Item Coversheet

Agenda Item - 3.b.


City of Garden Grove


INTER-DEPARTMENT MEMORANDUM

To:Scott C. Stiles

From:Patricia Song
Dept.:City Manager 

Dept.: Finance 
Subject:

Receive and file the annual financial reports and auditor’s communication related to Fiscal Year 2018-19 annual audit.  (Joint Action Item with the Garden Grove Sanitary District.)

Date:12/17/2019

OBJECTIVE

For the City Council to receive and file the annual financial reports and auditor’s communication related to Fiscal Year 2018-19 annual audit.

BACKGROUND

The City’s Municipal Code requires a complete financial statement and report be submitted to the City Council after the close of each fiscal year.  In order to ensure the reliability of the information contained within the financial statements, the City contracted with an independent audit firm, Davis Farr LLP, to perform the annual financial audit.  The goal of the audit is to provide reasonable assurance that the City’s financial statements are free from material misstatement.  Davis Farr LLP issued an unmodified, or clean opinion for the City’s financial statements for fiscal year ending June 30, 2019.

DISCUSSION

The annual audits of the financial statements of the City and its component units were completed on December 4, 2019. The financial statements were prepared in accordance with all applicable accounting standards in order to conform to Governmental Accounting Standards Board requirements. The independent auditor has issued an unmodified opinion of the City’s financial statements for the fiscal year ended June 30, 2019.  An unmodified opinion concludes that the financial statements of the City are presented fairly, in all material respects, in accordance with generally accepted accounting principles.

 

In addition to reviewing and examining the City’s financial records, the auditors also reviewed the internal control framework of the City.  Internal control is a set of activities, rules, and procedures implemented by the City to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Internal control mechanism is embedded in the normal operating procedures, designed with the intent of safeguarding assets, minimizing errors, and ensuring that operations are conducted in an approved manner.  There were no findings cited by the auditors during their review of the City internal control over its financial reporting.

 

The General Fund is the primary operating fund of the City. For Fiscal Year 2018-19, the General Fund ended with a positive operating result of $17.2 million before transfers.  The surplus was largely due to the passage of Measure O which brought in additional revenue of $4.8 million and savings in labor costs.  The surplus was not originally anticipated and budget reductions were implemented prior to the beginning of the fiscal year before the passage of Measure O. 

 

The City strives to develop a budget that accurately aligns available resources and operational needs. Therefore, all budget variances are carefully reviewed and analyzed. A budget variance is the difference between the budgeted amount of expense or revenue and the actual amount. The budget variance is favorable when the actual revenue is higher than budgeted or when the actual expense is less than budgeted.  Budget variances can occur for a variety of controllable and uncontrollable reasons, such as personnel savings due to vacancies, increases or decreases in development related activities, unspent funding in the current year due to projects crossing over fiscal years, implementation of technology to reduce cost, and the identification of additional revenue sources during the year.

 

Comparing to the budgeted amounts, the General Fund had a net favorable budget variance of $24.9 million for the fiscal year ended June 30, 2019. Included in this variance was $12.5 million in taxes, including $7.9 million Measure O revenue and residual property taxes that were not included in the budget.  Investment earnings exceeded the original estimate by $1.7 million largely due to a mark-to-market adjustment of unrealized gains in the amount $1.3 million.  Licenses, permits and plan check fees were higher than anticipated due to increased development activities, resulting in a combined favorable variance of $2.2 million.  On the expenditure side, $4.1 million of unspent capital improvement project funds were included in the total variance.  This amount was carried over to Fiscal Year 2019-20 to continue the projects.  During the year, the City also achieved labor savings as a result of the implementation of an early retirement program.  The program was implemented prior to the passage of Measure O in an effort to balance the budget.

 

During the audit, the auditors identified two misstatements.  One of them related to the year-end liability accrual for the City’s Worker’s Compensation self-insurance program.  The City commissions actuarial study on program liability on a biennial basis.  The most recent study was performed in December 2017, since then, the claim activity experienced a higher than expected level, resulting in higher liability.  Due to the time constraint, the City was not able to update the study before completing the financial audit, resulting in the “incurred but not reported” (IBNR) claims not included in the year-end accrual.  Staff will closely monitor the claim activities in the future and perform a timely update if necessary to avoid similar situation. The other finding was on a transaction posted to the incorrect fiscal period.  Franchise fee received in advance was erroneously recorded as current year revenue.  Moving forward, with new procedures and a new financial system in place, this type of misstatement will be effectively minimized.

FINANCIAL IMPACT

There is no fiscal impact to receive and file the auditor’s reports related to Fiscal Year 2018-19 annual financial audit.  The fees for auditing services were provided for in the annual operating budgets.

RECOMMENDATION

It is recommended that the City Council receive and file the following reports and documentations:

 

  • City of Garden Grove Comprehensive Annual Financial Report (CAFR) for Fiscal Year 2018-19 (Attachment 1)
  • Single Audit Report (Attachment 2)
  • Report on Agreed-Upon Procedures Applied to Appropriation Limit Worksheets – City of Garden Grove (Attachment 3)
  • Report on Agreed-Upon Procedures Applied to Appropriation Limit Worksheets – Garden Grove Sanitary District (Attachment 4)
  • Report on Internal Control and Compliance of the Air Quality Improvement Fund (Attachment 5)
  • Auditor Communications to the City Council (Attachment 6)

 

The Single Audit Report includes the auditor’s report on internal control and compliance over the financial statements and internal control and compliance over major federal programs.




ATTACHMENTS:
DescriptionUpload DateTypeFile Name
Attachment 1 - Comprehensive Annual Financial Report12/5/2019ExhibitAttachment_1_-_CAFR.pdf
Attachment 2 - Single Audit Report12/5/2019ExhibitAttachment_2-SingleAudit.pdf
Attachment 3 - Appropriation Limit Review - City12/5/2019ExhibitAttachment_3-GANN_City.pdf
Attachment 4 - Appropriation Limit Review - Sanitary District12/5/2019ExhibitAttachment_4_-_GANN_Sanitary_District.pdf
Attachment 5 - AQMD Compliance Review12/5/2019ExhibitAttachment_5-AQMD_Compliance.pdf
Attachment 6 - Auditor's Communication12/5/2019ExhibitAttachment_6-Auditor_Communication.pdf