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MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2022
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CITY OF SANTA CLARA
MEMORANDUM ON INTERNAL CONTROL
For the Year Ended June 30, 2022
Table of Contents
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Memorandum on Internal Control ...................................................................................................... 1
Schedule of Other Matters .......................................................................................................... 3
Status of Prior Year Other Matters ........................................................................................... 15
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MEMORANDUM ON INTERNAL CONTROL
To the City Council of
the City of Santa Clara, California
We have audited the basic financial statements of the City of Santa Clara for the year ended June 30, 2022 and have issued our report thereon dated Novemb er 30, 2022. Our opinions on the basic financial statements and this report, insofar as they relate to the component unit of the Santa Clara Stadium Authority, and the Investments in Joint Ventures of the Northern California Power Agency (NCPA), the Transmission Agency of Northern California (TANC) and the San Jose-Santa Clara Regional Wastewater Facility and Clean Water Financing Authority (SJSC), ar e based solely on the reports of other auditors.
In planning and performing our audit of the basic fina ncial 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, 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 th e design or operation of a control does not allow management or employees, in the normal course of performing their assigned func tions, 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 City’s financial statements will not be prevented, or detected and corrected, on a timely basis.
Our consideration of internal control was for the lim ited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. 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. Given these limitations during our audit, we did not identify any defici encies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
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.
Government Auditing Standards require the auditor to perform lim ited procedures on the City’s response to the findings identified in our audit and described in the accompanying Schedule of Other Matters. The City’s response was not subjected to the other auditi ng procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response.
This communication is intended solely for the inform ation 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
November 30, 2022
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MEMORANDUM ON INTERNAL CONTROL
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EFFECTIVE FISCAL YEARS 2022, 2023 and 2024:
GASB 99 – Omnibus 2022
The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of author itative literature by addressing (1) practice issues that have been identified during implementation and application of certain GASB Statements and (2) accounting and financial reporting for financial guarantees. The practice issues addressed by this Statement are as follows:
Classification and reporting of deri vative instruments within th e scope of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, that do not meet the definition of either an investment derivative instrument or a hedging derivative instrument
Clarification of provisions in Statement No. 87, Leases, as amended, related to the determination of the lease term, classification of a lease as a s hort term lease, recognition and measurement of a lease liability and a lease asset, and identification of lease incentives
Clarification of provisions in Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, related to (a) the determination of the public-private and public-public partnership (PPP) term and (b) recognition and measurement of installment payments and the transfer of the underlying PPP asset
Clarification of provisions in Statement No. 96, Subscription-Based Information Technology Arrangements, related to the subscription-based information technology arrangement (SBITA) term, classification of a SBITA as a short term SBITA, and recognition and measurement of a subscription liability
Extension of the period during which the London In terbank Offered Rate (L IBOR) is considered an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap that hedges the interest rate risk of taxable debt
Accounting for the distribution of benefits as part of the Supplemental Nutrition Assistance Program (SNAP)
Disclosures related to nonmonetary transactions
Pledges of future revenues when resources are not received by the pledging government
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GASB 99 – Omnibus 2022 (Continued)
Clarification of provisions in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as amended, related to the focus of the government-wide financial statements
Terminology updates related to certain provisions of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
Terminology used in Statement 53 to refer to resource flows statements.
The Requirements of this Statement are Effective as Follows:
The requirements in paragraphs 26–32 related to ex tension of the use of LIBOR, accounting for SNAP distributions, disclosures of nonmonetary transacti ons, pledges of future revenues by pledging governments, clarification of certain provisions in Statement 34, as amended, and terminology updates related to Statement 53 and Statement 63 are effective upon issuance.
The requirements in paragraphs 11 –25 related to leases, PPPs, and SBITAs are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter.
The requirements in paragraphs 4– 10 related to financial guarantees and the classification and reporting of derivative instruments within the scope of Stat ement 53 are effective for fiscal years beginning after June 15, 2023, and all reporting periods thereafter.
Earlier application is encouraged and is permitted by individual topic.
How the Changes in This Statement Will Improve Financial Reporting
The requirements of this Statement will enhance co mparability in the application of accounting and financial reporting requirements a nd will improve the consistency of authoritative literature. Consistent authoritative literature enables governments and other stakeholders to more easily locate and apply the correct accounting and financial reporting provisions , which improves the consistency with which such provisions are applied. The comparability of financia l statements also will improve as a result of this Statement. Better consistency and comparability improve the usefulness of information for users of state and local government financial statements.
