TO:
Honorable Mayor and Members of the City Council
THROUGH:
John Jalili, Interim City Manager
FROM:
Bruce Moe, Finance Director
Henry Mitzner, Controller
SUBJECT:Title
Results of Fiscal Year 2012-2013 Financial Audit (Finance Director Moe).
RECEIVE; REPORT
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council receive and file this report.
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FISCAL IMPLICATIONS:
There is no fiscal implication associated with the recommended action. The results of fiscal year 2012-2013 are summarized below, and are included in the attached "Comprehensive Annual Financial Report" (CAFR).
DISCUSSION:
Attached to this report is the City's CAFR for the year ended June 30, 2013. This independent audit report is prepared by the City's auditor, Lance, Soll and Lunghard, the certified public accountancy firm selected by the Council. Staff would like to take this opportunity to acknowledge the auditor's professionalism and diligence in the completion of the audit.
We are pleased to report that once again, the City has received an unqualified audit opinion, meaning that the auditor believes that the City's financial statements are fairly presented in all material respects in conformity with Generally Accepted Accounting Principles (GAAP).
The attached report contains detailed information about the City's financial results for FY 2012-2013. The document, which is in industry-standard format, is organized as follows:
Introductory Section
The Introductory Section includes the City's transmittal letter providing an executive summary of the financial and economic events characterizing FY 2012-2013. A review of the transmittal letter will help the reader understand the City's organizational structure and provides performance highlights of the City's most significant funds and operations.
Financial Section
The Financial Section presents the independent auditor's report. The auditor's report contains two main sections: the Audit Opinion and the Management Discussion & Analysis (MD&A).
Audit Opinion
The Audit Opinion, worded in an industry standard format, provides a statement by the auditor attesting to the fair presentation of financial data in conformity with generally accepted accounting principles and government accounting standards.
Management Discussion & Analysis (MD&A)
The required MD&A is intended to serve as an introduction to the City's basic financial statements, which comprise three components: 1) Government Wide Financial statements, 2) Fund Financial statements, and 3) notes to the financial statements, which is an overview and analysis of the financial activities of the City of Manhattan Beach for the fiscal year ended June 30, 2013.
The Government-wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private-sector business. These statements utilize full accrual accounting as is done in private industry. The statements included in this section are the statement of net position (formerly statement of net assets) and the statement of activities. Both government-wide statements are designed to show the annual increase or decrease in net assets and, in doing so, distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include general government, public safety, public works, planning, building and safety, and recreation. The City's business-type activities include water, waste water, storm water, refuse and parking.
The Fund Financial Statements include governmental funds reported on a budgetary modified accrual basis and proprietary funds reported on a full accrual basis. Major governmental funds (General Fund, Capital Improvement Fund) and major enterprise funds (Water, Waste Water, Refuse and Parking) are shown individually, while non-major funds are aggregated into a single column (full details are listed later in the document). Internal service funds are considered minor proprietary funds and are aggregated following enterprise funds.
The Notes to the Financial Statements section follows, which provides financial disclosures about the City's financial statements. That section is followed by the Combining Financial Statements & Schedules and the Statistical Section. The combining statements are presented in the traditional fund manner and report on the detail of all non-major funds which appear on a combined basis in the front of the document. The Statistical Section, not subject to audit review and testing, provides general trend information presenting financial and economic data over time.
New for FY 2012-2013 is a section entitled "Bond Disclosure." This optional enhancement has been added by the City to provide investors and other interested parties with a single source for all continuing disclosure requirements for debt issued by and through the City.
Staff recommends that the City Council, at a minimum, review the Letter of Transmittal, and MD&A portions of the report. These will provide an overview of the audit results and financial highlights.
The audit results were discussed with the Finance Subcommittee at their December 11, 2013 meeting. The Auditor will make a brief presentation and will be available to answer questions at the City Council meeting.
Summary of Results
General Fund
Overall, General Fund results were better than budgeted projections. Revenues exceeded expenditures by $2,769,401. When considering net transfers to and from other funds, and sale of capital assets, General Fund balance decreased by $271,833 from the prior year. Transfers out, which totaled $3,241,817, included $3 million to the Capital Improvement Project (CIP) Fund to facilitate projects (the list of transfers is detailed in the audit report in the MD&A).
