STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of January 25, 2022
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Acceptance of the FY 20-21 Annual Comprehensive Financial Report and other regulatory financial reports.
RECOMMENDED ACTION
Receive the Fiscal Year (FY) 20-21 Annual Comprehensive Financial Report (ACFR) and Accept the Audited Financial Statements.
FISCAL IMPACT OF RECOMMENDATION
There is no financial impact associated with accepting this report. The audited results of the FY 20-21 fiscal year are utilized as a starting point in the development of the FY 22-23 budget, especially in regard to the one-time funding.
BACKGROUND
The ACFR communicates the City’s financial condition and activity in a transparent and organized manner and in compliance with accounting and financial reporting standards established by the Governmental Accounting Standards Board (GASB). The report presents historical and comparative information that can be useful to City staff, elected officials, and external users such as debt rating agencies, businesses, other public agencies, and the City’s residents. The most recent ACFR and prior years reports are available at the City’s libraries, the City’s Finance Department, and on the City’s Finance website at:
https://www.ci.hercules.ca.us/government/finance/comprehensive-annual-financial-reports The City of Hercules prepares audited financial statements for each fiscal year as required by various financing covenants and rules associated with restricted funding. To ensure compliance with these requirements and bond indentures, the City contracts with an independent audit firm. The City’s external audit firm, The Pun Group, completed the independent audit and issued the audit report for the fiscal year ended June 30, 2021.
The quality of the City’s financial reporting and the ACFR are measured in two ways: (1) an unmodified audit report by the independent auditors; and (2) the Certificate of Achievement for Excellence in Financial Reporting, awarded by the Government Finance Officers Association (GFOA). The attainment of the latter is the highest form of recognition in governmental accounting and financial reporting.
Auditors follow audit industry standards established by the American Institute of Certified Public Accountants (AICPA). These standards require auditors to provide an opinion on specific areas of the City’s financial statements based on observations, inquiries, testing of transactions, and analysis.
The City’s CAFR includes the following major sections and information:
Introductory Section
Letter of Transmittal – prepared by management and used to communicate information on areas that may have an impact on the City’s finances now and in the future. This includes economic factors as well as budget and management factors.
Financial Section (the main body of the ACFR for current year information) Independent Auditors’ Report – the City’s report card on the content of the ACFR.
Management’s Discussion and Analysis (MD&A) – provides an analytical overview of the City’s financial status and results for the year.
Basic Financial Statements – reports finances at a point in time (assets - liabilities) and throughout the year (revenues - expenditures), and cash flows.
City-Wide Statements – overview of financial information including all of the City’s operations by financial activity.
Fund Financial Statements – a detailed look at funds, reporting the Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance.
Notes to the Financial Statements (Notes) – a narrative explanation that accompanies the Basic Financial Statements.
Required Supplementary and Supplementary Information Sections Budget to Actual Comparisons – for all governmental funds with a legally adopted budget.
Notes to Required Supplementary Information.
Pension Information – schedule of changes in the net pension liability and related ratios; schedule of contributions by plan.
OPEB Information – schedule of changes in the net Other Post-Employment Benefits (OPEB) liability and related ratios; schedule of contributions.
A breakout of individual non-major funds – for funds that were presented in a cumulative manner in the Financial Section Statistical Section (current and historical information – up to 10 years) Financial Trends
Revenue Capacity Information
Debt Capacity Information
Demographic and Economic Information
Operating Information
DISCUSSION
In FY 19-20, the City converted its financial statement from Basic financial statement report to ACFR. The Basic financial statement typically presents only the basic financial report about the government. The ACFR, in contrast, presents a wider variety of important information intended to help the reader properly understand the basic statements, as illustrated above. The basic financial statements only show the financial section that consists of the MD&A, the basic financial statements, and the independent auditor’s report, without the individual non-governmental fund financial statements and schedules.
The City’s external independent audit firm, The Pun Group, completed its audit of the annual Financial Statements and has issued an unmodified (or “clean”) audit opinion validating the fair presentation of the City’s financial position as of June 30, 2021. The City’s ACFR shows that the City continued to hold a sound financial position.
GENERAL FUND
The General fund is the chief unrestricted operating fund of the City. The General Fund reflects the City's sound management practices and prudent financial decisions as steady growth and improved financial results are evident in the audit report for FY 20-21. On June 30, 2021, the City's General Fund had a fund balance of over $45 million, of which $10 million is unassigned, and $2 million is available for expenditures.
The basis of accounting used for financial reporting purposes in accordance with Generally Accepted Accounting Principles (GAAP) is not necessarily the same basis used in preparing the budget document. For example, governmental funds are required to use the modified accrual basis of accounting in GAAP financial statements. In contrast, the cash basis of accounting or the "cash plus encumbrances" basis of accounting may be used in those same funds for budgetary purposes. Disparities between GAAP and the budgetary basis of accounting often occur because regulations governing budgeting (e.g., laws or ordinances of the state, county, City, or other jurisdiction) differ from GAAP. Thus, the City adopts its budgets each fiscal year on a cash plus encumbrances basis of accounting, which results in some items which are budgeted as expenditures, like, for example, transfers to reserves, being reflected in the audit as balance sheet adjustments/designation of fund balance.
