CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2021
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CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF MATERIAL WEAKNESSES
Table of Contents
Page
Memorandum on Internal Control ................................................................................................................... 1 Schedule of Material Weaknesses ........................................................................................................... 3 Schedule of Significant Deficiencies ....................................................................................................... 7 Schedule of Other Matters ....................................................................................................................... 9 Status of Prior Year Significant Deficiencies ........................................................................................ 19 This Page Left Intentionally Blank
MEMORANDUM ON INTERNAL CONTROL
To the City Council of
the City of San Pablo, California
In planning and performing our audit of the basic financial statements of the City of San Pablo as of and
for the year ended June 30, 2021, in accordance with auditing standards generally accepted in the United States of America, 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.
Our consideration of internal control was for the li mited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefor e material weaknesses or significant deficiencies may exist that were not identified. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls. However, as discussed below, we identified certain deficien cies in internal control that we consider to be material weaknesses and other deficiencies that we consider to be significant deficiencies.
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 po ssibility that a material misstatement of the City’s financial statements wi ll not be prevented, or detected an d corrected on a timely basis. We consider the deficiencies in internal control includ ed on the Schedule of Material Weaknesses to be material weaknesses.
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 en ough to merit attention by those charged with governance. We consider the deficiency in internal control included on the Schedule of Significant Deficiencies to be a significant deficiency.
Included in the Schedule of Other Matters are recommendations not meeting the above definitions that we believe are opportunities for strengthening internal controls and operating efficiency.
Management’s written responses included in this repo rt have not been subjected to the audit procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them.
This communication is intended solely for the information and use of management , City Council, others within the organization, and agencies and pass-through entities requiring compliance with Government Auditing Standards, and is not intended to be and should not be used by anyone other than these specified parties.
Pleasant Hill, California
December 14, 2021
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CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF MATERIAL WEAKNESSES
2021-01: Timeliness and Accuracy of Year-End Close Due to Finance Staff Turnover Criteria:
Well-managed organizations should de velop procedures that are well- documented, and have a plan in place to ensure that adequate resources will remain av
ailable in the event of employee departures. Part of
that plan is ensuring there are resources available to be utilized on short no tice to fill gaps in key positions, especially within the Finance Department. The procedures should be well-documented so that when there is turnover, the background, information and data are all available to anyone that comes in to fill the vacant positions, as these resources need to be in place thro ughout the fiscal year to ensure accounting processes and procedures continue and allow time for an alysis of account balances and activities. In addition, when recru iting for Finance, it is imperative to seek candidates that have the appropriate skills, knowledge and experience to perform the functions for the positions they are filling.
Especially in smaller organizations with minimal Finance staff, it is particularly beneficial if each position has municipal accounting depth.
Condition:
The City’s Finance Department ha s experienced a significant amount of turnover in the Accounting Manager position over the last several years, and just this last year, in the Director position as well. This has put a significant strain on the City’s ability to maintain a good internal co ntrol environment and to produce accurate and timely financial data.
While the current year’s closing procedures were si gnificantly improved from th e previous year, due to the lack of documentation of procedures and backgr ound information performed historically, we have noted it has been difficult for incoming personnel to reconcile prior year an d current year balances, causing the City’s staff to seek past reconciliations and information from the auditors. As the auditors are not a party to the City’s internal controls, it is imperative that documentation of procedures and financial activities be made a priority. We also understand that there will once again be turnover within the City’s Finance Department, and therefore, we wanted to summarize some of the significant issues that we have noted in the past, in order to assist the incoming personnel with prioritization of accounting concerns.
Areas that we have noted over the last few years that have suffered include:
Journal entries – not properly reviewed by pers onnel possessing the adequate level of skills an d knowledge to determine if they are accurate and for the correct time period Capital assets – spreadsheets are cumbersome an d not adequately updated, requiring restatements and/or significant reclassifications
Land and debt transactions between the City and the EDC not properly recorded prior to audit Loans receivable – lack of communication from othe r departments to address the need to record the loans on the general ledger
Accruals for receivables and payables not properly recorded prior to the audit Schedule of Expenditures of Federal Awards – not properly updated for expenditures incurred during the fiscal year
3 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF MATERIAL WEAKNESSES
2021-01: Timeliness and Accuracy of Year -End Close Due to Finance Staff Turnover (Continued)
Review of Financial Statements – not completed timely or accurately, causing restatements in subsequent years
Delays in preparation for audit fieldwork, causing delays in issuance of financial statements Lack of review of vendor and employee databases (see Finding 2021-02) Lack of documentation of review of check and payroll registers (see Finding 2021-02) Effect:
The above condition has caused dela ys in the City’s preparedness for audit, and significant audit adjustments, restatements and reclassifications require d following the year-end cl ose. These conditions
have increased the risk that errors or misstatement s may go undetected by staff and corrections may not be made in a timely matter. As a result, audit efforts have been significantly increased in response to these increased risks.
