Agenda

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Finance Committee

Meeting Date:	02/25/2020
FROM:	Bill Gallardo

Subject:

City of Brea Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2019 and Related Audit Reports

RECOMMENDATION

Receive and file the City's Comprehensive Annual Financial Report (CAFR) for the Fiscal Year Ended June 30, 2019 and related audit reports.

BACKGROUND/DISCUSSION

Each year the City of Brea issues a Comprehensive Annual Financial Report (CAFR) (attached). A CAFR summarizes the financial transactions of a local government for the year in accordance with the financial presentation requirements prescribed by governmental accounting standards.

The City's independent auditor, Eide-Bailley, LLP (Eide-Bailley), has completed its audit of the City's CAFR for Fiscal Year ended June 30, 2019. Edie-Bailley has issued an unmodified or "clean" opinion dated January 30, 2020 on the City's CAFR, which means the City's financial statements are free of material misstatements; are in accordance with Generally Accepted Accounting Principles (GAAP); and fairly present both the financial position and the results of operations for the year ended June 30, 2019.

Financial Highlights

The City's net position (assets and deferred outflows of resources less liabilities and deferred inflows) increased by $5.3 million, from $259.7 million to $265.0 million as of June 30, 2019. The increase in the City's net position was from the results of current operations. The City's capital assets represent $314 million of the $476 million total assets. The City's long-term (non-current) liabilities of $209 million primarily include $151 million in net pension and other post employment benefit liabilities and $58 million of outstanding bonds and capital leases (which was used to fund capital improvements and finance the acquisition of capital assets).

As of June 30, 2019, the General Fund's ending fund balance includes a reserve of $7.7 million for funds deposited in the City's pension rate stabilization program with Public Agency Retirement Services (PARS). This fund was set up to reduce the future unfunded pension liability and current and future retirement costs. As it relates to the City's net position, this amount is included in the unrestricted net position of the City's Governmental Activities to align with the classification net pension liability.

The Successor Agency to the Brea Redevelopment Agency financial transactions are reported as a Private Purpose Trust Fund within the Fiduciary Funds section of the CAFR. The Private Purpose Trust Fund is reporting long-term liabilities of $154.2 million of bonded obligations to be paid from future Redevelopment Property Tax (formerly tax increment).

Statement on Auditing Standards (SAS) 114 Report (Audit Communication Letter)
Statement on Auditing Standards (SAS) 114 was issued by the American Institute of Certified Public Accountants (AICPA) to establish a two-way communication between the independent auditors and those charged with governance (i.e. City Council). SAS 114 requires that the City's auditor communicate, either orally or in writing, certain information to an audit committee or another designated party that performs oversight of the financial reporting and auditing process.

The City's Finance Committee has been identified by the City Council to receive and review the report of the annual audit from the City's independent auditor and to review and make recommendations to the City Council to receive and file the report. Eide-Bailley attended the Finance Committe meeting on August 13, 2019 to discuss the City's annual audit for the Fiscal Year Ended June 30, 2019. The Audit Communication Letter dated January 30, 2020, and issued as part of the annual audit, did not identify any significant difficulties or disagreements with management that arose during the course of the audit and there are no uncorrected misstatements identified. It is noted that two adjustments were made during the audit related to the recording of franchise fees and overhead allocations which are outlined in the attached letter.

Certain items detected during the audit were also identified in the City's Management Letter (attached) and have been addressed by management. The auditors recommended the City implement procedures to address all variances on City bank reconciliations in a timely manner. The City reconciles its bank accounts monthly; however, from time to time there are variances which are unable to be cleared by the end of the month. Staff then continues to investigate any unreconciled items until the variances are cleared. However, there was a variance in the City's favor this past fiscal year that was unable to be identified. In order to mitigate this occurrence in the future, staff has implemented a daily reconciliation of bank activity to the general ledger cash activity to note and clear any discrepancies that may occur. The auditors also recommended the City implement separate cash drawers for each cashier at the Finance Department front counter for further segregation of duties. In conjunction with the 3rd floor remodel, the City will create separate drawers for each cashier at the front counter. It is anticipated that this will occur no later than September 30, 2020. Lastly, the auditors recommended further review of the processes related to Financial Reporting and Closing procedures more specifically related to the adjustments made during the audit. In order to verify the proper completeness of accounts, the City will be performing a year-over-year comparison of revenues and expenditures as part of the year-end closing.

Article XIIIB Limit on Appropriations Calculation Report (Appropriations Limit Report) - This report communicates the results of the audit firm's testing of the City's computation of the statutory appropriation limitation. No exceptions were noted in this report and the City is well within the constraints of the statutory limit provided by state law.

SUMMARY/FISCAL IMPACT

The City's annual audit for the Fiscal Year ended June 30, 2019 (FY 2018-19) has been completed and the City's independent auditor has issued an unmodified opinion on the City's CAFR, which is the highest level of assurance an entity can receive from its independent auditors (a "clean audit"). New procedures have been put in place to address items noted in the City's Management Letter. There is no fiscal impact on the City as a result of this audit.

RESPECTFULLY SUBMITTED

William Gallardo, City Manager
Prepared by: Cindy Russell, Administrative Services Director

Attachments
CAFR
Audit Communication Letter
Management Letter
Appropriations Limit Report