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HomeMy WebLinkAbout; ; 1992 Federal Financial Assistance audit report; 1992-07-30CITY OF CARLSBAD, CALIFORNIA Schedule of Federal Financial Assistance and Independent Auditors' Reports Required Under the Single Audit Act of 1984 June 30, 1992 CITY OF CARLSBAD, CALIFORNIA Schedule of Federal Financial Assistance and Independent Auditors' Reports Required Under the Single Audit Act of 1984 Year ended June 30, 1992 Table of Contents Page Independent Auditors' Report on Supplementary Schedule of Federal Financial Assistance 1 Schedule of Federal Financial Assistance 2 Notes to Schedule of Federal Financial Assistance 3 Independent Auditors' Report on Compliance at the General Purpose Financial Statement Level 4 Independent Auditors' Report on Compliance with General Requirements 5 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major and Nonmajor Federal Financial Assistance Programs 6 Special Tests and Provisions 8 Schedule of Findings and Questioned Costs 9 Status of Prior Year Findings 13 Independent Auditors' Report on Internal Controls at the General Purpose Financial Statement Level 14 Independent Auditors' Report on the Internal Control Structure at the Federal Financial Assistance Program Level 17 Peat Marwick Certified Public Accountants 750 B Street San Diego. CA 92101 Independent Auditors' Report on Supplementary Schedule of Federal Financial Assistance The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. These general purpose financial statements are the responsibility of the management of the City. Our responsibility is to express an opinion on these general purpose financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general purpose financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Our audit was made for the purpose of forming an opinion on the general purpose financial statements of the City of Carlsbad, California, taken as a whole. The accompanying Schedule of Federal Financial Assistance is presented for purposes of additional analysis and is not a required part of the general purpose financial statements. The information in that Schedule has been subjected to the auditing procedures applied in the audit of the general purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the general purpose financial statements taken as a whole. fad October 9, 1992 Member Firm of Klynveld Peat Marwick Goerdeler CITY OF CARLSBAD, CALIFORNIA Schedule of Federal Financial Assistance For the year ended June 30, 1992 Federal/Pass-Through Grantor/Program Title MAJOR PROGRAMS; Lower Income Housing Assistance Program (Section 8-Existing Housing and State Agency Program) Community Development Block Grant/Entitlement Grants NONMAJOR PROGRAMS; Housing Voucher Program Special Programs for the Aging, Title III, Parts A & B Special Programs for the Aging, Title III, Part C, Nutrition Services National Park Service, Department of the Interior (Historic Preservation Survey) Library Partnership-for-Change (Latino Outreach) Pass- Pass- Federal Through Through CFDA # Agency Grantor's # 14.156 N/A 14.218 N/A 14.177 N/A 13.633 13.635 15.904 84.034 N/A N/A N/A 30718E 30718E 06-91-6002 40-1954 and 40-2251 Pass-Through Agency; A. The San Diego County Department of the Area Agency on Aging. B. The California Department of Parks and Recreation. C. The California State Library. Total Expenditures 1,862,282 313,479 252,471 7,973 164,545 1,223 69.285 $ 2.671.258 See accompanying notes to Schedule of Federal Financial Assistance. 2 CITY OF CARLSBAD, CALIFORNIA Notes to Schedule of Federal Financial Assistance For the year ended June 30, 1992 (1) General The accompanying Schedule of Federal Financial Assistance presents the expenditures of all federal financial assistance programs of the City of Carlsbad (the City). The City's reporting entity is defined in Note 1 to the City's general purpose financial statements. All expenditures of federal financial assistance received directly from federal agencies as well as expenditures of federal financial assistance passed through other government agencies are included in the Schedule. (2) Basis of Accounting The accompanying Schedule of Federal Financial Assistance is presented using the modified accrual basis of accounting, which is described in Note 1 to the City's general purpose financial statements. (3) Relationship to General Purpose Financial Statements Federal financial assistance program revenues and expenditures are reported in the City's general purpose financial statements as follows: Special Revenue Funds:Community Development Block Grant Federal Grants (Partnershi ps-for- Change and Historic Preservation)Section 8 Housing Authority Senior NutritionCapital Projects Funds: Community Development Block Grant Fund Balance June 30, 1991 $ 553,412 20,853 118,155 Revenues Expenditures 21,850 89,427 2,134,328 172,518 313.479 Fund Balance June 30, Transfers 1992 575,262 70,508 2,114,753 172,518 313.479 (1,884)37,888 137,730 Total $ 692.420 2.731.602 2.671.258 (1.884) 750.880 Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report on Compliance at the General Purpose Financial Statement Level The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general purpose financial statements are free of material misstatement. Compliance with laws, regulations, contracts, and grants applicable to the City is the responsibility of the City's management. As part of obtaining reasonable assurance about whether the general purpose financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts and grants. However, our objective was not to provide an opinion on overall compliance with such provisions. Accordingly, we do not express such an opinion. The results of our tests indicate that, with respect to the items tested, the City complied, in all material respects, with the provisions referred to in the preceding paragraph. With respect to items not tested, nothing came to our attention that caused us to believe that the City had not complied, in all material respects, with those provisions. This report is intended for the information of members of City Council, management of the City and the Controller of the State of California. However, upon acceptance by the City, this report is a matter of public record and its distribution is not limited. October 9, 1992 Member Firm of Klynveld Peat Marwick Goerdeler May 20, 1993 TO: CITY CLERK VIA: ACTING FINANCE DIRECTOR FROM: Accountant REVISION TO FISCAL YEAR 1991-92 SINGLE AUDIT REPORT (SCHEDULE OF FEDERAL FINANCIAL ASSISTANCE & INDEPENDENT AUDITORS' REPORTS) The State Controller's Office required a revision to paragraph two of the Independent Auditors' Report on Compliance with General Requirements found on page 5 of the Single Audit Report. The word "major" has been eliminated. KPMG Peat Marwick has corrected