Cause:
The errors and timeliness have been impacted by the following:
Turnover within the Accounting Manager and Director positions Lack of municipal accounting depth
Lack of capacity due to vacant positions or staff leave Lack of effective review of reconciliations and journal entries Recommendation:
The City should analyze staff resources to determine wh at plans can or should be made to ensure that the
financial data is processed properly and timely during staffing transition s. The City must also develop procedures to ensure that accounts are analyzed through out the fiscal year and after the year end close to ensure that additional closing entries are not required prior to providing the general ledger for audit. This analysis should include an assessment of the muni cipal accounting depth required for each position, or a consideration of updated and/or additional positions needed to adequately process all of the City’s transactions.
Management’s Response:
Management agrees with the auditor’s comments and recommendations. City Management has brought in a Finance Director that has a great deal of depth of experience in municipal accounting, who has also had experience with smaller municipal entities requiring cleanup and reorganization within the Finance Department. The Accounting Manager position has also been filled, who also has experience in municipal accounting. A new Accountant and Management Analyst have been added to the department to help with the capacity concerns, and Finance is in process of finalizing its recruitment to replace the Account Technician position that became vacant in January 2022.
4 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF MATERIAL WEAKNESSES
2021-01: Timeliness and Accuracy of Year -End Close Due to Finance Staff Turnover (Continued)
Management’s Response (Continued):
With all positions filled with capable staff, Finance is committed to working on the following:
Provide cross-training of all accounting processes and transaction cycles. Institute multiple layers of review of journal entries and reconciliations. Improve communications with other departments to ensure any financial transactions are properly accounted for.
Review the capital assets details and update, as necessary, to accurately reflect assets and current capital projects.
Assess the grant accounting process and modify as necessary. Review revenue and expenditure accruals at year-end.
Develop a comprehensive Closing Checklist, de tailing all reconciliations, journal entries and schedules necessary to adequately close the general ledger. This Checklist will provide enough detail so that if there is turn over within the Finance Department, there is clear documentation for incoming personnel to follow in order properly close the general ledger.
Improve the efficiency and timeliness of closing the general ledger so that the audit of the financial statements and issuance of reports can be completed earlier. 5 This Page Left Intentionally Blank
CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF SIGNIFICANT DEFICIENCIES
2021-02: Accounts Payable and Payroll Cont rols – Review/Approval and Documentation Criteria:
Ideally, there should be segregation of duties and acce ss for all transaction cycles , so that the personnel performing duties related to processing transactions, such as receipts, accounts payable and payroll, do not also have access to the databases related to these transaction cycles.
When access cannot be restricted
due to capacity, there should be a procedure in place for another party to periodically review and approve any changes made to the database(s). In addition, the review of the databases, as well as the review of any correlating registers should be formally documented, including the date of the review and approval.
Condition:
During our review of City staff’s access to the fina ncial system, we noted that multiple staff have access to the vendor and employee databases, including the staff person who processes accounts payable, and the staff person who processes payroll. We were informed that Finance does not currently have a process to periodically review and approve changes made to the vendor database and employee database.
Furthermore, during our review of the City’s check and payroll registers, we noted the following:
Check logs and check registers dated December 3, 2020, February 18, 2021, and April 8, 2021, had documentation of review, however, the date of review was not documented. Payroll registers for pay periods ending Octo ber 15, 2020, March 15, 2021 and April 30, 2021 had no documentation of review.
Cause:
Per City staff, the access to the databases was changed, and the re views were not being completed and/or not documented due to significant turn
over in Finance and IT staff, as well as staff leave, which impacted the City’s day-to-day operations, including the processes noted above.
