Dec. 17, 2015 City Council Presentation of 2015 Audit Results and Financial Analysis
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The document summarizes the 2014-2015 financial audit results for the City of Corona conducted by the accounting firm Lance, Soll, & Lunghard. The audit resulted in an unmodified clean opinion. Two internal control deficiencies were noted regarding inventory management and payables management, but no material misstatements were found. Comparisons of the City's financial position, pension obligations, and debt to other similar cities were also presented. Future additional audit scope planned for 2015-2016 was outlined.
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Dec. 17, 2015 City Council Presentation of 2015 Audit Results and Financial Analysis
- 1. www.lslcpas.comwww.lslcpas.com LANCE, SOLL & LUNGHARD, LLP Orange County 714.672.0022 Temecula Valley 951.304.2728 Silicon Valley 408.573.6360 www.LSLCPAS.com CITY OF CORONA 2015 FINANCIAL AND AUDIT RESULTS
- 2. www.lslcpas.comwww.lslcpas.com INTRODUCTIONS Debbie Harper, CPA - Partner Lance, Soll, & Lunghard (LSL) 15 years with LSL Serve on State and National Specialty Committees for Local Governments LSL has served local governments since 1929 3 office locations – Temecula Valley, Silicon Valley, and Orange County (serves City of Corona) Full-service firm (tax, attestation, consulting) Specialize in City Government across California
- 3. www.lslcpas.comwww.lslcpas.com Audit Results are provided in three letters: 1.Audit Communication Letter (SAS 114 – conclusion) a. Summarizes the audit interaction with Management b. Changes and/or entries made to properly state the financials that were significant and agreed to by Management during the course of our testing c. Changes in accounting principles or practices d. Significant transactions e. Implemented and upcoming accounting pronouncements. 2.Report on Internal Controls and Other Matters a. Identifies any internal control deficiencies that we want to bring to your attention b. Identifies any compliance findings or other matters that we noted outside the internal control deficiencies that we became aware of 3.Opinion Letter a. Identifies what our opinion covers b. Responsibilities of Management and Auditors c. Our Opinion 2014-2015 AUDIT COMMUNICATION 3
- 4. www.lslcpas.comwww.lslcpas.com Fiscal Year 2014-2015 Audit Results were provided in these three letters: 1.Audit Communication Letter (SAS 114 – conclusion) a. No issues or difficulties with performing the audit b. No corrected or uncorrected misstatements noted c. Major changes to the City’s accounting practices/principles • GASB 68 – Accounting and Financial Reporting for Pensions a. Significant disclosure this year related to the GASB 68 – Pensions • This was explained in Note 12 – which details out the outstanding balance of the City’s net pension liability for each plan. 2014-2015 AUDIT RESULTS 4
- 5. www.lslcpas.comwww.lslcpas.com Fiscal Year 2014-2015 Audit Results were provided in these three letters: 1.Audit Communication Letter (SAS 114 – conclusion) e. Other audit findings or issues • Inventory Management – We noted variances between the value of the inventory listing of the Warehouse and the general accounting records of the City. The variance was immaterial and didn’t impact our opinion of the financial statements, but we recommended to Management that the City perform an assessment of processes and procedures of the inventory management to identify potential areas of weakness and implement procedures to allow for proper oversight. • Revenue and Expenditure/Expense Allocation – We noted inconsistencies in the account coding of certain expenses where a corresponding funding source within the fund or department to which the expense is coded, could not be identified. The errors noted were not material to the financial position to the related funds or the City as a whole, but we recommended an assessment of the processes to identify the potential weakness and address correcting procedure. 2014-2015 AUDIT RESULTS 5
- 6. www.lslcpas.comwww.lslcpas.com Fiscal Year 2014-2015 Audit Results were provided in these three letters: 1.Report on Internal Controls and Other Matters a. Definition of deficiency in internal controls: The design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, detect and correct, misstatements on a timely basis. • Payables Management – During our audit procedures it was noted that an invoice related to fiscal year 2014-2015 was paid subsequent to June 30, 2015, but was not properly recognized as an accrual. Upon further inquiry it was noted that this invoice was held at another department and not given to finance timely. We recommended alternative procedures to be taken for all City invoices and that all invoices sent to the finance department at the initial step of the process for proper tracking and then distributed to departments for proper approval proper to payment. 2.Opinion Letter a. Unmodified “clean” Opinion 2014-2015 AUDIT RESULTS 6