the report and supplied the replacement pages for distribution. Attached are two copies of the compliance report only. If you would prefer a new bound Single Audit Report, including the revised compliance report, please contact me in the Finance Department at extension 2868. BARBARA HONIG Attachments Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report on Compliance with General Requirements The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. We have also applied procedures to test the City's compliance with the following requirements applicable to its federal financial assistance programs, which are identified in the accompanying Schedule of Federal Financial Assistance, for the year ended June 30, 1992: Political activity Civil rights Cash management Davis Bacon Act Relocation assistance and real property acquisition Federal financial reports Allowable costs/cost principles Drug-Free Workplace Act Administrative requirements Our procedures were limited to the applicable procedures described in the Office of Management and Budget's Compliance Supplement for Single Audits of State and Local Governments. Our procedures were substantially less in scope than an audit, the objective of which is the expression of an opinion on the City's compliance with the requirements listed in the preceding paragraph. Accordingly, we do not express such an opinion. With respect to the items tested, the results of those procedures disclosed no material instances of noncompliance with the requirements listed in the second paragraph of this report. With respect to items not tested, nothing came to our attention that caused us to believe that the City had not complied, in all material respects, with those requirements. However, the results of our procedures disclosed immaterial instances of noncompliance with those requirements, which are described in the accompanying Schedule of Findings and Questioned Costs. This report is intended for the information of members of City Council, management of the City and the Controller of the State of California. However, upon acceptance by the City, this report is a matter of public record and its distribution is not limited. October 9, 1992 Member Firm of Klynveld Peat Marwick Goerdeler Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report on Compliance with General Requirements The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. We have also applied procedures to test the City's compliance with the following requirements applicable to its major federal financial assistance programs, which are identified in the accompanying Schedule of Federal Financial Assistance, for the year ended June 30, 1992: Political activity Civil rights Cash management Davis Bacon Act Relocation assistance and real property acquisition Federal financial reports Allowable costs/cost principles Drug-Free Workplace Act Administrative requirements Our procedures were limited to the applicable procedures described in the Office of Management and Budget's Compliance Supplement for Single Audits of State and Local Governments. Our procedures were substantially less in scope than an audit, the objective of which is the expression of an opinion on the City's compliance with the requirements listed in the preceding paragraph. Accordingly, we do not express such an opinion. With respect to the items tested, the results of those procedures disclosed no material instances of noncompliance with the requirements listed in the second paragraph of this report. With respect to items not tested, nothing came to our attention that caused us to believe that the City had not complied, in all material respects, with those requirements. However, the results of our procedures disclosed immaterial instances of noncompliance with those requirements, which are described in the accompanying Schedule of Findings and Questioned Costs. This report is intended for the information of members of City Council, management of the City and the Controller of the State of California. However, upon acceptance by the City, this report is a matter of public record and its distribution is not limited. October 9, 1992 Member Firm of Klynveld Peat Marwick Goerdeler Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Maior and Nonmaior Federal Financial Assistance Programs The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. We have also audited the City's compliance with the requirements governing types of services allowed or unallowed; eligibility; reporting; special tests and provisions as identified in the accompanying Attachment; monitoring of sub-recipients; and claims for advances and reimbursements that are applicable to each of its major federal financial assistance programs, which are identified in the accompanying Schedule of Federal Financial Assistance, for the year ended June 30, 1992. The management of the City is responsible for the City's compliance with those requirements. Our responsibility is to express an opinion on compliance with those requirements based on our audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States, and the Office of Management and Budget (OMB) Circular A-128, Audits of State and Local Governments. Those standards and OMB Circular A-128 require that we plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements. We believe that our audit provides a reasonable basis for our opinion. The results of our audit procedures disclosed immaterial instances of noncompliance with the requirements referred to in the second paragraph above, which are described in the accompanying Schedule of Findings and Questioned Costs. We considered these instances of noncompliance in forming our opinion on compliance, which is expressed in the following paragraph. In our opinion, the City of Carlsbad, California, complied, in all material respects, with the requirements governing types of services allowed or unallowed; eligibility; reporting; special tests and provisions as identified in the accompanying Attachment; monitoring of sub-recipients; and claims for advances and reimbursements that are applicable to each of its major federal financial assistance programs for the year ended June 30, 1992. Member Firm of Klynveld Peat Marwick Goerdeler In connection with our audit of the 1992 general purpose financial statements of the City and with our study and evaluation of the City's internal control systems used to administer federal financial assistance programs, as required by OMB Circular A-128, we selected certain transactions applicable to certain nonmajor federal financial assistance programs for the year ended June 30, 1992. As required by OMB Circular A-128, we have performed auditing procedures to test compliance with the requirements governing types of services allowed or unallowed and eligibility that are applicable to those