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EFFECTIVE FISCAL YEAR 2022/23:
GASB 91 – Conduit Debt Obligations
The primary objectives of this Statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This Statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commi tments 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 issu er, nor is it cross-collateralized with other debt of the issuer.
The third-party obligor or its ag ent, not the issuer, ultimately receives the proceeds from the debt issuance.
The third-party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments).
All conduit debt obligations involve the issuer making a limited commitment. Some issuers extend additional commitments or voluntary commitments to support debt service in the event the third party is, or will be, unable to do so.
An issuer should not recognize a conduit debt oblig ation 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 criteria 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 commit ment should evaluate whether those criteria are met when an event occurs that causes the issuer to reevaluate its w illingness 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, ca pital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by th ird-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 titles 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 paymen ts 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 obligor 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 arrangement, the issuer, at the inception of the arrangement, should recognize the entire capital as set and a deferred inflow of resources. The deferred inflow of resour
ces should be reduced, a nd an infl ow recognized, in a systematic and rational manner over the term of the arrangement.
This Statement requires issuers to disclose genera l information about their conduit debt obligations,
organized by type of commitment, including the ag gregate 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 debt 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 fina ncial reporting by eliminating the existing option for issuers to report conduit debt obligations as their own liabilities, thereby ending significant diversity in practice. The clarified definition will resolve stakeholders’ uncertainty as to whether a given financing is, in fact, a conduit debt obligation. Requiring issuer s to recognize liabilities associated with additional commitments extended by issuers and to recognize assets 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 requirements will provide financial statement users with better information regarding the commitments i ssuers 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 a nd 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 Statement 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 p ublic services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange-like 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 provi de, 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 accounti ng 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 th at may include designing, constructi ng, financing, maintaining, or operating an underlying nonfinancial asset for a period 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 transferor that are not required to be improved by the operator as part of the PPP arrangement 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) m eet the definition of an SCA or (2) are not within the scope of Statement 87, as amended (as clarified by this Statement). The PPP term is defined as the period during which an operator has a noncancellabl e 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 underl ying PPP asset as an asset in financial statements prepared using the economic resources measurement focus. 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 operator’s estimated carrying value of the underlying PPP asset as of the expected date of the transfer in ownership. 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 received by the transfer or 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 reve nue would be recognized in a systematic and rational manner over the PPP term.
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GASB 94 – Public-Private and Public-Public Partnership s and Availability Payment Arrangements (Continued)
This Statement also provides specific guidance in financial statements prepared using the economic resources measurement focus for a government that is an operator in a PPP that either (1) meets the definition of an SCA or (2) is not within the scope of Statement 87, as amended (as clarified in this Statement). An operator should report an intangible right-to-use asset related to an underlying PPP asset that either is owned by the transferor 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 liability measured based on the estimated carrying value of the underlying PPP asset as of the expected date of the transfer in ownership. 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 r ecognize a deferred outflow of resources for the consideration provided or to be provided to th e 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 account for PPP and non-PPP components of a PPP as separate contracts. If a PPP involves multiple underlying assets, a transferor and an operator in certain cases should account for each underlying PPP asset as a sep arate PPP. To allocate the contract price to different components, a transferor and an operator should use contract prices for individual components as long as they do not appear to be unreasonabl e 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 considered 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 installment payments or any receivable related to the transfer of ownership of the underlying PPP asset and by reducing the related deferred inflow of resources. An operator should account for a termination by reducing the carrying value of the right-to-use 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 PPP should be accounted for by remeasuring PPP assets and liabilities.
APAs - An APA that is related to designing, constructi ng, 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 asset. 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 relate d to operating or maintaining a no nfinancial asset should be reported by a government as an outflow of resources in the period to which payments relate.
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GASB 96 – Subscription-Based Information Technology Arrangements
This Statement provides guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs) for gove rnment end users (governments). This Statement (1) defines a SBITA; (2) establishes that a SBIT A results in a right-to-use subscription asset—an intangible asset—and a corresponding subscription liab ility; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent re levant, the standards for 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 for 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 incl udes periods covered by an option 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 should recognize a right-to-use subscription asset—an intangible asset—and a corresponding subscriptio n liability. A government should recognize the subscription liability at the commencement of the subscription term, —which is when the subscription asset is placed into service. The sub scription 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 SBITA vendor charges the government, which may be implicit, or the government’s incremental borrowing rate if the interest rate is not readily determinable. A government should recognize amortization of the disc ount on the subscription liability as an outflow of resources (for example, interest expense) in subsequent financial reporting periods.