Effect:
When there is a lack of segregation of duties and a ccess, and lack of detailed review, it increases the likelihood of unauthorized transactions, errors, or potential fraud.
Recommendation:
We recommend the City designate a staff, who is not involved in the accounts payable and payroll processes, to periodically review and approve the changes to the vendor and employee databases, for each check run, making sure to formally document that the review was performed, including the date of the review. In addition, as changes are made to Finance personnel, access should be reviewed and updated to ensure adequate controls and restrictions are in place. 7 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF SIGNIFICANT DEFICIENCIES
2021-02: Accounts Payable and Payroll Cont rols – Review/Approval and Documentation (Continued)
Management’s Response:
Management agrees with the comment and reco mmendations. As discussed in Comment #2021- 01, Finance has already added two new positi ons (Accountant and Management Analyst),
increasing its capacity and capability of providing segregation of duties. There will be cross- training in the revenue, disbursements and payr oll cycles. The Accounting Manager, who will not be involved in the processing of transactions, will review the check and payroll registers, as well as periodically reviewing the vendor and empl oyee databases. This review will be formally documented so that there is an audit trail of such review. Lastly, the Finance Director and Accounting Manager will be reviewing each po sition’s access to the accounting system, and restricting the access to eliminate any unnecessary or redundant access. 8 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
2021-03:
NEW GASB PRONOUNCEMEN TS OR PRONOUNCEMENTS NOT YET
EFFECTIVE
The following comment represents new pronouncements taking affect in the next few years. We ha ve
cited them here to keep you informed of developments:
EFFECTIVE FISCAL YEAR 2021/22:
GASB 87 – Leases
The objective of this Statement is to better meet the information need s of financial statement users by improving accounting and financial reporting for le ases by governments. This Statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previous ly were classified as operating le ases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational pr inciple that leases are fi nancings of the right to use an underlying asset. Under this Statement, a less ee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevanc e and consistency of inform ation about governments’
leasing activities.
A lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in this Statement.
GASB 89 – Accounting for Interest Cost Incurred before the End of a Construction Period The objectives of this Statement are (1) to enhanc e the relevance and comparab ility of information about capital assets and the cost of borrowing for a reportin g period and (2) to simplify accounting for interest cost incurred before the end of a construction period.
This Statement establishes accounti ng requirements for interest co st incurred before the end of a construction period. Such interest cost includes all interest that previously was accounted for in accordance with the requirements of pa ragraphs 5–22 of Statement No. 62, Codification of Accounting
and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which are superseded by this Statement. This Statement requires that interest cost incurred before the end of a construction period be re cognized as an expense in the period in which the cost is incurred for financial statements prepared using the economic resources measurement focus. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of a capital asset reported in a business-type activity or enterprise fund.
This Statement also reiterates that in financial stat ements prepared using the current financial resources measurement focus, interest cost incurred before the end of a construction period should be recognized as an expenditure on a basis consistent with governmental fund accounting principles. 9 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 92 – Omnibus 2020
The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing practice issues that have been identified during implementation and application of certain GASB Statements. This Statement addresses a variety of topics and includes specific provisions about the following:
The effective date of Statement No. 87, Leases , and Implementation Guide No. 2019-3, Leases, for interim financial reports
Reporting of intra-entity transfers of assets between a primary government employer and a component unit defined benefit pension plan or defined benefit other postemployment benefit (OPEB) plan
The applicability of Statements No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 , as amended, and No. 74, Financial Reporting for Postemployment Benefit Plan s Other Than Pension Plans , as amended, to reporting assets accumulated for postemployment benefits
The applicability of certain requ
irements of Statement No. 84, Fiduciary Activities , to postemployment benefit arrangements
Measurement of liabilities (and assets, if any) re lated to asset retirement obligations (AROs) in a government acquisition
Reporting by public entity risk pools for amounts that are recoverable from reinsurers or excess insurers
Reference to nonrecurring fair value measurements of assets or liabilities in authoritative literature
Terminology used to refer to derivative instruments.
GASB 93 – Replacement of Interbank Offered Rates
Some governments have entered into agreements in which variable payments made or received depend on
an interbank offered rate (IBOR)—most notably, th e London Interbank Offere d Rate (LIBOR). As a result of global reference rate reform, LIBOR is expected to cease to exis t in its current form at the end of 2021, prompting governments to amend or replace fi nancial instruments for the purpose of replacing LIBOR with other reference rates, by either changing the reference rate or adding or changing fallback provisions related to the reference rate.
Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, requires a government to terminate hedge accounting when it re negotiates or amends a critical term of a hedging derivative instrument, such as the reference rate of a hedging derivative instrument’s variable payment. In addition, in accordance with Stat ement No. 87, Leases, as amended, replacement of the rate on which variable payments depend in a lease contract would require a government to apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable. 10 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 93 – Replacement of Interbank
Offered Rates (Continued)
The objective of this Statement is to address th ose and other accounting and financial reporting implications that result from the replacement of an IBOR. This Statement achieves that objective by:
Providing exceptions for certain hedging deri vative instruments to the hedge accounting termination provisions when an IBOR is replaced as the reference rate of the hedging derivativ e
instrument’s variable payment
Clarifying the hedge accounting termination provisions when a hedge d item is amended to replace the reference rate
Clarifying that the uncertainty related to the cont inued availability of IBORs does not, by itself, affect the assessment of whether the occurrence of a hedged expected transaction is probable Removing LIBOR as an appropriate benchmark inte rest rate for the qualitative evaluation of the effectiveness of an interest rate swap
Identifying a Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates for the qua litative evaluation of the effectiveness of an interest rate swap
Clarifying the definition of reference rate, as it is used in Statement 53, as amended Providing an exception to the lease modifications guid
ance in Statement 87, as amended, for certain lease
contracts that are amended solely to replace an IBOR as the rate upon which variable payments depend.
GASB 97 – Certain Component Unit Criteria, and Accounting for and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans The primary objectives of this Stat ement are to (1) increase consiste ncy and comparability related to the
reporting of fiduciary component units in circumstan ces in which a potential component unit does not have a governing board and the primary government pe rforms the duties that a governing board typically would perform; (2) mitigate costs associated with the reporting of certain de fined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, an d employee benefit plans other than pension plans or OPEB plans (other employee benefit plans) as fiduciary component units in fiduciary fund financial statements; and (3) enhance th e relevance, consistency, and comparability of the accounting and financial reporting for Internal Revenue Code (IRC) Section 457 deferred compensation plans (Section 457 plans) that meet the definition of a pension plan and for be nefits provided through those plans.
This Statement requires that for purposes of determining whether a primary government is financially accountable for a potential componen t unit, except for a potential co mponent unit that is a defined contribution pension plan, a defined contribution OP EB plan, or an other employee benefit plan (for example, certain Section 457 plans), the absence of a governing board should be treated the same as the appointment of a voting majority of a governing board if the primary government performs the duties that a governing board typically would perform.
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 97 – Certain Component Unit Criteria, and Acco unting for and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans (Continued) This Statement also requires that the financial burden criterion in paragraph 7 of Statement No. 84, Fiduciary Activities, be applicable to only defined benefit pension pl ans and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement No. 67, Financial Reporting for Pension Plans, or paragraph 3 of Statement No. 74, Fi nancial Reporting for Postemployment Benefit Plans Other Than Pension Plans, respectively.
This Statement (1) requires that a Section 457 plan be classified as either a pension plan or an other employee benefit plan depending on whether the plan meets the definition of a pension plan and (2) clarifies that Statement 84, as amended, should be applied to all arrange ments organized under IRC Section 457 to determine whether those arrangements should be reported as fiduciary activities.
This Statement supersedes the remaining provision s of Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 De ferred Compensation Plans, as amended, regarding investment valuation requirements for Section 457 plans. As a result, investments of all Section 457 plans should be measured as of the end of the plan
’s reporting period in all circumstances.
The requirements of this Statement that (1) exempt primary governments that perform the duties that a governing board typically performs from treating the absence of a governing board the same as the appointment of a voting majority of a governing bo ard in determining whether they are financially accountable for defined contribution pension plans, defined contribution OPEB plans, or other employee benefit plans and (2) limit the applicability of the fi nancial burden criterion in paragraph 7 of Statement 84 to defined benefit pension plans and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement 74, respectively, are effective immediately.