transactions. Our procedures were substantially less in scope than an audit, the objective of which is the expression of an opinion on the City's compliance with these requirements. Accordingly, we do not express such an opinion. With respect to the items tested, the results of those procedures disclosed no material instances of noncompliance with the requirements listed in the preceding paragraph. With respect to items not tested, nothing came to our attention that caused us to believe that the City had not complied, in all material respects, with those requirements. This report is intended for the information of members of City Council, management of the City and the Controller of the State of California. However, upon acceptance by the City, this report is a matter of public record and its distribution is not limited. October 9, 1992 Attachment Program CITY OF CARLSBAD, CALIFORNIA Special Tests and Provisions Year ended June 30, 1992 Compliance Requirement Lower Income • The Public Housing Agency (PHA) is required to review the Housing Assistance Program (CFDA #14.156) contract rent (except for housing vouchers) and utility allowances for each unit to ensure that they do not exceed certain rent limitations. • Except for housing vouchers, the PHA is required to annually adjust contract rents and tenant utility allowances upon request from the owner. Special adjustments may also be granted to the extent determined necessary by the PHA and the Department of Housing and Urban Development (HUD). • The PHA is required to conduct an initial (and annually thereafter) inspection of units prior to executing the housing assistance payment contract to ensure that the units meet Housing Quality Standards (applies to existing housing and moderate rehabilitation programs only). Community Development Block Grant/ Entitlement Grants (CFDA #14.218) • The grantee is required to enter into written agreements with its subrecipients that meet certain criteria before disbursing funds to the subrecipients. • Community Development Block Grant (CDBG) funds (and local funds to be repaid with CDBG funds) cannot be obligated or expended before receipt of HUD's approval of a Request for Release of Funds (RROF) and environmental certification, except for exempt activities under 24 CFR 58.34. • CDBG projects must have an environmental review made unless they meet criteria specified in the Code of Federal Regulations that would exempt or exclude them from the requirements. • The grantee must accurately account for any program income generated from the use of CDBG Funds and must treat such income as additional CDBG Funds subject to all program rules. CITY OF CARLSBAD, CALIFORNIA Schedule of Findings and Questioned Costs For the year ended June 30, 1992 PROGRAM: Drug-Free Workplace Act Compliance Requirement: The City must publish a statement notifying employees that the unlawful manufacture, distribution, dispensing, possession or use of a controlled substance is prohibited in the City's workplace. Finding; The City has not published a policy statement notifying fire and police employees that the unlawful manufacture, distribution, dispensing, possession or use of a controlled substance is prohibited in the City's workplace. Recommendation; The City should finalize its draft policy statement with regard to the Drug-Free Workplace Act for fire and police employees. Once the policy statement is finalized, it should be published in order to ensure that all fire and police employees are notified that compliance is required. City's Response; Council adopted a drug policy for Carlsbad City Employees' Association in January 1992. However, the City has not yet concluded its meet and confer obligation, as defined by the Meyers-Millias-Brown Act, with the Carlsbad Police Officers' Association and the Carlsbad Firefighters' Association. At the conclusion of these discussions, the City will issue a policy and will conduct training with all employees' managers and supervisors in compliance with the Drug-Free Workplace Act. PROGRAM; Lower Income Housing Assistance Program 1. Compliance Requirement; The City is required to adjust contract rents and tenant utility allowances annually on request from the owner. Finding; For case file #4346, the City increased the amount of rent paid to the landlord; however, this increase was not supported by a request from the landlord to raise the rent. We did note subsequent correspondence between the City and the landlord regarding the increase in rent. CITY OF CARLSBAD, CALIFORNIA Schedule of Findings and Questioned Costs, Continued Recommendation; We recommend that a checklist be utilized for case files to ensure that all required documentation is contained and any pending items are resolved. City's Response; The Housing Authority has developed a "File Contents Checklist" to be utilized by caseworkers when processing initial, annual and interim recertifications. The implementation of this checklist will ensure that all required documentation is received prior to issuing the Housing Assistance Payment. The supporting documentation for case file #4346 has been received. 2. Compliance Requirement: See requirement on previous page. Finding; For case file #3545, the City entered an incorrect rent amount on the tenant summary form. The landlord requested a rent increase to $665 and a rent amount of $675 was entered on the summary form. This $10 monthly overpayment occurred for six months. Recommendation; The procedures in place to review tenant summary forms should include a re-verification of rent amounts by a second person to ensure proper amounts are entered. City's Response; The Housing Program Manager is reviewing all case files processed for payment. This review includes verifying that the amount of rent increase granted does not exceed the amount requested. Additionally, staff has received remedial training in this area. The $60.00 overpaid for case file #3545 has been recouped. 3. Compliance Requirement; Financial reports must be submitted on a periodic basis within the required timeframe. 10 CITY OF CARLSBAD, CALIFORNIA Schedule of Findings and Questioned Costs, Continued Finding; We noted that the City submitted its Requisition for Partial Payment of Annual Contributions for the quarter ended September 30, 1991 on November 27, 1991, which was after the deadline of November 15, 1991. The City indicated that a verbal extension was granted by HUD; however, they could not provide written approval for the extension. Recommendation ; Any communication between the City and regulatory agencies relating to compliance with rules and regulations should be in writing and retained by the City. City's Response; Any requests for extensions or other matters relating to compliance with rules and regulations will be communicated to the Department of Housing and Urban Development in writing and copies will be available in the pertinent housing files. PROGRAM; Community Development Block Grant (CDBG) As part of our testwork on the City's CDBG program, we examined a sample of 16 expenditures totaling approximately $176,000. Total federal expenditures in the CDBG program for fiscal year 1992 were $313,479. 