The subscription asset should be initially measured as the sum of (1) the in itial subscription liability amount, (2) payments made to the SBITA vendor before commencement of the subscription term, and (3) capitalizable implementation costs, less any incentives 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 anc illary 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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GASB 96 – Subscription-Based Information Technology Arrangements (Continued)
Operation and Additional Implementation Stag e, including activities such as subsequent implementation activities, maintenance, a nd 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 for 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 s ubscription asset, accumulated amortization, other payments not included in the measurement of a subscr iption liability, principal 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 financial 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. Th is Statement also will e nhance the relevance and reliability of a government’s financial statements by requiring a government to report a subscription asset and subscription liability for a SBITA and to disclo se essential information about 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.
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EFFECTIVE FISCAL YEAR 2023/24:
GASB 100 – Accounting for Changes and Error Corrections
The primary objective of this Statement is to enha nce accounting and financial reporting requirements for accounting changes and error corrections to provide mo re understandable, reliable, relevant, consistent, and comparable information for making decisions or assessing accountability
This Statement defines accounting changes as changes in accounting prin ciples, changes in accounting estimates, and changes to or within the financial re porting entity and describes the transactions or other events that constitute those changes. As part of those descriptions, for (1) cer tain changes in accounting principles and (2) certain changes in accounting estim ates that result from a change in measurement methodology, a new principle or methodology should be justified on the basis that it is preferable to the principle or methodology used before the change. That preferability should be based on the qualitative characteristics of financial reporting—understandability, reliability, rele vance, timeliness, consistency, and comparability. This Statement al so addresses corrections of errors in previously issued financial statements.
This Statement prescribes the accounting and financia l reporting for (1) each type of accounting change and (2) error corrections. This Statement requires th at (a) changes in accounting principles and error corrections be reported retroactively by restating pr ior periods, (b) changes to or within the financial reporting entity be reported by adju sting beginning balances of the curre nt period, and (c) changes in accounting estimates be reported prospectively by recognizing the change in the current period. The requirements of this Statement for changes in accoun ting principles apply to the implementation of a new pronouncement in absence of specific transition provisions in the new pronouncement. This Statement also requires that the aggregate amount of adjustments to and restatements of beginning net position, fund balance, or fund net position, as applicable, be displayed by reporting unit in the financial statements.
This Statement requires disclosure in notes to fina ncial statements of descriptive information about accounting changes and error corrections, such as th eir nature. In addition, information about the quantitative effects on beginning balances of each acc ounting change and error correction should be disclosed by reporting unit in a tabular format to re concile beginning balances as previously reported to beginning balances as restated.
Furthermore, this Statement addresses how informa tion that is affected by a change in accounting principle or error correction should be presented in required supplementary information (RSI) and supplementary information (SI). For periods that ar e earlier than those included in the basic financial statements, information presented in RSI or SI should be restated for error corrections, if practicable, but not for changes in accounting principles.
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EFFECTIVE FISCAL YEAR 2024/25:
GASB 101 – Compensated Absences
The objective of this Statement is to better meet th e information needs of financial statement users by updating the recognition and measurement guidance for compensated absen ces. That objective is achieved by aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures.
Recognition And Measurement
This Statement requires that liabilities for compensated absences be recognized for (1) leave that has not been used and (2) leave that has been used but not yet paid in cas h or settled through noncash means. A liability should be recognized for leave that has not been used if (a) the leave is attributable to services already rendered, (b) the leave accumulates, and (c) the leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means. Leave is attributable to services already rendered when an employee has performed the services required to earn the leave. Leave that accumulates is carried forward from the reporting period in which it is earned to a future reporting period during which it may be used for time off or otherwise paid or settled. In estimating the leave that is more likely than not to be used or otherwise paid or settled, a gove rnment should consider relevant factors such as employment policies related to co mpensated absences and historical information about the use or payment of compensated absences. Ho wever, leave that is more likel y than not to be settled through conversion to defined benefit postemployment benefits should not be included in a liability for compensated absences.
This Statement requires that a liability for certain types of compensated absences—including parental leave, military leave, and jury duty leave—not be recognized until the leave co mmences. This Statement also requires that a liability for specific types of compensated absences not be recognized until the leave is used.
This Statement also establishes guidance for measuring a liability for leave that has not been used, generally using an employee’s pay rate as of the date of the financial st atements. A liability for leave that has been used but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain salary-relate d payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities.