The requirements of this Statement that are related to the accounting and financial reporting for Section 457 plans are effective for fiscal years beginning after June 15, 2021. For purposes of determining whether a primary government is financially accountable for a potential component unit, the requirements of this Statement that provide that for all other arrangements, the abse nce of a governing board be treated the same as the appointment of a voting majority of a governing board if the primary government performed the duties that a governing board typically would perform, are effective for reporting periods beginning after June 15, 2021. Earlier application of those requirements is en couraged and permitted by requirement as specified within this Statement.
How the Changes in this Statement will Improve Financial Reporting The requirements of this Statement will result in more consistent financial reporting of defined contribution pension plans, define d contribution OPEB plans, and ot her employee benefit plans, while mitigating the costs associated with reporting thos e plans. The requirements also will enhance the relevance, consistency, and comparability of (1) the information related to Section 457 plans that meet the definition of a pension plan and the benefits provid ed through hose plans and (2) investment information for all 457 plans.
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MEMORANDUM ON INTERNAL CONTROL
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EFFECTIVE FISCAL YEAR 2022/23:
GASB 91 – Conduit Debt Obligations
The primary objectives of this Statement are to pr ovide a single method of reporting conduit debt obligations by issuers and eliminate diversity in pr actice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) relate d note disclosures. This Statement achieves those objectives by clarifying th e existing definition of a conduit debt obligation;
establishing that a conduit debt obligation is not a liability of the issuer; es tablishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures.
A conduit debt obligation is defined as a debt instrument having all of the following characteristics:
There are at least three parties involved:
(1) an issuer
(2) a third-party obligor, and
(3) a debt holder or a debt trustee.
The issuer and the third-party obligor are not within the same financial reporting entity. The debt obligation is not a parity bond of the issuer, nor is it cross-collateralized with other debt of the issuer.
The third-party obligor or its agent, not the issu er, ultimately receives the proceeds from the debt issuance.
The third-party obligor, not the issuer, is prim arily obligated for the payment of all amounts associated with the debt obligation (debt service payments).
All conduit debt obligations involve the issuer ma
king a limited commitment. Some issuers extend
additional commitments or voluntary commitments to support debt servic e in the event the third party is, or will be, unable to do so.
An issuer should not recognize a conduit debt obli gation as a liability. However, an issuer should recognize a liability associated with an additional commitment or a voluntary commitment to support debt service if certain recognition crite ria are met. As long as a conduit debt obligation is outstanding, an issuer that has made an additional commitment should evaluate at least annually whether those criteria are met. An issuer that has made only a limited commitment should evalua te whether those criteria are met when an event occurs that causes the issuer to reevaluate its willingn ess or ability to support the obligor’s debt service through a voluntary commitment.
This Statement also addresses arrangements—often characterized as leases—that are associated with conduit debt obligations. In those arrangements, cap ital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by thir d-party obligors in the course of their activities.
Payments from third-party obligors are intended to cover and coincide with debt service payments.
During those arrangements, issuers retain the titles to the capital assets. Those titl es may or may not pass to the obligors at the end of the arrangements.
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GASB 91 – Conduit Debt Obligations (Continued)
Issuers should not report those arrangements as leases, nor should they recognize a liability for the related conduit debt obligations or a receivable for the paym ents related to those arrangements. In addition, the following provisions apply:
If the title passes to the third-party obligor at th e end of the arrangement, an issuer should not recognize a capital asset.
If the title does not pass to the third-party obli gor and the third party has exclusive use of the entire capital asset during the arrangement, the issuer should not recognize a capital asset until the arrangement ends.
If the title does not pass to the third-party obligor and the third party has exclusive use of only portions of the capital asset during the arrang ement, the issuer, at the inception of the arrangement, should recognize the entire capital a sset and a deferred inflow of resources. The deferred inflow of resources should be reduced, and an inflow recognized, in a systematic and rational manner over the term of the arrangement.
This Statement requires issuers to disclose general information about their co nduit debt obligation s,
organized by type of commitment, including the aggreg ate outstanding principal amount of the issuers’ conduit debt obligations and a description of each ty pe of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit de bt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period.
How the Changes in this Statement will Improve Financial Reporting The requirements of this Statement will improve financial reporting by eliminating the existing option for issuers to report conduit debt obligations as their ow n liabilities, thereby ending significant diversity in practice. The clarified definition will resolve stakeholde rs’ uncertainty as to whether a given financing is, in fact, a conduit debt obligation. Requiring issuers to recognize liabilities associated with additional commitments extended by issuers and to recognize a ssets and deferred inflows of resources related to certain arrangements associated with conduit debt obligations also will eliminate diversity, thereby improving comparability in reporting by issuers. Revised disclosure re quirements will provide financial statement users with better information regarding the commitment’s issuers extend and the likelihood that they will fulfill those commitments. That information will inform users of the potential impact of such commitments on the financial resources of issuers and help users assess issuers’ roles in conduit debt obligations.