1. Compliance Requirement; CDBG funds may be used for activities including planning activities and administrative costs. Finding; During our review of expenditures, we noted that amounts being charged relating to administering the CDBG program are based on budgeted estimates of labor costs and not actual expenditures. The City should be using actual time spent when charging administration time to CDBG. The amount of the budgeted costs identified in our review was $738. Recommendation; The City should discontinue using estimates to determine administrative charges to the CDBG program and should develop a method for charging such costs based on actual hours worked. 11 CITY OF CARLSBAD, CALIFORNIA Schedule of Findings and Questioned Costs, Continued City's Response; The City of Carlsbad will no longer rely on managerial estimates to determine the actual charges for CDBG program administration. A system has been developed and implemented to record and monitor staff time spent on CDBG administrative activities on a daily basis. Each employee working on the CDBG program is recording hours on a detailed timesheet. The figures are evaluated on a quarterly basis and a year-end adjustment will be made to reflect the actual administrative expenses incurred instead of the original estimates for costs. A similar finding was made by the U.S. Department of Housing and Urban Development and the actions described above resulted in the finding being cleared. 2. Compliance Requirement; Financial reports must be submitted on a periodic basis within the required timeframe. Finding; The City's Federal Cash Transactions Report for the quarter ended September 30, 1991 for its Community Block Development Grant was submitted on November 14, 1991 which is not within the required fifteen-day deadline. Recommendation; The City should emphasize the procedures currently used to monitor the timely submission of quarterly reports. City's Response; Instructions included in the work folder state that the report is due at the Department of Housing and Urban Development no later than the fifteenth day of the month following the end of the quarter. We are currently mailing the report no later than the tenth day. 12 CITY OF CARLSBAD, CALIFORNIA Status of Prior Year Findings For the year ended June 30, 1992 PROGRAM; Drug-Free Workplace Act Compliance Requirement: The City must publish a statement notifying employees that the unlawful manufacture, distribution, dispensing, possession or use of a controlled substance is prohibited in the City's workplace. Finding; The City has published a policy statement that does not include fire and police employees. See Schedule of Findings and Questioned Costs. 13 Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report on Internal Controls at the General Purpose Financial Statement Level The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general purpose financial statements are free of material misstatement. In planning and performing our audit of the general purpose financial statements of the City for the year ended June 30, 1992, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the general purpose financial statements and not to provide assurance on the internal control structure. The management of the City is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of general purpose financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any internal control structure, errors or irregularities may nevertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. Member Firm of Klynveld Peat Marwick Goerdeler For the purpose of this report, we have classified the significant internal control structure policies and procedures in the following categories: 1. Accounting Controls • Purchases/Disbursements • Payroll • Revenue/Receipts • Investments 2. Administrative controls established to ensure compliance with laws and regulations. Our consideration of the internal control structure included all of the control categories listed above except that we did not evaluate the internal control structure over the revenue/receipts cycle or investments because we believed the audit could be performed more efficiently by expanding substantive testing rather than placing reliance on the internal control structure and because these categories are not significant to the major federal financial assistance programs. The purpose of our consideration of the internal control structure was to determine the nature, timing, and extent of the auditing procedures necessary for expressing an opinion on the general purpose financial statements. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a reportable condition in which the design or operation of one or more of the specific internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the general purpose financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control structure and its operation that we consider to be material weaknesses as defined above. 15 However, we noted certain matters involving the internal control structure and its operation that we have reported to the management of the City in a separate letter dated October 9, 1992. This report is intended for the information of members of City Council, management of the City, and the Controller of the State of California. However, upon acceptance by the City, this report is a matter of public record and its distribution is not limited. October 9, 1992 16 Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report on the Internal Control Structure at the Federal Financial Assistance Program Level The Honorable Members of City Council City of Carlsbad, California: We have audited the general purpose financial statements of the City of Carlsbad, California (the City), for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. We have also audited the City's compliance with requirements applicable to major federal financial assistance programs and have issued our report thereon dated October 9, 1992. We conducted our audits in accordance with generally accepted auditing standards; Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Circular A-128, Audits of State and Local Governments. Those standards and OMB Circular A-128 require that we plan and perform the audit to obtain reasonable assurance about whether the general purpose financial statements are free of material misstatement and about whether the City complied with laws and regulations, noncompliance with which would be material to a