203 N. Brea Blvd., Suite 203
Brea, CA 92821 Lance, Soll & Lunghard, LLP Phone: 714.672.0022 INDEPENDENT AUDITORS’ 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
To the Honorable Mayor and Members of the City Council
City of Orange, California
We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the fin ancial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Orange, California (the “City”), as of and for the year ended June 30, 2022, and the related notes to the financial statements, which collectively comprise the Ci ty’s basic financial statements, and have issued our report thereon dated December 16, 2022.
Report on Internal Control over Financial Reporting
In planning and performing our audit of the financial statement s, we considered the City’s internal control over financial reporting (internal control) as a basis for desi gning audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements, on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that ther e is a reasonable possibility t hat a material misstatement of the entity’s financial statements will not be prevented, or detected and cor rected, on a timely basis. A significant deficiency is a deficiency, or a combinati on of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal c ontrol was for the limited purpo se described in the first paragraph of this section and was not designed to i dentify all deficiencies in internal control that might be material weaknesses or, significant defic iencies. Given these limitation s, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses or significant deficiencies may exist that were not identified.
Report on Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Cit y’s financial statements are free from material misstatement, we performed tests of its compliance wit h certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the financial statements. However, providing an opinion on complian ce with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findin gs and responses as item 2022-001.
To the Honorable Mayor and Members of the City Council
City of Orange, California
City of Orange, California’s Response to Findings
Government Auditing Standards requires the auditor to perform limited procedures on the City ’s response to the findings identified in our audit and described in the accompanying schedule of findings and responses. The City’s response was not subjected to the other auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response.
Purpose of this Report
The purpose of this report is solely to describe the scope of o ur testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control or on compliance. This report i s an integral part of an audit p erformed in accordance with Government Auditing Standards in considering the City’s internal control and compliance. Acc ordingly, this communication is not suitable for any other purpose.
Brea, California
December 16, 2022
To the Honorable Mayor and Members of the City Council
City of Orange, California
SCHEDULE OF FINDINGS AND RESPONSES
Reference No.: 2022-001
Condition:
As part of our standard audit procedures, we examined the City’s compliance with laws, regulations, grant agreements, contracts, and bond co venants. It was identified as part of this examination that the City did not submit its audited financial statement for the fiscal year ended June 30, 2021 to the Electronic Municipal Market Access (EMMA) website by the deadline prescribed by the Bond Official Statement, which is a required continuing disclosure for the 2021 Taxable Pension Obligation Bonds.
Criteria:
Securities and Exchanges Commission (SEC) Rule 15c2-12 requires dealers, when underwriting certain types of municipal securities, to ensure that the state or local government issuing the bonds enters into an agreement to provide certain information to the Municipal Securities Rulemaking Board (MSRB) about the securities on an ongoing basis. These disclosures are made avai lable to investors and the public on the MSRB’s EMMA website. Continuing disclosures provide updated fin ancial or operating information about the state or local government that issued the bond, such as audited financial statements.
Pursuant to the Bond Official Statement for the 2021 Taxable Pe nsion Obligation Bonds, the City has agreed to provide certain financial and operating data relating to the City by no later than March 31 of each year commencing March 31, 2022 to the MSRB’s EMMA website.
Cause of Condition:
The City has contracted with a third-party consultant to submit continuing disclosures for the 2021 Taxable Pension Obligation Bond, and consultant staff failed to submit the audited financial statements for the fiscal year ended June 30, 2021 to MSRB’s EMMA website when received from the City for submission. The City also did not have a review mechanism or procedure in place to verify that the consultant had completed the submission in a timely manner.
Effect or Potential Effect of Condition:
The City was not in compliance with the terms and conditions and covenants of the 2021 Taxable Pension Obligation Bond indenture and SEC Rule 15c2-12. However, as per the indenture, a failure by the City to comply with the provisions of the continuing disclosure requirement does not constitute an event of default.
Recommendation:
We recommend that the City develo p procedures or a review mecha nism to verify that continuing disclosures are submitted by the consultant in the manner prescribed by SEC Rule 15c2-12 and the 2021 Taxable Pension Obligation Bond’s Official Statement, including verifying through a search of the MSRB’s EMMA website after the audited financial statements have been i ssued but before the due date of March 31 that the continuing disclosure has been submitted by the consultant.
Client Response:
The City will develop procedures or a review mechanism to verify that continuing disclosures are submitted by the consultant in the manner prescribed by SEC Rule 15c2-12 and the 2021 Pension Obligation Bond’s Official Statement including verifying through a search of the MSRB’s EMMA website after the audited financial statements have been issued but before the due date of March 31 st, that the continuing disclosure
has been submitted by the consultant.
To the Honorable Mayor and Members of the City Council
City of Orange, California
Other Information:
The 2021 Taxable Pension Obligation Bond constitutes the most significant debt financing of the City with $278,790,000 in principal outstanding at June 30, 2022. After discussing the matter with management, the City submitted the audited financial statements for the fiscal year ended June 30, 2021 to the MSRB’s EMMA website on October 18, 2022.
Evaluation of Finding:
Significant Deficiency
Material Weakness
Material Noncompliance X
Other Matters