Agenda

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Finance Committee

Meeting Date:	03/26/2019
FROM:	Bill Gallardo

Subject:

Comprehensive Annual Financial Report for the City of Brea for Fiscal Year Ended June 30, 2018

RECOMMENDATION

Receive and file the City's Comprehensive Annual Financial Report (CAFR) for the Fiscal Year ended June 30, 2018, which includes the independent auditor's unmodified opinion.

BACKGROUND/DISCUSSION

The City's independent auditor, Vavrinek, Trine, Day & Co., LLP (VTD), has completed its audit of the City's financial statements for Fiscal Year ended June 30, 2018. VTD has issued an unmodified opinion 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; and fairly present both the financial position and the results of operations for the year ended June 30, 2018. In addition, included are the Audit Communication Letter and Management Letter, both dated March 8, 2019.

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. The Audit Communication Letter did not identify any disagreements with management.

The Audit Communication Letter identified difficulties in completing the audit due to clarifications and additional information requested by the auditor and the auditor's time to review the information provided. The additional information requested by the auditor was mostly related to the implementation of Governmental Accounting Standards Board (GASB) Statement No. 75 Accounting and Financial Reporting for Other Post Employment Benefits (GASB 75); information supporting non-recurring events such as debt refundings and details supporting the recording of a significant amount of dedicated capital assets for Blackstone and La Floresta developments as outlined in the City's Management Letter discussed further in this report.

Certain items detected during the audit were identified in the City's Management Letter and have been addressed by management. The auditors recommended further review of the processes related to Financial Reporting and Closing procedures.   The other recommendation was to formalize policies and procedures and update our Capital Asset Policy related to Developer Contributions (dedicated capital assets from developments).

Financial Highlights

As described in Management's Discussion and Analysis (MD&A) and Notes 1 and 10 to the financial statements, the City implemented GASB 75, which requires reporting the liabilities. Although the situation surrounding the City's other post employment benefits has not changed, the way in which they are accounted for and reported in the financial statements has changed based on the new GASB statement. The net impact on the City's net position as of June 30, 2018 now reports post employment benefits liability of $26 million.

The City's net position (assets and deferred outflows of resources less liabilities and deferred inflows) increased by $31 million, from $228 million to $259 million as of June 30, 2018. The increase in the City's net position was due to a $51 million increase from the results of current operations and a $20 million decrease due to the restatement of net position by implementing Governmental Accounting Standards Board (GASB) Statement No. 75, Accounting and Financial Reporting for Post Employment Benefits Other Than Pensions, effective July 1, 2017. The City's capital assets represent $316 million of the $464 million total assets.  The City's long-term (non-current) liabilities of $210 million primarily include $151 million in net pension and other post employment benefit liabilities and $59 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, 2018, the General Fund's ending fund balance includes a reserve of $7.3 million for funds deposited in the City's pension rate stabilization program with Public Agency Retirement System (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 now included in the unrestricted net position of the City's Governmental Activities to align with the classification net pension liability. Previously, this amount was reported as restricted net position.

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).

SUMMARY/FISCAL IMPACT

The City's annual audit for the Fiscal Year ended June 30, 2018 (FY 2017-18) 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: Lee Squire, Financial Services Manager
Concurrence: Cindy Russell, Administrative Services Director

Attachments
CAFR
Audit Communication Letter
Management Letter