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Agenda Item 24.

City Council Meeting

Meeting Date:

04/18/2017

Subject:

Comprehensive Annual Financial Report for the City of Brea for Fiscal Year Ended June 30, 2016

RECOMMENDATION

Receive and file the City's Comprehensive Annual Financial Report (CAFR) for the Fiscal Year ended June 30, 2016, which includes the independent auditor's unmodified (clean) opinion.

BACKGROUND/DISCUSSION

The City's independent auditor, Lance, Soll & Lunghard, LLP, (LSL) has completed its audit of the City's financial statements for Fiscal Year ended June 30, 2016. LSL has issued an unmodified or "clean" opinion on the City's CAFR, which means there are no exceptions, modifications or qualifications identified. Additionally, the audit firm's opinion 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, 2016. Also included are the Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters based on an Audit of the Finance Statements Performed in Accordance with Government Auditing Standards (Management Letter) and the Audit Communication Letter, both dated March 28, 2017. As requested by City Council, these letters are now a part of the CAFR and can be found beginning on page 159.

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 difficulties in completing the audit; any material misstatement, corrected or uncorrected detected as a result of audit procedures or disagreements with management.

Certain items detected during the audit were identified in the City's Management Letter and have been addressed by management. The City's planning staff has updated its schedule for the General Plan Annual Report which includes the Housing Successor's Annual Progress Report in order to assure that this report is received by the Office of Planning and Research and the Department of Housing and Community Development no later than April 1 of each year. The Housing Successor's Annual Report for the fiscal year 2015-2016 was included with the General Plan Annual Report for 2016 which was received by City Council on March 7, 2017, and submitted to the Office of Planning and Research and the Department of Housing and Community Development on March 13, 2017.

During the Fiscal Year ended June 30, 2016, Finance division identified several capital projects that had not been accounted for in the City's infrastructure capital assets. The Finance division has assumed the responsibility for keeping the detailed records for the City's infrastructure capital assets. Additionally, these records are reconciled with capital acquisition and construction records throughout the year to assure the infrastructure capital assets balance is up to date.

Financial Highlights
The City's net position (assets and deferred outflows of resources less liabilities and deferred inflows) increased by $14 million, from $200 million to $214 million as of June 30, 2016. The increase in the City's net position was $5.6 million from the results of current operations and $8.3 million due to the restatement for capital asset infrastructure. The City's capital assets represent $259 million of the $395 million total assets. The City's long-term (non-current) liabilities of $168.2 million primarily include $94.7 million in net pension liabilities and $59.2 million of outstanding bonds and capital leases (which was used to fund capital improvements and finance the acquisition of capital assets).

During the fiscal year, the City Council approved $6 million to be set-aside to offset the City's unfunded pension liabilities. As of June 30, 2016, the General Fund's ending fund balance includes a reserve for the City's unfunded pension liabilities of $6.1 million.

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 $174.8 million of bonded obligations to be paid from future Redevelopment Property Tax (formerly tax increment).

COMMISSION/COMMITTEE RECOMMENDATION

The report was reviewed by the Finance Committee at its April 11, 2017, meeting and recommended to receive and file by the City Council.

FISCAL IMPACT/SUMMARY

The City's annual audit for the Fiscal Year ended June 30, 2016 (FY 2016-17) 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, Fiscal Services Manager
Concurrence: Cindy Russell, Administrative Services Director

Attachments
Brea CAFR FY 2016-17