Finance & Management Committee April 11, 2023
AGENDA REPORT TO: Steven FalkFROM:Erin Roseman Interim City Administrator Finance Director SUBJECT:Annual Comprehensive Financial Report and Management Letter DATE:March 8, 2023 City Administrator Approval Date: RECOMMENDATIONStaff Recommends That The City Council Receive The Annual Comprehensive Financial Report (ACFR) And The Auditor’s Required Communication To City Council (Management Letter) For The Year Ended June 30, 2022. EXECUTIVE SUMMARY The Finance Department is pleased to present to the City Council the attached independent annual audit, referred to as the Annual Comprehensive Financial Report (ACFR), and the auditor’s required communication to City Council, also known as the Management Letter. This report was titled the Comprehensive Annual Financial Report (CAFR) in prior years and has been renamed at the direction of the Governmental Accounting Standards Board. The ACFR incorporates management’s discussion and analysis of the City’s financial position, basic financial statements, notes to basic financial statements, and the independent auditor’s report on internal control over financial reporting and on compliance and other matters based on an audit of financial statements performed in accordance with Government Auditing Standards. Macias, Gini & O’Connell, the City’s external auditor, audited the City’s financial statements for the year ending June 30, 2022 (Attachment A). The auditor’s unmodified opinion letter for the ACFR affirms that the basic financial statements contained therein accurately represent the financial condition of the City of Oakland as of June 30, 2022. The auditor expressed an opinion that the City’s financial statements are fairly stated and in accordance with accounting principles generally accepted in the United States. The Fiscal Year (FY) 2021-22 ACFR provides relevant financial information to the City Council, residents and businesses of Oakland, creditors, investors, and other interested parties. This report also fulfills the City Council’s responsibilities under Section 809 of the City Charter, which states in part, “The Council shall engage during the first month of each fiscal year an independent certified public accountant who shall examine and report to the Council on the annual financial statement of the City.” Mar 29, 2023
Steven Falk, Interim City AdministratorSubject: Annual Comprehensive Financial Report and Management Letter Date: March 8, 2023 Page 2 Finance & Management Committee April 11, 2023
BACKGROUND / LEGISLATIVE HISTORY The Annual Comprehensive Financial Report The FY 2021-22 ACFR provides a description of the City’s financial activities for the period of July 1, 2021 through June 30, 2022, and is divided into the following major sections: Introductory Section: This section intends to familiarize the reader with the organizational structure of the City, the scope of City services and the City general government operations. This section also highlights the Government Finance Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting award for the previous fiscal year; Financial Section: This section contains the City’s audited financial statements, notes to the basic financial statements, the Independent Auditor’s Report, and Management’s Discussion and Analysis (MD&A); and Statistical Section: This section provides ten years of summary financial data, as well as demographic, economic, and statistical information related to the City and its operations. The auditor’s opinion contained in the Financial Section of the ACFR represents their unmodified opinion that the City’s financials are presented fairly and in conformity with Generally Accepted Accounting Principles (GAAP). The Management Letter or Auditor’s Required Communication to City Council The Management Letter is a required communication and recommendation by Statement on Auditing Standards (SAS) No. 114. The letter outlines the auditor’s responsibility, planned scope, and timing of the audit, and provides advice on accounting policies, evaluates accounting estimates, proposes audit adjustments, and notes significant audit findings, the status of prior years’ recommendations, corrected and uncorrected misstatements, disagreements with management, management representations, and any major difficulties encountered in performing the audit. The Management Letter is intended solely for the information and use of the City Council, the Finance and Management Committee, Federal grantor agencies, and the management of the City. ANALYSIS AND POLICY ALTERNATIVES The FY 2021-22 ACFR provides a comprehensive review of the City’s financial operations. The ACFR is submitted to the City Council for review and to provide relevant financial information to the residents of Oakland, creditors, investors, and other interested parties. This document includes an opinion from the City’s external auditor that the City’s financial statements for FY 2021-22 are fairly stated in conformity with accounting principles generally accepted in the United States. This is the most favorable conclusion and is commonly known as an Steven Falk, Interim City AdministratorSubject: Annual Comprehensive Financial Report and Management Letter Date: March 8, 2023 Page 3 Finance & Management Committee April 11, 2023
