fiscal year 2018-19.
Discussion
The Finance Department is r~sponsible 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 role is the
completion of the city's annual financial audit by a CPA firm.
Results of the Fiscal Year 2018-19 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 2018-19 audit began in May 2019 with the external auditors conducting interim
fieldwork, and the audit concluded on December 5, 2019, 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 (GAAP).
The auditor did not identify any material weaknesses in internal controls nor any material
instances of noncompliance. The auditors made recommendations on how the city could
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improve its internal controls through a separately issued report. These recommendations and
management's responses were:
1. Reduce the number of prior period adjustments. Although the city only had two prior
period adjustments, the city understands the importance of recording transactions in
the manner prescribed by GAAP.
2. Continue to evaluate whether older developer deposits can be refunded to developers
or escheated to the city. The finance department will continue to work with the
construction management and inspection department as well as the city attorney's
office to determine the disposition of older developer deposits.
3. Enhance the reporting capabilities of a city's nevvly implemented parks and recreation
registration system. The city wil.l partner with the new software vendor for parks and
recreation (CivicRec) to develop reports to assist in the balancing of deferred revenues,
accounts with credit balances, and credit card charges to ensure that the balances in
these accounts can be supported.
Citywide Financial Results
The city's revenues have continued to remain strong during this exceptionally long economic
expansion since the ~'Great Recession." The city's "big three" revenue sources are property,
sales, and transient occupancy taxes:
• In the most recent four fiscal years, property taxes have shown significant growth. An
increase in fiscal year 2018-19 of 5.4 percent in total assessed values, including
residential, commercial and industrial properties, led to higher property tax revenues.
This was the fourth year in a row since the recession the city saw growth in all three
assessed value components.
• Sales tax revenues were up significantly for the year. The state recently implemented a
new system that impacted the timing of sales tax revenues for the year. Sales tax
revenues for the previous fiscal year were artificially low due to this system conversion;
however, the city was made whole in fiscal year 2018-19.
• Higher room and occupancy rates throughout the city, as well as the addition of two
new hotels (the second LEGOLAND Hotel and the Westin Hotel) led to higher transient
occupancy taxes for the year.
Additionally, the city implemented a new business license system in November 2016, creating
timing differences in the receipt of license revenues. Fiscal year 2018-19 saw the second full
year using the new system. During this transition to the new system, additional resources were
allocated to the team to ensure timely processing of new business license applications and
renewals, generating additional revenues for the fiscal year as compared to the prior fiscal year.
As expected, development slowed down during fiscal year 2018-19, but remained relatively
strong for the year. The city saw infill residential development as well as some of the last
remaining master planned community development. There was very little commercial and
industrial development during the year.
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Income from investments were heavily impacted by three factors: required accounting
adjustments1, an increase in the average yield on the treasurer's portfolio for the year, and an
increase in the average daily cash balance in the General Fund for the year. These three factors
combined created a significant increase in income from investments. Flat rates for water and
wastewater combined with a reduction in water consumption led to lower charges for services
for the year.
A decrease in the donation of developer constructed assets (roads, pipelines, sidewalks, etc.)
and a reduction in developer impact fees due to lower level of development throughout the city
led to the decrease in capital grants and contributions. ·
The total cost of all programs and services was approximately $266.8 million in fiscal year 2018-
19, moderately higher (4.5 percent) than the fiscal year 2017-18. During the fiscal year, the City
Council approved a new budget surplus policy that changed how unspent appropriations from
one fiscal year are carried forward into the next fiscal year. With this change, city departments
focused on completing projects and procuring planned items before fiscal year end. This
accelerated costs that were incurred in fiscal year 2018-19 as compared to previous fiscal year.
Several other factors that influenced the change in expenses during the fiscal year:
• General government expen~es were lower from a smaller supplementary Cal PERS
payment made on the city's miscellaneous plan, but partially offset by higher personnel
costs due to personnel increases.
• The increase in public safety expenses was driven predominantly by two factors: an
additional CalPERS payment of $14.2 million partially offset by required annual pension
accounting adjustments.
• Community services expenses were impacted by required annual pension accounting
adjustments, general salary and benefit increases, and additional focus on code
enforcement.
• 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 $185. 7 million, an increase of $6.6 million. The unassigned fund balance
portion of the General Fund was $101. 7 million, an increase of $19.1 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 useful 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 and the new budget surplus policy, partially offset by
additional CalPERS payments.
1 Government Accounting Standards require investments to be adjusted to fair market value as of June 30, 2019.
Investment markets improved throughout the year; however, the recognition of the gains in fiscal year 2018~19
are artificial as the city's Investment Policy of holding investments to maturity.