Revenue Analysis
FY 20-21 Audited
General Fund Revenues
The majority of General Fund revenues comes from the following categories, about 70% of total revenues:
Utility Users Tax
Sales Tax
Property Taxes
Intergovernmental: Vehicle License Fee (VLF)
The Utility User’s Tax (UUT) is imposed by the City on the consumption of utility services, including (but not limited to) electricity, gas, water, sewer, telephone, and cable television. The City determines the rate of the tax and the use of its revenues. As of June 30, 2021, the City has collected about $3.6 million, or 3% better than what was projected in the forecast. This tax fluctuates with consumer consumption and is assessed based on a percentage of gross receipts. The UUT is of limited duration, and is set to expire on January 1, 2025, unless it is extended. Extension of the UUT would require voter approval. The UUT is an important source of revenue for the City, and failure to extend the UUT would have a serious impact on the City’s ability to provide a basic level of public service.
Sales Taxes, the largest revenue source for the City’s General Fund, is remitted to the City from the State on an on-going basis. This tax is also exceeded the revenue projections by $269K or 6% better than what was projected in the forecast. Total Sales Tax revenue is highly concentrated within a few major operators. A few top producers generate over 30% of the City’s sales tax. The following depicts the summary history of the City’s sales tax revenues by the type of sales and use tax:
Property Tax and related taxes collected through June 30, 2021, which are the current year secured and unsecured, were slightly lower compared to the budget.
Also, the County anticipates the final deferred subordinated pass-thru payment of will be made in the next RPTTF distribution in January 2022. The estimated City share of pass thru and residual RPTTF is approximately $142K. This will be treated as one-time use of funding in future budget recommendations, as those payments will dimmish as a fixed amount of subordinated pass-throughs is fully repaid.
Due to COVID-19 closure, most of the Parks & Recreation program was closed for fiscal year 20-21. As a result, the staff revised the revenue projection downward during mid-year of FY 20-21 Budget.
Overall, the General Fund year-end revenues totals came in $708K, or 4% higher than the FY 20-21 revised budget figure.
Expenditure Analysis
FY 20-21 Audited
General Fund Expenditures
This section discusses the General Fund expenditures. It includes encumbrances, which are obligations in the form of purchase orders or contracts chargeable to the budget for which a part of the budget is reserved. The FY 20-21 expenditure budget, as revised, was $14.6 million. Operating expenses in total are all tracking 3% below the revised budget figure. The total operating costs were $458K, better than projections.
The Parks & Recreation revised projections show $1.4 million of expenditures. The revised year-end estimates presented to the Council during the mid-year adjustment of FY 20-21 budget included the adjustments related to the impact of COVID-19. The actual expenditures were lower by 3% compared to the revised estimate.
Net Annual Results
The General Fund operation resulted in higher revenues than anticipated, and expenditures came below the revised appropriation. Because the General Fund ended with positive results better than the projected FY 20-21 Budget, there was no withdrawal needed to use reserves to bridge the gap as previously anticipated from the fund, and the City ended the FY 19-20 with three months of expenditures or 25% as opposed to the 17% as projected.
During FY 20-21 mid-year Budget, staff adjusted the budget that include the return of unused money drawn from the reserve and other factors that enhanced the City's financial standings in FY 20-21. This includes subsequent events such as the allocation from CARES Act funding of $315,000 and cash flow savings of $458,000 from the library bonds' refinancing.
OTHER GOVERNMENTAL FUNDS
Fund balances in the City’s other restricted governmental funds (including Debt Service, Gas Tax, Measure C Street Fund, City Capital Projects, and other governmental funds) totaled approximately $20 million as of June 30, 2021. These funds are governed by many covenants and restrictions and may only be used on specific purpose.
INTERNAL SERVICE FUNDS
The available net position in the City’s Internal Service Funds totaled approximately $2.6 million as of June 30, 2021. The ending balance was an accumulation of reserves to meet future fleet, equipment, and information technology replacements, and facility maintenance needs.
SEWER ENTERPRISE FUND
The net position in the City’s Sewer Fund totaled approximately $44 million as of June 30, 2021, which was $1.8 million greater than the ending balance in the prior fiscal year. Of the $44 million in net position, $7.2 million is invested in capital assets, $7.6 million is restricted for debt service, and $29.5 million is unrestricted for sewer system replacement.
FILINGS WITH THE STATE CONTROLLER’S OFFICE AND ISSUANCE OF SUPPLEMENTAL REPORTS In addition, the City prepares the City Financial Transactions to be submitted to the California State Controller’s Office by January 31, 2022. Also, the City is required to issue the following supplemental reports: the FY 20-21 Public Financing Authority Financial Report, Wastewater Financial Report, and Agreed Upon Procedures (AUP) for Measure B and C, and GANN Appropriation Limit Calculation as attached.
ATTACHMENTS:
FY 20-21 SAS Letter or Required Communication Letter in an Audit FY 20-21 Annual Comprehensive Financial Report (ACFR)
FY 20-21 Hercules Public Financing Authority (PFA) Financial Statements FY 20-21 Hercules Wastewater Fund Financial Statements
FY 20-21 Agreed Upon Procedures (AUP) Report on Measure B FY 20-21 Agreed Upon Procedures (AUP) Report on Measure C FY 20-21 Agreed Upon Procedures (AUP) Report on GANN Appropriation Limit Calculation Annual Audit Presentation
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