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).
Single Audit Report and Corrective Action Plan
A Single Audit, including the Corrective Action Plan is required of any organization expending $750,000 or more of federal funds in a year. The purpose of the Single Audit Report is to report on an organizations compliance with the federal government’s requirements for the use of federal funds, awards or grants. For the year ended June 30, 2018, the City had $7,466,792 in federally funded expenditures mostly related to the Tracks at Brea project (See attached report, page 6-7). The following is a summary of the Single Audit Report and Corrective Action Plan:
- The Independent Auditors’ Report on Internal Control Over Financial Reporting – This report communicates any significant deficiencies in internal control or material instances of noncompliance as it relates to the City’s financial reporting. This report noted no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
- The Independent Auditors’ Report on Compliance for Each Major Federal Program – This report communicates any significant deficiencies in internal control over compliance for Each Major Federal Program. Due to a missing procurement file, the City’s auditor states that they were unable to obtain sufficient and appropriate audit evidence supporting the compliance of the major federal program reviewed and consequently were unable to determine whether the City complied with those requirements applicable to that program. (see information below, Findings 2018-002 and 2018-003). Therefore, the auditor believes that their audit provides a reasonable basis for a qualified opinion on compliance and consider the deficiency in internal controls over compliance as described in the report to be a material weakness. However, the report also indicates, the audit does not provide a legal determination of the City’s compliance. Additionally, the auditor identified instances of non-compliance which are required to be reported and that the auditor considers to be significant deficiencies; however, their opinion on each major federal program is unmodified with response to these matters.
- Schedule of Expenditures of Federal Awards and Notes which outlines the federal award activity for the City of the Fiscal Year ended June 30, 2018.
- The Schedule of Findings and Questioned Costs, including the Corrective Action Plan
- Financial Statement Findings – None
- Federal Award Findings and Questioned Costs:
- Findings 2018-002 for Procurement, Suspension and Debarment and 2018-003 Special Tests and Provisions (both related to the missing procurement file previously mentioned) which include questioned costs of $424,738. Due to the missing procurement file, the City was not in compliance with the terms and conditions of the grant agreement which required the retention of all records for three years from final expenditure of the grant revenues. The costs are not being questioned because they cannot be verified or are unallowable, but the City was unable to provide the procurement files supporting the contract’s competitive procurement process; evidence of verification at the time of procurement of whether the entity was suspended or debarred and certain indirect cost rate information. Additionally, the City’s policies for procurement of professional services at that time were not specific to engineering and design services, nor was there evidence of approval by the State of California Department of Transportation.
It is noted that City staff did provide certain evidence of the contract’s competitive procurement process to include the Request for Proposal; the successful proposal and several staff reports related to the contract amendments that outlined the competitive process used to procure the original contract. Additionally, staff provided information that the vendor has not been suspended or debarred since October 31, 2012, and is currently not suspended or debarred. Lastly, the City’s current purchasing policies include written procedures regarding the competitive process for procurement of professional services and the City has also obtained documentation of the indirect cost self-certifications from the vendor for 2012 through 2016, and has requested the calendar year 2017 document from the vendor.
The City’s Corrective Action Plan for these two findings includes a review and update to the Grant Management Policies and Procedures (GMPP) to ensure that these requirements are sufficiently documented and to include detailed information regarding specific procedures over methods of procurement used for engineering and design services. Additionally, the City will be considering maintaining a copy of the pertinent records for documentation along with the contract on file in the Purchasing Division office.
- Federal Award Findings 2018-001 and 2018-004 had no questioned costs identified and were as follows:
- Finding 2018-001 - Allowable Costs/Cost Principles, Cash Management. As stated in the finding, the City implemented a written Grant Management Policies and Procedures (GMPP) document dated November 20, 2018 which documents a number of procedures that were already in place at June 30, 2018.
- Finding 2018-004 - Reporting. As stated in the finding, the City’s procedures include a review of the Active Transportation Program (ATP) Project Progress Reports by the City Engineer. The City’s Grants Management Policies and Procedures will be updated to indicate that documentation of such review and approvals be maintained in the project files.
- Schedule of Prior Audit Findings - The City has implemented all the prior year Financial Statement Findings as of June 30, 2018 and implemented the Federal Award Finding as of November 20, 2018 (see Finding 2018-001)
Appropriations Limit Report – It is the City’s responsibility to calculate and adopts the annual appropriations limit pursuant to Article XIII-B of the California State Constitution. The City’s auditor is required to review and approve the appropriations calculation as part of the annual audit of the City. The auditor found no exceptions to the City’s calculation of the appropriations limit. See attached report. |