By category, revenues exceeded the final (amended) budget by $2,656,192 and expenditures came in under final (amended) budget by $1,646,565 as detailed in Attachment 1.
The total fund balance in the General Fund as of June 30, 2013 was $19,588,760. Utilizing governmental accounting standards classifications for governmental type funds (GASB 54), the fund balance is as follows:
Unassigned: $17,983,812
Restricted: $1,130,434
Non-Spendable: $474,514
The Unassigned category includes the City Council financial policy reserve of $10.6 million (20% of expenditures) and the Economic Uncertainty Reserve of $4 million. Once all City Council established internal reserves and designations have been accounted for, the General Fund had an available balance as of June 30, 2013 of $3.4 million (please note that this amount does not reflect subsequent appropriations from the available fund balance including those in the fiscal year 2013-2014 budget).
Other Funds of Note
While most funds performed as expected, several are worth mentioning.
The Water Fund continues to build the resources for planned capital improvements needed to sustain the utility's operation and infrastructure. Net income from operations totaled $6,170,437, an improvement from the prior year which had net operating income of $4,119,271. Revenue from sales increased by 19.4%, while operating expenses (labor, materials, services, etc.) rose by 4.5%. During FY 2010, the City Council approved increased water and waste water rates to support system infrastructure needs as well as to bolster the fiscal integrity of those funds. The rate structure became effective in January 2010 and provides for annual increases each January through 2014. The most recent increase in water rates, which became effective half way through the fiscal year, contributed to the results which will be used to fund planned capital improvements to the utility's infrastructure, estimated at $32.9 million over the next five years.
The Waste Water fund net operating income for FY 2012-2013 was $1,436,254 versus $1,416,545 in FY 2011-2012 - a net increase of $19,709, or 1.4%. Revenue from sales increased $322,746 (10.5%) while operating expenses increased $300,695 (18.0%). This improvement is primarily due to new waste water rates implemented along with the water rates in January 2013. Similar to the water utility, the new rates are being utilized to fund needed capital improvements to the waste water system.
Refuse Fund net income from operations totaled $258,880 in FY 2012-2013, an increase of $86,016 from the prior year. Operating expenses decreased by $23,565 (0.6%) while operating revenues rose by $62,451 (1.4%). The implementation of a new refuse hauling contract in late fiscal year 2011 along with a new rate structure contributed to the results. In FY 2013-2014, the City voluntarily commenced issuing refunds of past street sweeping charges collected on the utility bill. Those refunds will affect FY 2013-2014 fund balance.
The Storm Water Fund net operating (loss) in FY 2012-2013 totaled $57,093, an improvement from the FY 2011-2012 net loss of $397,854. The fund received a grant for $500,000 in FY 2012-2013 for a capital project low flow infiltration below the City's greenbelt parkland. Without the grant, the fund would have sustained a negative change in net position of $54,915. The combination of fixed assessments and rising costs currently requires a General Fund subsidy of administrative overhead, and ultimately will require cash subsidies. Additionally, capital improvements due to legislative mandates will also result in increased costs. A Proposition 218 assessment vote will be necessary to properly fund operations going forward.
CONCLUSION:
Staff is pleased to report that the fiscal year 2012-2013 financial audit resulted in the City once again receiving an unqualified opinion. The General Fund performed better than expected, with revenues exceeding expenditures by $2.77 million. City Council policy reserves remain fully funded.
The Interim City Manager and Finance Director wish to recognize the dedication, hard work and attention to detail of all departments during the year that enables the City to achieve the unqualified opinion. Special recognition is in order for Finance staff, particularly Henry Mitzner, Jeanne O'Brien, Eden Serina, Eugene Wee and Julie Chan.
Attachments:
1. FY 2012-2013 General and Enterprise Fund Summary Results
2. FY 2012-2013 Comprehensive Annual Financial Report
3. Report on Internal Control (Management Letter)
4. Audit Committee Letter