With respect to financial statements prepared usin g the current financial r esources measurement focus, this Statement requires that expenditures be recognize d for the amount that normally would be liquidated with expendable available financial resources.
Notes To Financial Statements
This Statement amends the existing requirement to disclose the gross increases and decreases in a liability for compensated absences to allow governments to disclose only the net change in the liability (as long as they identify it as a net change). In addition, governments are no longer required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences.
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GASB 101 – Compensated Absences (Continued)
How the Changes in this Statement Will Improve Financial Reporting
The unified recognition and measurement model in this Statement will r esult in a liability for compensated absences that more appropriately reflects when a government incurs an obligation. In addition, the model can be applied consistently to any type of co mpensated absence and will eliminate potential comparability issues between governments that offer different types of leave.
The model also will result in a more robust estim ate of the amount of compensated absences that a government will pay or settle, which will enhance the relevance and reliability of information about the liability for compensated absences.
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STATUS OF PRIOR YEAR
OTHER MATTERS
2021-01 Timely Submission of Purchase Ca rd Supporting Documentation to Finance
Purchase card statement reviews and reconciliations are an important element of the City’s internal control. In order to be an effective control, the City should co mplete the review of purch ase card transactions and statement reconciliations as soon as possible after each mo nth-end, usually within thirty to forty-five days of receipt of statements, and the reconciliations should s ubsequently be reviewed fo r accuracy. Errors and un- reconciled differences should be researched, understood and corrected immediately, so as to prevent additional errors and a decrease in efficiency. The City’s policies require that department supervisors and managers reconcile and verify the purchase card charges against the employee-submitted receipts, and once everything is attached and approved, that information is then submitted to the Finance Department for final review.
We originally selected the months of September 2020 and January 2021, to test for timely reconciliation and proper approval of the purchase card statements and reconciliations. However, as of March 24, 2021, the January 2021 reconciliation was still in process, so we selected another month for testing, December 2020, but the Principal Accountant mentioned that it was still in process. Therefor e, we tested the September 2020 and November 2020 purchase card statements and noted that there was a total of 20 statements that were reviewed 30-45 days after month end, but there were fourteen September 2020 statements that were not reviewed timely, with dates ranging from December 11, 2020 to March 30 ,2021, and there were six November 2020 statements that were not reviewed until March 17, 2021.
We understand the review and reconciliation of the purchase card statements was delayed due to documentation not being provided timely by employees to support the purchases, which in turn delayed the department supervisor and manager reviews and submission to the Finance Department.
Update for June 30, 2022:
We selected the months of August 2021 and December 2021, to test for timely reconciliation and proper approval of the purchase card statements and reconciliations. We noted that the August 2021 purchase card statements and reconciliations were reviewed and approved with dates ranging from March 4, 2022 to March 8, 2022, and as of March 29, 2022, the December 2021 statements and reconciliations had not been reviewed by the City Auditor’s office.
We understand the review and reconciliation of the purchase card statements was delayed due to documentation not being provided timely by employees to support the purchases, which in turn delayed the department supervisor and manager reviews and submission to the Finance Department.
If the review of purchase card statements is not pe rformed timely, potential er rors and/or unauthorized transactions may not be detected and remedied in a timely manner. In a ddition, if errors and/or unauthorized transactions are not identified timely, the City may lose the ability to contest the items with the bank due to the limit on the length of time the City can do so.
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CITY OF SANTA CLARA
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR
OTHER MATTERS
2021-01 Timely Submission of Purchase Card Sup porting Documentation to Finance (Continued)
The City should communicate to al l employees with purchase cards the importance of remitting supporting documentation in a timely manner to the department supe rvisors and managers to en sure that purchase card reconciliations can be completed and submitted to the Finance Department for review in a timely manner.
Current Status:
The City agrees with the recommendation that it should remind employees the importance of remitting complete supporting documentation in a timely manner for the Finance Department to finish their review in a timely manner. The City plans to provide citywide training to all staff to emphasize the importance of complete and timely submission of supporting documentation.
The City is also in the process of updating the Purchase Card Policy to include a more formalized process to enforce late report submissions. This is anticipated to be completed in the Spring of 2023.
2021-02 Developing Funding Plan for Net Position Deficit
The fund balance or net position of funds should be m onitored to ensure that all balances are positive and that plans are developed to eliminate any deficits that may develop. And, cost recovery funds, such as the internal service funds, should set charges for services sufficient to cover costs incurred by the fund.
As of June 30, 2021, the Special Liability Insurance Cl aims Internal Service Fund had deficit net position of $2.7 million.
