CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2022
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2022
Table of Contents
Page
Transmittal Letter ........................................................................................................................................... i Required Communications ............................................................................................................................ 1 Current Year Recommendations ................................................................................................................... 6 Status of Prior Year Recommendations ........................................................................................................ 6 Summary of Uncorrected Financial Statements Misstatements .................................................................... 7 www.mgocpa.com
Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596 i
Honorable Mayor and Members
of the City Council
City of Pleasant Hill, California
We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Pleasant Hill, California (City), as of and for the year ended June 30, 2022, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements. Professional standards require that we communicate to you the information related to our audit discussed on pages 1 through 4.
In planning and performing our audit of the basic financial statements of the City as of and for the year ended June 30, 2022, in accordance with 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, 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 reasonable possibility exists when the likelihood of an event occurring is either reasonably possible or probable as defined as follows:
Reasonably possible. The chance of the future event or events occurring is more than remote but less than likely.
Probable. The future event or events are likely to occur.
Our consideration of internal control was for the limited purpose described in the second paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
The purpose of this communication, which is an integral part of our audit, is to describe, for management and those charged with governance, the scope of our testing of internal control and the results of that testing. Accordingly, this communication is not intended to be and should not be used for any other purpose. This report is a matter of public record and this does not limit the distribution of this report.
Walnut Creek, California
February 7, 2023
ii
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CITY OF PLEASANT HILL, CALIFORNIA
Report to the City Council
For the Year Ended June 30, 2022
1 REQUIRED COMMUNICATIONS
We have audited the financial statements of the City as of and for the fiscal year ended June 30, 2022, and have issued our report thereon dated February 7, 2023. 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 July 14, 2022, 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. 87, Leases; Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period; Statement No. 92, Omnibus 2020; Statement No. 93, Replacement of Interbank Offered Rates; Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred
CITY OF PLEASANT HILL, CALIFORNIA
Report to the City Council
For the Year Ended June 30, 2022
2 REQUIRED COMMUNICATIONS (Continued)
Compensation Plans – an Amendment of GASB Statements No. 14 and No. 84, and a Supersession of GASB Statement No 32; and certain requirements of GASB Statement No. 99, Omnibus 2022. The implementation of these statements did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2022.
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 accounting estimates affecting the City’s basic 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, money market mutual funds, and equity 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 are 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.
CITY OF PLEASANT HILL, CALIFORNIA
Report to the City Council
For the Year Ended June 30, 2022
3 REQUIRED COMMUNICATIONS (Continued)
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.
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, both individual and in the aggregate, to the financial statements taken as a whole and each applicable opinion unit. Uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even though the uncorrected misstatements are immaterial to the financial statements currently under audit.
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 identified by us as a result of our 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 February 7, 2023.
CITY OF PLEASANT HILL, CALIFORNIA
Report to the City Council
For the Year Ended June 30, 2022
4 REQUIRED COMMUNICATIONS (Continued)
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.
Other Information Included in Annual Comprehensive Financial Report 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 have 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 about 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 do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Supplementary Information
We were engaged to report on the combining and individual fund financial statements and schedules, which accompany the financial statements but are not RSI. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America.
CITY OF PLEASANT HILL, CALIFORNIA
Report to the City Council
For the Year Ended June 30, 2022
5 Other Information
We were not engaged to report on the introductory and statistical sections, which accompany the financial statements but are not RSI or supplementary information. Our opinions on the basic financial statements do not cover the other information, and we do not express an opinion or any form of assurance thereon.
In connection with our audit of the basic financial statements, our responsibility is to read the other information and consider whether a material inconsistency exists between the other information and the basic financial statements, or the other information otherwise appears to be materially misstated.
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.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2022
6 CURRENT YEAR RECOMMENDATIONS
None noted.
STATUS OF PRIOR YEAR RECOMMENDATIONS
Item 2021-001 Significant Deficiency
Improve Internal Controls over Capital Asset Accounting During our prior year 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.
It was recommended 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. It was recommended that the City should conduct regular reviews of the CIP account to ensure costs within CIP are capitalizable in nature. It was recommended that 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. It was also recommended that the City should monitor the effect of these changes to ensure that the policies and procedures are designed appropriately and are operating effectively.
Status
Corrective action plan has been implemented.
CITY OF PLEASANT HILL
Report to the City Council
For the Year Ended June 30, 2022
7 SUMMARY OF UNCORRECTED FINANCIAL STATEMENTS MISSTATEMENTS Number Accounts/Adjustment Descriptions Debit Credit
#1 Loans Receivable $ 20,292
Interest Revenue $ 20,292
(Successor Agency Private Purpose Trust Fund - to record the impact of accruing interest on loans receivable)
#2 Loans Receivable 38,940
Interest Revenue 38,940
#3 Expenditures 27,938
Accounts Payable 27,938
(General Plan Fee Fund / Governmental Activities - to record expenditures incurred as of June 30, 2022)
(Low and Moderate Income Housing Asset Fund / Governmental Activities - to record the impact of accruing interest on loans receivable)