"unmodified" or "clean" opinion. The independent auditor’s report is included in the Financial Section of the ACFR. The presentation of this report supports the Citywide priority of responsive, trustworthy government. The ACFR communicates the City’s financial position and obligations to the public, policy makers, and investors, while the audit of this information provides assurance of the accuracy of information contained therein. The report also fulfills the requirements of the City Charter for an annual audit of the City’s finances as well as commitments to the City’s bondholders for annual updates on the City’s financial position. Financial Highlights For the fiscal year ended June 30, 2022, total assets and deferred outflows of resources exceeded total liabilities and deferred inflows of resources by $551.2 million. This result compares to a net position of $96.3 million on June 30, 2021 and reflects a $454.9 million improvement in net position on a government-wide basis, as detailed in Table 1. Of the $454.9 million improvement in net position, $28.2 million was derived from increases in general revenues, including $32.5 million in property tax, $25.0 million in real estate transfer tax, and $10.4 million in sales and use tax. These gains were offset by declines of $62.6 million in other revenues, which was primarily due to one-time revenues received in the prior year. $223.6 million of the improvement in net position results from decreased expenses, including a $201.8 million reduction in pension and other post-employment benefits (OPEB) expense due to declines in estimates of related liabilities. OPEB-related changes accounted for $102.0 million of the improvement in net position, primarily due to changes in actuarial assumptions about future interest earnings on assets held in trust for these obligations. These assumption changes followed the City’s restoration of contributions to address unfunded OPEB liabilities that were suspended at the beginning of the COVID19 pandemic. Pension-related changes resulted in $107.9 million of the improvement in net position and reflect relatively strong investment results. The City’s net position of $551.2 million incorporates a $1.6 billion deficit in unrestricted net position that has primarily resulted from the historical underfunding of pension and OPEB liabilities. The net pension liability accounts for $1.2 billion of this deficit and the net OPEB liability accounts for $0.6 billion. While still substantial, the City’s unrestricted net deficit declined by $434 million in the fiscal year ended June 30, 2022. Capital assets such as buildings, land, and equipment, less any related outstanding debt, account for $1.3 billion of the City’s net position. These capital assets are used to provide services to residents and are not available for future spending. Resources that are subject to restrictions on their use, such as bond proceeds or grant funds, contribute an additional $860.5 million to net position and are available to meet the City’s ongoing obligations for specific programs. Of this amount, $332.9 million pertains to Low and Moderate Income Housing Redevelopment, $413.8 million is restricted for Housing and Community Development programs, and $40.2 million is restricted for debt service.
Steven Falk, Interim City AdministratorSubject: Annual Comprehensive Financial Report and Management Letter Date: March 8, 2023 Page 4 Finance & Management Committee April 11, 2023
Total fund balance for the City's governmental funds increased by 25.4 percent, or $288.0 million, ending the year at $1.4 billion. In addition to the factors noted above, this increase reflects the issuance of general obligation bonds during the fiscal year that had not yet been fully expended at year end. Total fund balance in the consolidated General Fund increased by 32.3%, or $149.9 million, rising to $613.9 million. This improvement reflects the use of federal COVID funds to reduce General Fund expenditures, gains in general revenues, and reduced expenses due to vacancies. These strong financial results also positively impacted the City's reserves. On June 30, 2022, the General Purpose Fund Emergency Reserve, a sub-fund of the General Fund, had a balance of $54.0 million. In addition, the General Purpose Fund had unassigned fund balance of $90.6 million. In combination these balances totaled $144.6 million, exceeding the amount required under the City's Consolidated Fiscal Policy of 7.5 percent of FY 2021-22 General Purpose Fund appropriations, or $54.5 million.