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GASB 94 – Public-Private and Public-Public Partnerships and Availability Payment Arrangements The primary objective of this Statemen t is to improve financial reporting by addressing issues related to public-private and public-public part nership arrangements (PPPs). As used in this Statement, a PPP is an arrangement in which a government (the transferor) contracts with an operator (a governmental or nongovernmental entity) to provide public services by conveying control of the right to operate or use a
nonfinancial asset, such as infrastructure or other ca pital asset (the underlying P PP asset), for a period of time in an exchange or exchange-lik e transaction. Some PPPs meet the definition of a service concession arrangement (SCA), which the Board defines in this Statement as a PPP in which (1) the operator collects and is compensated by fees from third parties; (2) the transferor determines or has the ability to modify or approve which services the operator is required to pr ovide, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services; and (3) the transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement.
This Statement also provides guidance for accounting and financial reporting for availability payment arrangements (APAs). As defined in this Statement, an APA is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a peri od of time in an exchange or exchange-like transaction.
PPPs - This Statement requires that PPPs that meet the definition of a lease apply the guidance in Statement No. 87, Leases, as amended, if existing assets of the transfer or that are not required to be improved by the operator as part of the PPP arra ngement are the only underlying PPP assets and the PPP does not meet the definition of an SCA. This St atement provides accounting and financial reporting requirements for all other PPPs: those that either (1) me et the definition of an SCA or (2) are not within the scope of Statement 87, as amende d (as clarified by this Statement) . The PPP term is defined as the period during which an operator has a noncancellable right to use an underlying PPP asset, plus, if applicable, certain periods if it is reasonably certain, based on all relevant factors, that the transferor or the operator either will exercise an option to extend the PPP or will not exercise an option to terminate the PPP.
A transferor generally should recognize an underlyi ng PPP asset as an asset in financial statements prepared using the economic resources measurement fo cus. However, in the case of an underlying PPP asset that is not owned by the transferor or is not the underlying asset of an SCA, a transferor should recognize a receivable measured based on the operato r’s estimated carrying value of the underlying PPP asset as of the expected date of the transfer in ow nership. In addition, a transferor should recognize a receivable for installment payments, if any, to be received from the operator in relation to the PPP.
Measurement of a receivable for installment payments should be at the present value of the payments expected to be received during the PPP term. A tran sferor also should recognize a deferred inflow of resources for the consideration received or to be recei ved by the transferor as part of the PPP. Revenue should be recognized by a transferor in a systematic and rational manner over the PPP term.
This Statement requires a transferor to recognize a receivable for installment payments and a deferred inflow of resources to account for a PPP in financia l statements prepared using the current financial resources measurement focus. Governmental fund revenue would be recognized in a systematic and rational manner over the PPP term.
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GASB 94 – Public-Private and Public-Public Partnersh ips and Availability Payment Arrangements (Continued)
This Statement also provides specific guidance in financial statements prepared using the economic resources measurement focus for a go vernment that is an operator in a PPP that either (1) meets the definition of an SCA or (2) is not within the scop e of Statement 87, as amen ded (as clarified in this Statement). An operator should report an intangible right-to-use asset re lated to an underlying PPP asset that either is owned by the transfer or or is the underlying asset of an SCA. Measurement of the right-to- use asset should be the amount of consideration to be provided to the transferor, plus any payments made to the transferor at or before the commencement of the PPP term, and certain direct costs. For an
underlying PPP asset that is not owned by the transfer or and is not the underlying asset of an SCA, an operator should recognize a liabilit y measured based on the estimated carrying value of the underlying PPP asset as of the expected date of the transfer in ow nership. In addition, an operator should recognize a liability for installment payments, if any, to be made to the transferor in relation to the PPP. Measurement of a liability for installment payments should be at the present value of the payments expected to be made during the PPP term. An operator also should recogn ize a deferred outflow of resources for the consideration provided or to be provided to the transferor as part of the PPP. Expense should be recognized by an operator in a systematic and rational manner over the PPP term.
