CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
Table of Contents
Page
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 .............................................................. 1 Required Communications ............................................................................................................................ 3 Schedule of Findings and Responses ............................................................................................................ 7 Summary of Uncorrected Financial Statements Misstatements .................................................................... 8 www.mgocpa.com
Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
1 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 Honorable Mayor and Members
of the City Council
City of Pleasant Hill, 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 financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Pleasant Hill, California (City), as of and for the year ended June 30, 2021, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated March 9, 2022.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City’s internal control over financial reporting (internal control) as a basis for designing 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 there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination 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 control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify a deficiency in internal control, described in the accompanying schedule of findings and responses as item 2021-001, that we consider to be a significant deficiency.
2 Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with 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 compliance 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 no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
City’s Response to Finding
The City’s response to the finding identified in our audit is described in the accompanying schedule of findings and responses. The City’s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
Walnut Creek, California
March 9, 2022
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
3 REQUIRED COMMUNICATIONS
We have audited the financial statements of the City as of and for the fiscal year ended June 30, 2021, and have issued our report thereon dated March 9, 2022. Professional standards require that we advise you of the following matters relating to our audit.
Our Responsibility in Relation to the Financial Statement Audit As communicated in our engagement letter dated June 21, 2021, our responsibility, as described by professional standards, is to form and express opinions about whether the financial statements that have been prepared by management with your oversight are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of your respective responsibilities.
Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, as part of our audit, we considered the internal control of the City solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control.
We are also responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process.
However, we are not required to design procedures for the purpose of identifying other matters to communicate to you.
Planned Scope and Timing of the Audit
We conducted our audit consistent with the planned scope we previously communicated to you. The timing of our audit was delayed due to the transition of management in the finance department.
Compliance with All Ethics Requirements Regarding Independence The engagement team, others in our firm, as appropriate, our firm, and our network firms have complied with all relevant ethical requirements regarding independence.
Qualitative Aspects of the City’s Significant Accounting Practices Significant Accounting Policies
Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the City is included in Note 1 to the financial statements. As described in Note 1(N) to the City’s basic financial statements, the City implemented Governmental Accounting Standards Board (GASB) Statement No. 84, Fiduciary Activities. The City evaluated all funds and activities in accordance with the statement and determined that the funds and activities previously reported as agency funds should be reported as custodial funds. The City also implemented GASB Statement No. 90, Majority Equity Interests, an amendment of GASB Statements No. 14 and No. 61, and Statement No. 98, The Annual Comprehensive Financial Report. Implementation of these statements did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2021.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
4 REQUIRED COMMUNICATIONS (Continued)
No matters have come to our attention that would require us, under professional standards, to inform you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus.
Significant Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments.
The most sensitive estimates affecting the financial statements were:
Fair value of investments. The City’s investments are generally carried at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All of the City’s investments are measured using level 2 inputs, except for investments in California Local Agency Investment Fund and money market mutual funds which are not subject to fair value hierarchy. Estimated allowance for losses on notes and loans receivable. The allowance for losses on notes and loans receivable was based on management’s estimate regarding the likelihood of collectability. Depreciation estimates for capital assets, including depreciation methods and useful life assigned to depreciable assets. The estimated useful lives of capital assets were determined based on the nature of the capital assets and management’s estimate of the economic life of the assets. Accrual of compensated absences. The accruals of compensated absences were based on accrued eligible hours of vacation and other compensated leave for eligible employees. Net pension liabilities, contributions, expenses, and other related balances. These balances are based on actuarial valuations performed by the California Public Employees’ Retirement System’s independent actuaries.
Claims loss reserve. The City is exposed to a variety of risks of loss due to general liability, workers’ compensation and other claims, and records an estimate of these losses based on actuarial studies performed by third-party actuaries. These studies are prepared based on the City’s prior claims history, which is used as a basis for extrapolating losses for known and incurred but not reported claims. Actual loss experience may vary from these estimates.
We evaluated the key factors and assumptions used to develop the accounting estimates described above and determined that it is reasonable in relation to the basic financial statements taken as a whole and in relation to the applicable opinion units.
Financial Statement Disclosures
Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statements were the disclosures of the Employee Benefits in Note 10 and Risk Management in Note 11.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
5 REQUIRED COMMUNICATIONS (Continued)
Significant Difficulties Encountered during the Audit
We encountered no significant difficulties in dealing with management relating to the performance of the audit.
Corrected and Uncorrected Misstatements
For purposes of this communication, professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and communicate them to the appropriate level of management. Further, professional standards require us to also communicate the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole and each applicable opinion unit. The accompanying Summary of Uncorrected Financial Statements Misstatements summarizes uncorrected financial statements misstatements whose effects in the current and prior periods, as determined by management, are immaterial to the financial statements taken as a whole and each applicable opinion unit.