major federal financial assistance program. In planning and performing our audits for the year ended June 30, 1992, we considered the City's internal control structure in order to determine our auditing procedures for the purpose of expressing our opinions on the City's general purpose financial statements and on its compliance with requirements applicable to major programs and not to provide assurance on the internal control structure. This report addresses our consideration of internal control structure policies and procedures relevant to compliance with requirements applicable to federal financial assistance programs. We have addressed policies and procedures relevant to our audit of the general purpose financial statements in a separate report dated October 9, 1992. The management of the City is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and 17 Member Firm of Klynveld Peat Marwick Goerdeler related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of general purpose financial statements in accordance with generally accepted accounting principles, and that federal financial assistance programs are managed in compliance with applicable laws and regulations. Because of inherent limitations in any internal control structure, errors, irregularities, or instances of noncompliance may nevertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. For the purpose of this report, we have classified the significant internal control structure policies and procedures used in administering federal financial assistance programs in the following categories: Accounting Controls • Purchases/disbursements • External financial reporting Administrative Controls General requirements; Political activity Civil rights Cash management Davis Bacon Act Relocation assistance and real property acquisition Federal financial reports Allowable costs/cost principles Drug-Free Workplace Act Administrative requirements Specific requirements; • Types of services • Eligibility • Reporting • Special tests and provisions, if any For all of the internal control structure categories listed above, we obtained an understanding of the design of relevant policies and procedures and determined whether they have been placed in operation, and we assessed control risk. 18 During the year ended June 30, 1992, the City expended 81 percent of its total federal financial assistance under major federal financial assistance programs. We performed tests of controls, as required by OMB Circular A-128, to evaluate the effectiveness of the design and operation of internal control structure policies and procedures that we considered relevant to preventing or detecting material noncompliance with specific requirements, general requirements, requirements governing claims for advances and reimbursements, and amounts claimed or used for matching that are applicable to the City's major federal financial assistance programs, which are identified in the accompanying Schedule of Federal Financial Assistance. Our procedures were less in scope than would be necessary to render an opinion on these internal control structure policies and procedures. Accordingly, we do not express such an opinion. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a reportable condition in which the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that noncompliance with laws and regulations that would be material in relation to a federal financial assistance program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control structure and its operations that we considered to be material weaknesses as defined above. We also noted other matters involving the internal control structure and its operation that we have reported to the management of the City of Carlsbad, California in a separate letter dated October 9, 1992. This report is intended for the information of members of the City Council, management of the City, and the Controller of the State of California. However, upon acceptance by the City, this report is a matter of public record and its distribution is not limited. October 9, 1992 19 KPMG Peat Marwick Certified Public Accountants 750 B Street Telephone 619 233 8000 Telecopier 619 696 0121 San Diego, CA 92101 March 12, 1992 Mr. James F. Elliott Financial Management Director City of Carlsbad 1200 Carlsbad Village Drive Carlsbad, California 92008 Dear Jim: As requested, we are writing to provide you with an estimate of fees for the audit of the financial statements of the City of Carlsbad as of and for the year ending June 30, 1992. This letter will confirm our understanding of that engagement. We will conduct our audit in accordance with generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of the United States with the objective of issuing the reports listed below at the conclusion of our audit. It should be understood that the City's management has responsibility for representations contained in the financial statements and that we will require a written representation letter be furnished to us by members of the City's management near the completion of our audit. Our responsibility is to express an opinion on these financial statements based on our audit. In conducting our audit we will perform tests of the accounting records and such other procedures as we consider necessary in the circumstances to form our opinion about whether the financial statements are free of material misstatement and to report on whether management has complied with laws and regulations and has established and maintained an internal control structure. An audit in accordance with the above standards is not designed to provide absolute assurance that there are no misstatements in your financial statements or any noncompliance with laws and regulations resulting from errors or irregularities. The City's internal control structure should provide assurance, although not absolute assurance, against the possibility of such errors and irregularities. We understand that all records, documentation and information we request in connection with our audit will be made available to us. At the conclusion of our audit, we plan on issuing the following reports for the year ending June 30, 1992. For the City: • A report on the general purpose financial statement of the City as a whole with supplementary information as incorporated in the Comprehensive Annual Financial Report; A report on the component unit financial statements of the Carlsbad Redevelopment Agency; KPMG Peat Marwick Mr. James F. Elliott City of Carlsbad March 12, 1992 Page 2 A report on the component unit financial statements of the City of Carlsbad Public Improvement Corporation; A report on the component unit financial statements of the Building Authority of the City of Carlsbad; • A report on the component unit financial statements of the Parking Authority of the