- 7. www.lslcpas.comwww.lslcpas.com FINANCIAL ANALYSIS COMPARISION WITH OTHER CITIES •SIMILAR POPULATION •SIMILAR SERVICES COMPARISON FROM 2013-2014 TO 2014-2015 7
- 8. www.lslcpas.comwww.lslcpas.com Source: City Websites Net Position City-wide Governmental Activities and Business-type Activities Decrease $152 M 8
- 9. www.lslcpas.comwww.lslcpas.com Net Position Use Governmental Activities Only 9
- 10. www.lslcpas.comwww.lslcpas.com Net Position Use Business-type Activities Only Source: City websites 10
- 11. www.lslcpas.comwww.lslcpas.com Pension Obligations Source: City websites 11
- 12. www.lslcpas.comwww.lslcpas.com OPEB Obligations Source: City websites 12
- 13. www.lslcpas.comwww.lslcpas.com Total Long-term Debt – Citywide Analysis Source: City websites 13
- 14. www.lslcpas.comwww.lslcpas.com Fiscal Health of General Fund Liquidity Analysis Source: City websites 14
- 15. www.lslcpas.comwww.lslcpas.com Fiscal Health of General Fund Liquidity Analysis 15
- 16. www.lslcpas.comwww.lslcpas.com LOOKING TO 2014-2015 • Began the addition scope of services we discussed last year, should have results in January: • Additional Scope of Services – 2014-2015 • Review of Wire Transfer between Financial Institutions • Tested 120 wire transfers for fiscal year 2014-2015 • Review of Bank Reconciliations • Tested 4 bank reconciliation (1 per quarter) for fiscal year 2014- 2015 • Review of Cash Receipts • Tested 120 cash receipts for fiscal year 2014-2015 • Additional Scope of Services – 2015-2016 • Will come out in January to complete • Review of Vendor Contracts • Review of Inventory/warehouse processes • Expanded review of internal controls for accounting in multi-funded, cross functional departments 16
- 17. www.lslcpas.comwww.lslcpas.com LANCE, SOLL & LUNGHARD, LLP Orange County 714.672.0022 / Temecula Valley 951.304.2728 / Silicon Valley 408.573.6360 www.LSLCPAS.com Thank You
Editor's Notes
- The City is already proactive on internal procedures and has already contracted a consultant to conduct a business process review with the goal of centralizing the accounts payable function. The new process will have all invoices directly sent to the Finance Division. After being entered into the City’s core financial system, invoices will be distributed to department for review and approval through workflow. The new process will ensure proper internal control procedures are in place and all invoices are captured in the financial system. Based on the results of the audit, let’s look on the changes from 2014 to 2015 and how the City compares to other similar cities
- Net Position Citywide (“owner’s equity” – broken out by Governmental Activities and Business-type Activities (DWP, Transit & Airport): Average Government Activities Net Position in 2014 - $674,683,761 Corona was above that at $897,600,470 Average Business-type Activities Net Position in 2013 - $147,799,342 Corona was above that at $202,803,803 Corona 2015 vs 2014 Government Activities Net Position decreased by $152M – This was impacted Net Pension Liability now shown in the Gov’t wide financial statements. Overall increase in Govt activities of $44M but a restatement for the Net Pension Liability of $196M. Balance at 6/30/2015 for NPL in Govt Act. is $178,823,071. Business-type Activities Net Position increased by $4M – The overall current year increase $19M but a restatement for the Net Pension Liability of $15M brings it down to the $4M net increase for 2015. The balance at 6/30/2015 for the NPL in Business Type Act. Is $13,946,765. Total NPL at 6/30/2015 for the City was $192,7698,836, which we will look into deeper later in the presentation.
- Let’s look at the make-up of the Net Position. You can have a strong Net Position, but if it is all held up in Capital Assets or Restricted for Debt Service, it will have an impact on your fiscal health to meet expenditures and future increasing costs, such as, pension costs, long-term debt requirements, and OPEB costs (which we will look at soon). Comparison to other similar cities: Corona’s Unrestricted Net Position is well above the average of 12%, which is available funds to meet future obligations. In 2014 Corona’s grew to 30% from 28%. Remember - Governmental Activities decreased Overall by $152M Net Investment in Capital Assets to total Net Position increased from 62% to 79% Restricted Assets Decreased mainly due to Capital Project restrictions – Various Capital Projects being completed Unrestricted Net Position to total Net Position decreased from 30% to 12%, which is available to meet future obligations. This was caused by the Net Pension Liability being recorded in the financial statements.