Jan. 21, 2020 Item #2 Page 3 of 6
Property taxes, transient occupancy tax, sales tax, business license taxes, franchise fees, income
from property and investments drove the revenue growth of the city. The economy continues
to remain strong. This was evident as all the tax revenues in the city saw moderate to
significant growth during the year. As expected, development activity within the city saw a
moderate decrease (charges for services and licenses and fees), after a relatively strong 2017-
18 fiscal year. With the city approaching buildout, several of the remaining large residential
master planned communities and industrial/commercial parks saw a reduction in construction
activity as they neared completion, leaving only a small portion of the city undeveloped. This
slower pace is projected to continue and cause a further revenue decline for the foreseeable
future as the city approaches buildout.
Operations and maintenance expenses finished lower than budgeted and the new budget
surplus policy reduced the amount of carry forward budgets from fiscal year 2018-19 to fiscal
year 2019-20 by $6.9 million. Included in fiscal year 2018-19 expenses is the city's additional
$20 million Cal PERS payment, impacting the General Fund ($5.1 million towards general
government and $14.2 million public safety2). Additionally, community services were impacted
by the full year operation of the Pine Avenue Community Center: additional focus on homeless
programs, higher nuisance abatement costs, new library programs, and an update of the
Schulman Auditorium sound system. Another change driving the general government results
was the change made in the accounting for billing services provided by the finance department
for the city's enterprises which also impacted interdepartmental charges.
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 (cost recovery), financial position, and cash flows ..
Water funds had an operating loss of approximately $3.9 million for the year. Operating
revenues were approximately $47.5 million and operating expenses were approximately $51.4
million. One of the larger factors in the operating loss was the decrease in volume of water
sales, which was directly attributable to almost three times more rainfall in the current
year. Water rates were increased in January 2017 and held flat during 2018 and 2019. The cost
of purchased water from the Metropolitan Water District and the San Diego County Water
Authority (suppliers of the city's potable water) continued to increase. The decrease in
purchased water, and the purchase of costlier desalinated water, were offset primarily by an
additional payment made to Encina (the operator of the recycled water facility) to assist in
paying off their Cal PERS unfunded liability. Increases in income from investments and property
taxes resulted in income before transfers and capital contributions of $5.2 million.
In the twelfth year of operation, the Golf Course Fund had an operating loss of $3.1 million,
primarily due to depreciating the enterprise's assets ($3.S million). If golf course operating
revenues are not sufficient to cover golf course operating expenses (excluding depreciation),
2 The city used $5.S million of funds previously set aside (assigned) for Cal PERS stability to help make this payment.
Jan. 21, 2020 Item #2 Page 4 of 6
the General Fund will make contributions in the form of lease payments to pay for the
shortfall. This was the second year in a row that the General Fund did not make a lease
payment to the Golf Course Fund; a direct result of paying off the golf course bonds in fiscal
year 2016-17. Revenues remained strong in the current year, but an increase in course
maintenance and personnel expenses drove a lower operating result.
The Wastewater Funds had an annual operating loss of $1.1 million for the fiscal year. Total
revenues from operations were up due primarily to development throughout the city. The
increase in operating expenses was predominantly due to an additional payment made towards
the unfunded CalPERS liability and a depreciation true-up at Encina, the operator of the
wastewater treatment facility. Non-operating revenues related to income from investments
added $1.7 million to the operating income, resulting in a net gain of $593,000 before transfers
and capital contributions.
Solid Waste Operations and Storm Water Programs are combined on the city's financial reports
and showed a net operating loss of $256,000 for the year. Revenues were essentially the same
as the previous fiscal year, and expenses increased due to planned increases in outside
professional service costs. The operating loss was more than offset by income from
investments, which resulted in a net gain before transfers and capital contributions of
$294,000.
The unrestricted net position for the Water, Golf Course, Wastewater, and Solid Waste
Operations at the end of the year amounted to $96.6 million, or approximately 20 percent of
the total enterprise funds net position. The unrestricted net position may be used for rate
stabilization, fluctuations in operating expenses, and unforeseen repairs and
maintenance. Approximately $38.5 million, or 8 percent, of the net position of all the
enterprise funds are restricted for the future capital construction of new and replacement
water and wastewater infrastructure assets. Since the 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 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)
Pursuant to Public Resources Code Section 21065, receiving this annual report does not
constitute a "project" within the meaning of CEQA in that is has no potential to cause either a
direct or indirect physical change in the environment, or a reasonable foreseeable indirect
physical change in the environment and, therefore, does not require environmental review.
Jan. 21, 2020 Item #2 Page 5 of 6
Public Notification
This item was noticed in accordance with the Ralph M. Brown Act and was available for public
viewing and review at least 72 hours prior to the scheduled meeting date.
Exhibit
None.
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