Steven Falk, Interim City AdministratorSubject: Annual Comprehensive Financial Report and Management Letter Date: March 8, 2023 Page 5 Finance & Management Committee April 11, 2023
Table 1: Consolidated Statements of Net Position June 30, 2022 and 2021 (in thousands): Governmental ActivitiesBusiness-TypeActivities Total2022 2021 2022 2021 2022 2021 Assets Current and other assets 2,522,302 2,136,443 104,953 91,994 2,627,255 2,228,437 Capital assets 1,459,289 1,440,601 253,930 255,239 1,713,219 1,695,840 Total Assets 3,981,591 3,577,044 358,883 347,233 4,340,474 3,924,277 Deferred outflows of resources Loss on refunding of debt 11,023 12,268 -- -- 11,023 12,268 Pensions 265,730 339,194 4,528 908 270,258 340,102 OPEB 194,723 221,051 3,949 4,527 198,672 225,578 Total Outflows 471,476 572,513 8,477 5,435 479,953 577,948 Liabilities Long-term liabilities 1,186,108 1,045,103 23,526 26,359 1,209,634 1,071,462 Other liabilities 472,663 467,428 5,766 3,117 478,429 470,545 Net pension liability 1,186,077 1,754,45 29,806 46,916 1,215,883 1,801,374 Net OPEB liability 606,108 827,123 11,361 15,713 617,469 842,836 Total Liabilities 3,450,956 4,094,112 70,459 92,105 3,521,415 4,186,217 Deferred inflows of resources Gains on refunding of debt 2,544 2,785,000 276,000 316,000 2,820,000 3,101,000 Leases 37,215 -- -- -- 37,215 -- Pensions 386,245 2,854 11,362 -- 397,607 2,854 OPEB 304,276 210,886 5,910 2,876 310,186 213,762 Total deferred inflows 730,280 216,525 17,548 3,192 747,828 219,717 Net Position Net investment in capital assets 1,040,918 1,102,435 230,128 228,564 1,271,046 1,330,999 Restricted 860,545 779,672 -- -- 860,545 779,672 Unrestricted (deficit) (1,629,634) (2,043,187) 49,224 28,807 (1,580,410) (2,014,380) Total net position 271,829 (161,080) 279,352 257,371 551,181 96,291 FISCAL IMPACT This item is for informational purposes only and does not have a direct fiscal impact or cost. PUBLIC OUTREACH / INTEREST This item did not require any additional public outreach other than the required posting on the City’s website.
Steven Falk, Interim City AdministratorSubject: Annual Comprehensive Financial Report and Management LetterDate: March 8, 2023 Page 6 Finance & Management CommitteeApril 11, 2023
COORDINATIONThis report was prepared in coordination and with input from the Finance Department. It presents financial information for all City departments as well as the Port of Oakland.SUSTAINABLE OPPORTUNITIESEconomic: There are no direct economic opportunities associated with this informational report.Environmental: There are no direct environmental opportunities associated with this informational report.Race & Equity: This informational report documents changes in the City’s financial position and provides assurance to policymakers, investors, and residents that the City’s finances are accurately reported. While there are no direct race or equity opportunities associated with this informational report, it provides a foundation upon which policymakers may take further actions to advance racial equity.ACTION REQUESTED OF THE CITY COUNCILStaff Recommends That The City Council Receive The Annual Comprehensive Financial Report (ACFR) And The Auditor’s Required Communication To City Council (Management Letter) For The Year Ended June 30, 2022. For questions regarding this report, please contact Stephen Walsh, Controller, at (510) 238-4906.Respectfully submitted,ERIN ROSEMANFinance DirectorFinance DepartmentPrepared by: Stephen Walsh, ControllerController’s BureauAttachments (2):A: Annual Comprehensive Financial Report For the Year Ended June 30, 2022 B: Auditor’s Required Communication to City Council (Management Letter)