City of Carlsbad; • An agreed upon procedures letter relating to the Gann limit; • A report on the internal control structure based solely on our consideration - of the structure made as a part of the audit of the general purpose financial statements; and • A report on compliance with laws and regulations that may have a material effect on the general purpose financial statements. • A report on compliance with laws and regulations relating to the Carlsbad Redevelopment Agency. For the City's federal assistance programs: • A report on the supplementary schedule of the City's federal financial assistance programs; A report on compliance with laws and regulations identifying all findings of noncompliance and questioned costs; • A report on the internal control structure used in administering federal financial assistance programs; and • A report on fraud, abuse, or illegal acts (or indications of such acts), if necessary. It should be understood that our audit may not reveal all errors, irregularities or illegal acts which may have occurred during the year. However, please be advised that it is our responsibility to ensure that the City Council is informed of any significant illegal acts that we become aware of during our audit. If the illegal act involves funds from other governmental entities, it is the City Council's responsibility to inform the other governmental entities of these acts. If the City of Council is involved in t he illegal act or does not report to the other governmental entities on a timely basis, we will be obligated to report the illegal acts to these other governmental entities. KPM&?ea\. Marwick Mr. James F. Elliott City of Carlsbad March 12, 1992 Page 3 Our fees, which will be billed to you as the work progresses, are based on hourly rates plus reimbursement of out-of-pocket expenses. Our fee for the engagement are estimated to be as follows: Comprehensive Annual Financial Report $ 31,900 Schedule of Federal Financial Assistance and the Auditors' Reports Required Under the Single Audit Act of 1984 3,600 Carlsbad Redevelopment Agency 2,900 City of Carlsbad Public Improvement Corporation 2,900 Building Authority of the City of Carlsbad 775 Parking Authority of the City of Carlsbad 775 Gann Limit 1,000 These fees are inclusive of out-of-pocket costs including report charges and mileage estimated to be $7,200 for the above reports. If the terms of our engagement as outlined in his letter are acceptable to you, please sign and return the enclosed copy of this letter. If you have any questions regarding this letter or any other matter, please do not hesitate to call me. Very truly yours, KPMG Peat Marwick John H. Davis Partner JHD:dcm Enclosure cc: Ms. Lisa Hildabrand Accepted by: Signed (RAYMOND R. PATCHETT, City Manager Date CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements June 30, 1992 (1) Organization and Summary of Significant Accounting Policies The Carlsbad Redevelopment Agency (the Agency) was established in July 1976 with the adoption of Ordinance No. 1191 by the Carlsbad City Council pursuant to the California Community Redevelopment Law, now codified as Part 1, Division 2k, of the State of California Health and Safety Code. The Agency has the broad authority to acquire, rehabilitate, develop, administer and sell or lease property. The Agency is not subject to federal or state income taxes. The principal objectives of the Agency are to eliminate blighted influences within the "Village Area" of the City of Carlsbad, stimulate and attract private investment, generate added employment through increased specialty goods and services and expand the City's sales tax revenue. The Agency is an integral part of the reporting entity of the City of Carlsbad (the City). The funds and account group of the Agency have been included within the scope of the general purpose financial statements of the City because the City Council exercises oversight responsibility over the operations of the Agency. Only the funds and account group of the Agency are included herein; therefore, these financial statements do not purport to represent the financial position or results of operations of the City of Carlsbad, California. The accounting policies of the Agency conform to generally accepted accounting principles as applicable to governmental units. The following is a summary of the more significant policies: (a) Basis of Presentation; The accounts of the Agency are organized on the basis of funds and an account group, each of which is considered to be a separate accounting entity. The operations of each fund and account group are accounted for by providing a separate set of self-balancing accounts that comprise its assets, liabilities, fund balance, revenues, and expenditures. The various funds and account group are summarized by type in the financial statements. The fund types and account group used by the Agency are as follows: GOVERNMENTAL FUND TYPES; Governmental funds are used to account for the Agency's expendable financial resources and related liabilities. The measurement focus is upon determination of changes in financial position. The following are the Agency's governmental fund types: (Continued) 2 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (1) Organization and Summary of Significant Accounting Policies. Continued (a) Basis of Presentation. Continued; Special Revenue Funds Special revenue funds are used to account for revenues derived from specific sources (other than major capital projects) that are restricted by law or administrative regulation to expenditures for specified purposes. Debt Service Funds Debt service funds are used to account for the accumulation of resources for, and payment of general long-term debt principal, interest and related costs. Capital Projects Funds Capital projects funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities. GENERAL LONG-TERM DEBT ACCOUNT GROUP; This account group is used to establish accounting control and accountability for the Agency's general long-term debt. This account group is used to account for all long-term obligations of the Agency. (b) Measurement Focus and Basis for Accounting! Governmental fund types are accounted for on a "spending" measurement focus. Accordingly, only current assets and current liabilities are included on their balance sheets, and the reported fund balance provides an indication of available, spendable resources. Operating statements for governmental fund types report increases (revenues) and decreases (expenditures) in available spendable resources. (Continued) 3 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (1) Organization and Summary of Significant Accounting Policies. Continued (b) Measurement Focus and Basis for Accounting. Continued; The modified accrual basis of accounting is utilized by the governmental