During fiscal year 2021, we understand unanticipated claims activity led to the deficit net position in the Fund.
The City must develop plans for fund ing the deficit to ensure it does not increase and is eliminated in a reasonable period of time.
Update for June 30, 2022:
The net position deficit for the Special Liability Insura nce Claims Internal Serv ice Fund decreased to $781 thousand as of June 30, 2022.
Current Status:
Implemented - The City normally transfers funds to eliminate the deficit in the Special Liability Insurance Claims Internal Service Fund in the final Monthly Financial Report in December. Evaluation of the remaining deficit will continue to be addressed during the budget process.
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CITY OF SANTA CLARA
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR
OTHER MATTERS
2017-02 Developing Funding Plans for Fund Balance/Net Position Deficits
At June 30, 2017, three of the City’s funds reporte d unrestricted net position deficits. The City should develop funding plans for the deficits as noted below:
A. Cemetery Enterprise Fund Net Position Deficit
The Cemetery Enterprise Fund unrestricted net posit ion deficit grew to $5.3 million at June 30, 2017. The fund records the receipt and use of monies for services provided at the Mission City Memorial Park. The Fund received a long-term advance from the General Fund that grew from $4.9 million as of June 30, 2016 to $5.2 million as of June 30, 2017, that is to be repaid when funds become available. The fiscal year 2018 bu dget does indicate revenues that equal expenses for the Fund, but does not provide for funds to be available to reduce the deficit or for repayment of any portion of the advance.
The City should perform a review of rates and co sts in the Fund to determine if costs can be reduced or rates adjusted to work to elimin ate the net position deficit and provide funds for repayment of the interfund borrowing. If the advance is not expected to be repaid within a reasonable period of time, Generally Accepted A ccounting Principles require that the interfund balance be reduced and the amount that is not expected to be repaid should be reported as a transfer from the fund that made the loan to the fund that received the loan.
B. Workers’ Compensation Insurance Claims Internal Service Fund Net Position Deficit
The Workers’ Compensat ion Insurance Claims Internal Service Fund reports a net position deficit of $16.8 million as of June 30, 2017, which was an improvement of $2.1 million from the prior fiscal year. The majority of the decrease in the deficit is due to the change in uninsured claims payable which decreased $1.5 million during the fiscal year. The City must develop plans for funding the deficit to ensure cash is available when the claims come due.
Update for June 30, 2018:
The net position deficits for the Cemetery Enterprise Fund and the Workers’ Compensation Insurance Claims Internal Service Fund increased to $3.2 million and $16.7 million, respectively as of June 30, 2018.
Update for June 30, 2019:
The net position deficits for the Cemetery Enterprise Fund increased to $3.9 million and the Workers’ Compensation Insurance Claims Inte rnal Service Fund decreased to $16.1 million as of June 30, 2019. In addition, the General Fund’s advance to the Cemetery Enterprise Fund increased to $5.7 million.
Update for June 30, 2020:
The net position deficits for the Cemetery Enterprise Fund increased to $4.9 million and the Workers’ Compensation Insurance Claims Inte rnal Service Fund decreased to $15.5 million as of June 30, 2020. In addition, the General Fund’s advance to the Cemetery Enterprise Fund increased to $6.3 million.
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CITY OF SANTA CLARA
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR
OTHER MATTERS
2017-02 Developing Funding Plans for Fund Balance/Net Position Deficits (Continued)
Update for June 30, 2021:
The net position deficit for the Cemetery Enterprise Fu nd increased to $5.1 milli on and the deficit in the Workers’ Compensation Insurance Claims Internal Service Fund decrea sed to $13.7 million as of June 30, 2021. In addition, the General Fund’s advance to the Cemetery Enterprise Fund increased to $7.1 million.
Update for June 30, 2022:
The net position deficit for the Cemetery Enterprise Fund was eliminated, as the General Fund’s advance to the Fund was forgiven during the fiscal year. The deficit in the Work ers’ Compensation Insurance Claims Internal Service Fund decreased to $11.6 million as of June 30, 2022.
Current Status:
Cemetery – Implemented.
Workers’ Compensation Insurance Claims Internal Service Fund – Implemented - The City normally transfers funds to eliminate the current deficit in the Workers’ Compensation Insurance Claims Internal Service Fund in the final Monthly Financial Report in December. However, the long term deficit in the Fund that is the resu lt of recording the estimate of the long-term claims liabilities will continue to be monitored and addressed during the budget process, as needed.
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