This Statement also requires a government to ac count for PPP and non-PPP components of a PPP as separate contracts. If a PPP involves multiple underlyi ng assets, a transferor and an operator in certain cases should account for each underlying PPP asset as a separate PPP. To allocate the contract price to different components, a transferor and an operator s hould use contract prices fo r individual components as long as they do not appear to be unreasonable based on professional judgment or use professional judgment to determine their best estimate if there are no stated prices or if stated prices appear to be unreasonable. If determining the best estimate is not practicable, multiple components in a PPP should be accounted for as a single PPP.
This Statement also requires an amendment to a PPP to be consider ed a PPP modification, unless the operator’s right to use the underlying PPP asset decreases, in which case it should be considered a partial or full PPP termination. A PPP termination should be accounted for by a transferor by reducing, as applicable, any receivable for insta llment payments or any receivable re lated to the transfer of ownership of the underlying PPP asset and by reducing the rela ted deferred inflow of resources. An operator should account for a termination by reducing the carrying value of the right-to-us e asset and, as applicable, any liability for installment payments or liability to transfer ownership of the underlying PPP asset. A PPP modification that does not qualify as a separate PP P should be accounted for by remeasuring PPP assets and liabilities.
APAs - An APA that is related to designing, construc ting, and financing a nonfinancial asset in which ownership of the asset transfers by the end of the contract should be accounted for by a government as a financed purchase of the underlying nonfinancial as set. This Statement requires a government that engaged in an APA that contains multiple components to recognize each component as a separate arrangement. An APA that is related to operating or maintaining a nonfinancial asset should be reported by a government as an outflow of resources in the period to which payments relate. 16 CITY OF SAN PABLO
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SCHEDULE OF OTHER MATTERS
GASB 96 – Subscription-Based Information Technology Arrangements This Statement provides guidance on the accounting and financia l reporting for subscription-based information technology arrangements (SBITAs) for government end users (governments). This Statement (1) defines a SBITA; (2) establishe
s that a SBITA results in a righ t-to-use subscription asset—an intangible asset—and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription pa yments, including implementation cost s of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent relevant, the standards fo r SBITAs are based on the standards established in Statement No. 87, Leases, as amended.
A SBITA is defined as a contract that conveys cont rol of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract fo r a period of time in an exchange or exchange-like
transaction.
The subscription term includes the period during which a government has a noncancelable right to use the underlying IT assets. The subscription term also includ es periods covered by an op tion to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option).
Under this Statement, a government generally shou ld recognize a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability. A government should recognize the subscription liability at the commencement of the su bscription term, —which is when the subscription asset is placed into service. The subscription liability should be initially measured at the present value of subscription payments expected to be made during the subscription term. Future subscription payments should be discounted using the interest rate the SB ITA vendor charges the go vernment, which may be implicit, or the government’s incremental borrowing rate if the interest rate is not readily determinable. A government should recognize amorti zation of the discount on the subscrip tion liability as an outflow of resources (for example, interest expense) in subsequent financial reporting periods.
The subscription asset should be in itially measured as the sum of (1 ) the initial subscription liability amount, (2) payments made to the SBITA vendor before commencement of the subscription term, and (3) capitalizable implementation costs, less any incentiv es received from the SBITA vendor at or before the commencement of the subscription term. A government should recognize amortization of the subscription asset as an outflow of resources over the subscription term.
Activities associated with a SBITA, other than making subscription payments, should be grouped into the following three stages, and their costs should be accounted for accordingly:
Preliminary Project Stage, including activities such as evaluating alternatives, determining needed technology, and selecting a SBITA vendor. Outlays in
this stage should be expensed as incurred.
Initial Implementation Stage, including all ancill ary charges necessary to place the subscription asset into service. Outlays in this stage genera lly should be capitalized as an addition to the subscription asset.
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SCHEDULE OF OTHER MATTERS
GASB 96 – Subscription-Based Information Technology Arrangements (Continued) Operation and Additional Implementation Stage, including activities such as subsequent implementation activities, maintenance, and other activities for a government’s ongoing operations related to a SBITA. Outlays in this stage should be expensed as incurred unless they meet specific capitalization criteria.