- Overall Business Type Activities is moving in the right direction. There was a strong increase in Net Position of $4.2 M. The Average Unrestricted Net Position available for future obligations dropped to -12%, which Corona falls short with a negative 45%. What this means is the Net Position of the Business-type Activities for Corona, is held up in Capital Assets (136% of total assets) and Capital Debt (89% of total liabilities). Will look at debt within the Business-type Activities and the large increase that took place in 2015, related to NPL. Overall from 2014 to 2015 there were strides in a positive direction. Although the Negative Unrestricted Net Position increase by $1.5M, holding at the -45% of Total Net Position. Restrictions went up by $10.8M for Capital Project commitments. *Capital Lease Structure between the City and Water and Sewer = Water and Sewer lines
- Let’s look at the major future obligations that are on everyone’s mind – Pension Obligations: Average Pension Liabilities for both Miscellaneous Groups and Police was $458,820,772 in 2014, growing from the last year’s average of $436M. Temecula doesn’t have the public safety so if you don’t account for Temecula then the Avg is $493,202,438 Corona is right along the average with $451 M, A little below if you exclude Temecula. Corona’s obligation grew to $498 M in 2015, which includes the GASB 68 implementation. Many things impact the overall obligation – Investment Return from CalPERS, changes in assumptions, changes in benefits, Mortality Rate etc. Just a note – Next year there are many changes coming into effect with CalPERS internal policy changes Valuation of Assets and Liabilities will be based on Market Value, instead of Actuarial Value – expected to increase to contribution rates. Amortization and smoothing policies changed from spreading investment returns over 15-year period while experience gains and losses were amortized over a rolling 30-year period. This will now change to an amortization and smoothing policy that will spread rate increases or decreases over a 5-year period, and will amortize all experience gains and losses over a fixed 30-year period. Cause rates to increase and pension obligation amounts to increase These liabilities are now reflected in long-term debt with GASB 68 implementations Total % of funded pension obligation for the City Average % funded for similar cities was 73% for 2014, a drop from 82% Corona is 64% funded in 2014 and it increased to 67% in 2015, with the new GASB 68 NPL.
- Average OPEB Liability for Similar Cities was $39 M in 2014, with Corona’s liability totaling $96M an increase from $81 M in 2013. Now $127 M in 2015. Average Unfunded liability percentage is 90% and Corona was under that at 79% in 2014 and in 2015. This shows that the City contributed a equal amount to OPEB assets as the increase in total OPEB liability. Therefore, no change in funding status.
- Average Total Debt Citywide was $147 M in 2014, and Corona had $158 M in 2014 and in 2015. Paid off a COP Bond in the business-type activities in 2014 of about $40 M. – 2003 Clearwater Cogeneration/Recycled Water Project Debt Service Ratios – Short-term debt portion due/total income to pay for it. This is the percentage of total income needed for debt repayments and the remaining amount is available to meet other obligations of the City. Average Debt Service Ratio for 2014 to similar cities for governmental activities was 15% Corona’s debt service ratio health was better at a rate of only 5% in 2014 and got even better in 2015 at 4%. Average Debt Service Ratio for 2014 to similar cities for business-type activities was 5%. Corona’s debt service ratio health at the average at 5% but increased to 12% in 2015. New Installment agreement with Brine Line System Discharge Right Agreement ($8.8M) and short term payments coming due to COPS at $8M
- Liquidity Ratio – Represents the ability to meet committed expenses when faced with an emergency. 1st lets look at the Cash balances of the General Fund: Average General Fund Cash and Cash Equivalents of similar cities in 2014 was $34.7 M Corona was at $60.6 M in 2014 and increased to $73.3 M in 2015, above twice the average 2nd lets look at the Expenditures of the General Fund: Average General Fund expenditures of similar cities in 2013 was $85 M Corona was at $125.7 M in 2014 and increased to $129.5 M in 2015 * The reason cash is higher in 2015 was the extra funds held to call the 2015 COP bonds. This was called in September after the 6/30/15 date, bringing the cash balance back down closer to 2013-2014 cash balance.
- Liquidity Ratio – Represents the ability to meet committed expenses when faced with an emergency. - CONTINUED This ratio used analyzes ability to maintain paying on expenses using your cash as the emergency fund. The shaded area represents a recommended healthy ratio of 3-6, meaning you can handle an emergency of between 3 to 6 months. The average liquidity ratio of similar cities for 2013 was 5, which Corona was at 6 in 2014 and up to 7 2015. After the COP Bond call in September the ratio is back down to 6. As you can see even though the expenditures were higher than the average the large cash balances provide for a healthy liquidity ratio to handle emergency events.
- As a firm, we engage in conversations and discussion on the environment of local governments and possible risks that other City’s have incurred. Important to look outside just the financial audit and look at specific risk areas inside the Agency and how can they be mitigated Based on these discussion, Management has requested that we do additional services in the following areas: 2014-2015 Wire Transfers – for authorization, accountability, and appropriateness Bank Reconciliation – accuracy, monitoring processes, support documentation Cash Receipts – Proper Documentation, recordation, and accountability all the way through the financial institution Vendor Contracts – Review contracts for proper adherence to the procurement policy, review the change order details and authorization, and monitoring procedures for work performed. 2015-2016 Based on our audit we discussed with management on additional scope of services for 2015-2016