fund types. Revenues are recognized when susceptible to accrual, i.e., both measurable and available. Available means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Revenues that are accrued include the tax increment on real property taxes and interest income. Real property taxes are levied on October 15 against owners of record at March 1. The taxes are due in two installments, on November 1 and February 1, and become delinquent after December 10 and April 10, respectively. Tax liens attach annually as of 12:01 a.m. on the first day of March in the fiscal years for which the taxes are levied. Under the provisions of NCGA Interpretation 3, property tax revenue is recognized in the fiscal year for which the taxes have been levied, provided it is collected within 60 days of the end of the fiscal year. Governmental fund expenditures are recognized when the liability is incurred, except for principal and interest on long-term debt which is recognized when due. (c) Encumbrances; Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of monies are recorded in order to reserve that portion of the applicable appropriation, is employed as an extension of formal budgetary control in the governmental funds. Encumbrances outstanding at year-end do not constitute expenditures or liabilities, but are reported as reservations of fund balance for subsequent-year expenditures. (d) Cash and Investments; The Agency participates in the pooled cash and investment fund of the City of Carlsbad. Pooled investments are stated at cost or amortized cost. The Agency's equity in the pooled cash is included in the financial statements as cash and investments. Interest earned as a result of the pooling is allocated to the Agency based on its average monthly balances. (Continued) 4 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (1) Organization and Summary of Significant Accounting Policies. Continued (e) Compensated Absences; Vacation pay is payable to employees at the time used or upon termination of employment. The cost of accumulated vacation expected to be paid in the next 12 months is recorded as a fund liability; currently no amounts are expected to be paid after 12 months. (f) Total Columns: Total columns on the accompanying combined financial statements are captioned "Totals (Memorandum Only)" to indicate that they are presented only to facilitate financial analysis. Data in these columns do not present financial position, results of operations, or changes in fund balance in conformity with generally accepted accounting principles. Such data is not comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data. (2) Budgetary Data The budget for the Agency is established by the City of Carlsbad. The City Manager is authorized to make transfers of appropriated amounts within a fund and function for up to $15,000. Revisions that alter the total appropriations of any fund or function must be approved by the City Council. A mid-year budget review is conducted each year. Any major changes to the adopted budget are approved by the City Council at that time. Budgets are adopted on the modified accrual basis, except that encumbrances are treated as budgeted expenditures in the year purchases are committed. Expenditures may not exceed budgeted appropriations at the departmental level. Unencumbered appropriations lapse at year-end. Annual budgets are adopted for the special revenue and debt service funds. There were no encumbrances outstanding for the debt service fund as of June 30, 1992. (Continued) 5 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (2) Budgetary Data. Continued The following schedule is a reconciliation of the budgetary and GAAP fund balances: Special Revenue Debt Service Fund balance - budgetary basis $ 2,019,072 2,287,588 Encumbrances outstanding at year-end 6,196 - Debt service on advances from City of Carlsbad - not budgeted - (530.531) Fund balance - GAAP basis $ 2.025.268 1.757.057 (3) Cash and Investments The Agency participates in the pooled cash fund of the City. In addition, some deposits are held separately by several of the Agency's funds. Authority for Deposits and Investments; The Agency's investment policy and state statutes authorize the Agency to invest in demand and time deposits, obligations of the U.S. Treasury, its agencies and instrumentalities, commercial paper rated A-l by Standard and Poor's Corporation or P-l by Moody's Commercial Paper record, banker's acceptances with a maximum maturity of 270 days, repurchase and reverse repurchase agreements, certificates of deposit with national and state licensed or chartered banks or federal or state savings and loan associations, money market and mutual funds whose portfolios consist of one or more of the foregoing investments, and the State Treasurer's investment pool. State statutes require that all deposits be insured or collateralized. Depositories holding public funds on deposit are required to maintain collateral in the form of a pool of securities with the agent of the depository having a market value of at least 10 to 50 percent in excess of the total amount of all public funds on deposit. (Continued) 6 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (3) Cash and Investmentst Continued Deposits; The following summary presents the amount of the Agency's deposits which are fully insured or collateralized with securities held by the Agency or its agent in the Agency's name (Category One), those deposits which are collateralized with securities held by the pledging financial institution's trust department or agent in the Agency's name (Category Two), and those deposits which are not collateralized or are collateralized with securities held by the pledging financial institution or its trust department or agent but not in the Agency's name (Category Three) at June 30, 1992. Total Category Category Category Bank Carrying One Two Three Balance Amount Cash on deposit with trustee $ - 2.825.795 1.151.608 3.977.403 3.977.403 Investments; At June 30, 1992, the Agency had $3,267,590 invested in the pooled cash fund of the City. Since securities are not used to evidence the Agency's investment in this fund, these amounts cannot be classified according to the level of risk assumed by the Agency. (4) Pension Plan The Agency's employees are included in the City's pension plan which is administered by the California Public Employees Retirement System (PERS). PERS is an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for participating public entities within the state of California. (Continued) CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (4) Pension Plan. Continued All full-time employees are eligible to participate as members of the PERS. Benefits vest after an employee has been a member of the plan for five years. Employees are eligible to retire after age 50 