DISCUSSION
The annual audits of the financial statements of the City and its component units were completed on January 31, 2023. 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, 2022. 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 was no material weakness cited by the auditors during their review of the City internal control over its financial reporting. However, the auditors pointed out that multiple adjustments were made to the accounting records during the audit. This was due to the implementation of a new accounting standard on leases, as well as the conversion of the payroll system in January 2022. Staff acknowledges the deficiency addressed in the management letter, and has started implementing the recommended action accordingly.
The audited financials show that for Fiscal Year 2021-22, the City overall had a positive operating result of $71.1 million, due to a combination of higher tax revenues and the receipt of the second tranche of the State and Local Fiscal Recovery Funds (SLFRF) in the amount of $24.2 million. The City has programmed the SLFRF money in our fiscal year 2021 to 2023 biennial budget, to fund for essential government services including public safety, public works, and community services. This much needed one-time funding also enabled the City to plan for two major infrastructure-based programs that will support the long-term growth of the community. They are the Pavement Management Acceleration Plan, and Public Facilities and Infrastructure Program. Both programs were included in the adopted fiscal years 2021-23 biennial budget for a total of $35.0 million.
The General Fund is the primary operating fund of the City. For Fiscal Year 2021-22, revenue exceeded expenditures by $49.2 million in the General Fund. While expenditures had a mild increase of $5.3 million, revenues enjoyed a $25.0 million boost. The largest increase was in TOT, in the amount of $16.3 million, followed by sales tax with an increase of $10.4 million. Property taxes remained the largest revenue in the General Fund, closed the year with $59.8 million. Sales tax reached $58.8 million, and TOT was $23.4 million, nearly at the pre-pandemic level. Total taxes amounted to $147.4 million, representing 80.3% of overall General Fund revenue. Combined with the $24.2 million SLFRF funds received in June 2022, Fiscal Year 2021-22 enjoyed a surplus of $49.2 million.
In June 2022, when amending the City’s continuation year budget for the fiscal years 2021-23 budget cycle, anticipating the positive operating results of the fiscal year, additional appropriations of $23.6 million was adopted in the amended Fiscal Year 2022-23 budget. In addition to the labor cost increases caused by new Memoranda of Understanding and pension liability, these additional appropriations were planned to fund for several major initiatives, including $7.0 million for a navigation center, and an additional $8.3 million for the Civic Center/Public Safety Facility project. At the close of the year, audited financials showed higher revenue amounts in the General Fund, staff is recommending the City Council to appropriate an additional $1.1 million for Fiscal Year 2022-23 for the following items:
- The City acquired the Purcell Building in October 2022 for $8.0 million as part of the strategic plan for the Civic Center. Additional tenant improvements are needed to relocate certain Police workforce as well as the Garden Grove Housing Authority and the Information Technology laboratory. Total additional appropriation needed for the tenant improvement including a space utilization study is $1.0 million.
- The City received cost estimate in the amount of $218,000 from the County regarding the 2022 Statewide General Election. The cost has doubled due to legislative changes in regards to election process and voting center configuration. The City originally budgeted $112,000 for the election. An additional $106,000 was necessary to cover cost increase.
- The City started using Amazon Web Services (AWS), a cloud-based solution to host data and store critical backups this year. The fee structure is tiered based on service needs. Original purchase orders issued for AWS totaled $35,000, an additional $24,000 is necessary to cover service needs for the remainder of the year.
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 $51.5 million for the fiscal year ended June 30, 2022. The majority of the variance was unspent funds on major capital projects, including the Civic Center/Public Safety Facility Project ($19.9 million), and the Pavement Acceleration Program ($17.5 million). The total unspent capital budget in the amount of $37.4 million were carried over into the next year to complete these projects. Personnel cost savings due to vacancy totaled about $3.3 million, and the remaining balance were for unspent contract amount as of June 30, 2022. These funds were encumbered and re-appropriated in Fiscal Year 2022-23.