In classifying certain outlays into the appropriate stage, the nature of the activity should be the determining factor. Training costs should be expensed as incurred, regardless of the stage in which they are incurred.
If a SBITA contract contains multiple components, a
government should account for each component as a
separate SBITA or nonsubscription component and allocate the contract price to the different components. If it is not practicable to determine a best estimate fo r price allocation for some or all components in the contract, a government should account for those components as a single SBITA.
This Statement provides an exception for short-te rm SBITAs. Short-term SBITAs have a maximum possible term under the SBITA contract of 12 mont hs (or less), including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs should be recognized as outflows of resources.
This Statement requires a government to disclose descriptive information about its SBITAs other than short-term SBITAs, such as the amount of the subscription asset, accumulated amortization, other payments not included in the measur ement of a subscription liability, pr incipal and interest requirements for the subscription liability, and other essential information.
How the Changes in this Statement will Improve Financial Reporting The requirements of this Statement will improve fi nancial reporting by establishing a definition for SBITAs and providing uniform guidance for accounting and financial reporting for transactions that meet that definition. That definition and uniform guidan ce will result in greater consistency in practice.
Establishing the capitalization criteria for implementa tion costs also will reduce diversity and improve comparability in financial reporting by governments. This Statement also will enhance the relevance and reliability of a government’s financial statements by re quiring a government to report a subscription asset and subscription liability for a SBITA and to disclose essential information ab out the arrangement. The disclosures will allow users to understand the scal e and important aspects of a government’s SBITA activities and evaluate a government’s obligations and assets resulting from SBITAs.
Management’s Response:
The City will implement applicable GASB Pronouncements as they become effective. 18 CITY OF SAN PABLO
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STATUS OF PRIOR YEAR SIGNIFICANT DEFICIENCIES
2020-01
Prior Period Adjustment – Sales Tax Revenue Accruals
Criteria:
When closing the general ledger at fiscal year-end, a ll significant revenue sources should be reviewed to ensure accruals are properly recorded so that revenues are recorded in the correct fiscal year.
Condition:
During the June 30, 2020 fiscal year , Finance determined that sales tax revenues, and related receivables,
were not properly accrued for the fiscal year ende d June 30, 2019. This resulted in revenues and receivables being underreported in the General Fund , Paratransit Special Revenue Fund and Measure K Special Revenue Fund, respectively.
Cause:
The former Accounting Manager that closed the gene ral ledger for fiscal year ended June 30, 2019 was not familiar with the timing of sales tax revenues received subsequent to year-end.
Effect:
The General Fund, Paratransit and Measure K Special Revenue funds underreported sales tax revenues for fiscal year ended June 30, 2019 and a prior period adjustment was required during the current fiscal year to correct the error.
Recommendation:
In order to ensure all significant accruals are properly recorded at year-end, the Accounting Manager and Administrative Services Director should review all si gnificant accounts and ensure all closing entries are properly recorded. Receipts received after year-end should be reviewed to determine which fiscal year they belong to. We also recommend that management perform an analytical review of its significant accounts, and that the year-end closing checklist be updated in detail so that accruals are not missed.
Current Status:
The Sales Tax revenues appeared to be properly accrued during the closing of the general ledger for fiscal year ended June 30, 2021.
2020-02 Transactions Between City and Economic Development Corporation (EDC) Criteria:
All transactions between the City and Economic De velopment Corporation should be recorded in the general ledger prior to closing the general ledger.
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MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR SIGNIFICANT DEFICIENCIES
2020-02
Transactions Between City and Economic Development Corporation (EDC) (Continued)
Condition:
During fiscal year ended June 30, 2020, the EDC transferred the San Pablo Community Center capital assets to the City, and the lease an d note payable previously recorded between the City and the EDC was written off, however, these transactions were not recorded in the general ledger prior to the audit.
Cause:
Finance staff were not aware of the transaction.
Effect:
Capital assets, loans receivable and notes payable were not adjusted prior to the a udit, therefore, material audit adjustments were required to correct the balances.
Recommendation:
To ensure that all significant transactions between the City and the EDC are pr operly accounted for, we recommend Finance communicate with EDC staff to en sure all activities are known and accounted for in the general ledger. These adjustments should be recorded prior to or as part of the year-end close.
Current Status
:
We did not note any transactions between the City and the EDC that were not accounted for in the June 30, 2021 general ledger.
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