with 5 years of credited service. Annual retirement benefits are determined based on age at retirement, the length of membership service and the amount of earnings based on the highest twelve consecutive months average. The PERS also provides death and disability benefits. These benefit provisions and all other requirements are established by state statute. Employees are required to make contributions equaling 7 percent of gross pay. This is paid by the City for the benefit of the employees in lieu of salary. The City is also required to contribute the remaining amounts necessary to fund the benefits for its members, using the actuarial basis recommended by the PERS actuaries and actuarial consultants and adopted by the PERS Board of Administration. Additional disclosures required by Governmental Accounting Standards Board Statement No. 5 are not available for the Agency as a separate entity. This information for the City's reporting entity is presented in the Comprehensive Annual Financial Report of the City of Carlsbad. (5) Long-term Debt The following is a summary of changes in long-term debt for the year ended June 30, 1992: Advances from the City of Carlsbad Bonds payable Principal Balance July 1, 1991 $ 6,989,854 11.745.000 $ 18.734.854 Additional Principal Obligations Retirements Principal Balance June 30, 1992 500,731 29,800 7,460,785 - 270.000 11.475.000 500.731 299.800 18.935.785 (Continued) 8 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (5) Long-term Debt. Continued Since activation of the Redevelopment Agency in July 1976, the City has advanced the Agency monies for approved expenditures. Advances from the City bear interest at 10% per year. There is no stated maturity date. Bonds payable consist of $11,475,000 in 1988 Carlsbad Housing and Redevelopment Commission Tax Allocation Bonds. Principal is due in amounts ranging from $290,000 to $595,000 on April 1 of each year through 2003, a principal payment of $2,890,000 on April 1, 2007, and a principal payment of $3,950,000 on April 1, 2011. The principal payments of $2,890,000 and $3,950,000 are subject to mandatory sinking fund redemption which amounts are reflected in the debt service requirements below. Interest is payable each year on October 1 and April 1 at rates varying from 5.5% to 7.55% per annum. Debt service requirements to maturity for the bonds, including sinking fund payments, are as follows: 1993 $ 1,137,938 1994 1,135,828 1995 1,142,222 1996 1,146,598 1997 1,148,522 1998-2002 5,786,452 2003-2007 5,860,824 2008-2011 4.750.280 22,108,664 Less amounts representing interest (10.633,664) Bonds payable $ 11.475.000 At June 30, 1992, the Agency was in compliance with all significant debt covenants. (Continued) 9 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (6) Obligations Under Operating Leases In June 1988, the Agency entered into an agreement to lease a parking lot from a private party. The lease requires monthly rental payments of $3,270 for twenty years. Rent expense was $39,240 for the year ended June 30, 1992. In May 1990, the Agency entered into an agreement to lease a parking lot on Carlsbad Village Drive from a private party. The lease requires monthly rental payments of $4,350 commencing July 1, 1991 for five years. Total annual rent expense is $52,200. The following is a schedule by year of future minimum rental payments required under operating leases at June 30, 1992: Annual Year ending June 30. Rental Payments 1993 $ 91,440 1994 91,440 1995 93,794 1996 41,954 1997 41,954 Thereafter 526.119 Total minimum lease payments $ 886.701 (7) Fund Balances Reserves for the loan receivable and low and moderate income housing are established to show that certain assets are already committed to other purposes and are not available for discretionary expenditures. Reserve for debt service represents resources legally restricted to the payment of general long-term debt principal and interest maturing in future years. Reserve for encumbrances represents commitments related to unperformed contracts for services and undelivered goods. Unreserved-designated for approved capital projects represents the fund balance expected to be used for the acquisition or construction of major capital facilities. (Continued) 10 CARLSBAD REDEVELOPMENT AGENCY Notes to Combined Financial Statements, Continued (7) Fund Balances. Continued Unreserved-undesignated balances represent the fund balance remaining after reduction for reserved and designated fund balances. (8) Other Required Individual Fund Disclosures Expenditures exceeded appropriations in the following fund: Expenditure Appropriation Debt service fund - interest and fiscal charges $ 863,326 863,288 Special revenue fund - general government 104,309 98,113 The excess of expenditures over appropriations in the debt service fund relates to fiscal charges and the excess of expenditures over appropriations in the special revenue fund relates to various expenditures. Peat Marwick Certified Public Accountants 750 B Street San Diego, CA 92101 Independent Auditors' Report On Compliance With Audit Guidelines For California Redevelopment Agencies The Board of Commissioners Carlsbad Redevelopment Agency Carlsbad, California: We have audited the combined financial statements of the Carlsbad Redevelopment Agency (a component unit of the City of Carlsbad, California) as of and for the year ended June 30, 1992, and have issued our report thereon dated October 9, 1992. These combined financial statements are the responsibility of the Agency's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. In connection with our audit, we performed the procedures contained in the publication entitled Guidelines for Compliance Audits of California Redevelopment Agencies, as promulgated by the Controller of the State of California in connection with a review of the Agency's compliance with laws, regulations and administrative requirements governing activities of the Agency, as required by Section 33080.1 (a) of the Health and Safety Code of the State of California. The procedures we preformed would not necessarily disclose all instances of noncompliance because they were based on selective tests of accounting records and related data. During the performance of the aforementioned procedures, nothing came to our attention that would lead us to believe that the Carlsbad Redevelopment Agency of the City of Carlsbad did not comply with applicable laws, regulations and administrative requirements governing its activities. This report is to be used solely for filings with appropriate regulatory agencies and is not intended for any other purpose. This restriction is not intended to limit the distribution of this report which, upon acceptance by the Agency, is a matter of public record. fat October 9, 1992 Member Firm of Klynveld Peat Marwick Goerdeler