In addition, professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures. None of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements as a whole and each applicable opinion unit.
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter, which could be significant to the City’s financial statements or the auditor’s report. No such disagreements arose during the course of the audit.
Representations Requested from Management
We have requested certain written representations from management, which are included in the letter dated March 9, 2022.
Management’s Consultations with Other Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting matters. Management informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and accounting matters.
Other Significant Matters, Findings, or Issues
In the normal course of our professional association with the City, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, operating and regulatory conditions affecting the entity, and operational plans and strategies that may affect the risks of material misstatement. None of the matters discussed resulted in a condition to our retention as the City’s auditors.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
6 REQUIRED COMMUNICATIONS (Continued)
Other Matters
Pursuant to professional standards, our responsibility as auditors for other information in documents containing the City’s audited financial statements does not extend beyond the financial information identified in the audit report, and we are not required to perform any procedures to corroborate such other information. However, in accordance with such standards:
Required Supplementary Information
We applied certain limited procedures to the management’s discussion and analysis, and the schedules related to the pension plans, which are required supplementary information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI.
Supplementary Information and Other Sections
We were engaged to report on the combining and individual fund statements and schedules, which accompany the financial statements but are not RSI. With respect to this supplementary information, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves.
We were not engaged to report on the introductory and statistical sections, which accompany the financial statements but are not RSI or supplementary information. We did not audit or perform other procedures on this other information and we do not express an opinion or provide any assurance on it.
Our responsibility also includes communicating to you any information which we believe is a material misstatement of fact. Nothing came to our attention that caused us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the financial statements.
The report is intended solely for the information and the use of the Mayor, City Council, and City’s management and is not intended to be and should not be used by anyone other than these specified parties.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
7 SCHEDULE OF FINDINGS AND RESPONSES
Item 2021-001 Significant Deficiency
Improve Internal Controls over Capital Asset Accounting During our audit, MGO observed that the City retired significant balances in their capital assets, construction-in-progress (CIP) account. The purpose of the CIP account is to accumulate costs that the City incurs in the progress of constructing capital assets. Therefore, the City should only include costs that will be capitalized at the completion of a capital project. In FY2020-21, the City identified within the CIP account significant transportation costs incurred during prior years that were not ultimately capitalized as road improvements within capital assets, such as infrastructure. Therefore, the CIP and net position balances were overstated in prior year, as these costs should have resulted in the recognition of repairs and maintenance type expenses in the period incurred, rather than capitalized as part of CIP.
We recommend the City re-evaluate its capital asset policies and procedures and develop adequate internal controls over the identification of costs that meet the definition of capital outlay and that should be included in the capital asset financial reporting process. The City should conduct regular reviews of the CIP account to ensure costs within CIP are capitalizable in nature. The City should communicate the policies and procedures to department staff, such as the engineering division, who oversee the CIP projects in order to assist them in better understanding the expectations of management for financial reporting purposes. The City should also monitor the effect of these changes to ensure that the policies and procedures are designed appropriately and are operating effectively.
Management Response
The City concurs with the auditor’s finding and recommendation that construction-in-progress (CIP) should only be used for projects that will be capitalized when completed. The City Finance Department will work with the Engineering Department to review ongoing projects and verify if they should be capitalized as CIP or be considered as repair/maintenance for financial reporting purposes.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2021
8 SUMMARY OF UNCORRECTED FINANCIAL STATEMENTS MISSTATEMENTS Number Accounts/Adjustment Descriptions Debit Credit
#1 Sales Tax Revenue 722,087 $
Net Position $ 722,087
#2 Loans Receivable 22,212
Interest Revenue 22,212
(Successor Agency Private Purpose Trust Fund - to record the impact of accruing interest on loans receivable)
#3 Loans Receivable 33,630
Interest Revenue 33,630
#4 Expenditures 19,194
Accounts Payable 19,194
#5 Expenditures 4,204
Accounts Payable 4,204
#6 Expenditures 12,106
Accounts Payable 12,106
#7 Beginning Net Position 3,007,828
Expenses - Transportation 3,007,828
(Governmental Activities - to adjust expenses for capital assets improperly capitalized in prior years and written off during the year ended June 30, 2021.
The net position and capital assets balances were corrected as of June 30, 2021.
(Governmental Activities - to record the impact of not accruing the FY 2020 sales tax payment from the State Board of Equalization) (Low and Moderate Income Housing Asset Fund / Governmental Activities - to record the impact of accruing interest on loans receivable) (Gas Tax Fund / Governmental Activities - to record expenditures incurred as of June 30, 2021)
(Measure J Growth Management Fund / Governmental Activities - to record expenditures incurred as of June 30, 2021)
(Diablo Vista Water System Enterprise Fund / Business-Type Activities - to record expenditures incurred as of June 30, 2021)