For City Council Meeting [05/09/2023]
TO: Honorable Mayor and City Council
APPROVAL: Arron Brown, Acting City Manager
FROM: Katherine Stevens, Director of Finance
Title
Request City Council, Rialto Housing Authority, Rialto Utility Authority, and Successor Agency to Accept, Review, and file the Fiscal Year 2021-2022 Annual Comprehensive Financial Report and Related Documents.
Body
BACKGROUND
August 10, 2021, Lance, Soll & Lunghard (LSL) was chosen through council action to be the external audit firm for the City of Rialto (City). LSL was contracted to do the following:
• Audit all funds
• Prepare the City’s Annual Comprehensive Financial Report an issue an opinion on the basic financial statements.
• Review the Management Discussion & Analysis and the Required Supplemental Information
• Attend audit related City council and Budget Committee meetings by a Principal of the audit firm.
November 3, 2022, the Provided By Client (PBC) List was provided to the Finance Team at the City and the team began providing documents to LSL in order to prove adequate internal controls and to produce the Annual Comprehensive Financial Report.
ANALYSIS/DISCUSSION
The annual audit for the year ending June 30, 2022, was completed by LSL in conformity with Generally Accepted Auditing Standards (GAAS). The unmodified, or “clean” opinion given in the Independent Auditor’s Report states that “… the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Rialto, California, as of June 30, 2022, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.” Attached are the following items:
• Annual Comprehensive Financial Report (Formerly the Comprehensive Annual Financial Report)
• Auditor’s Communication with Those Charged with Governance Letter
• Independent Auditors’ Report on Internal Control over Financial Reporting
Annual Comprehensive Financial Report
This document is a thorough and detailed presentation of the City’s financial state and includes financial statements on the fiscal year’s activities and balances that are audited by the City’s independent auditors. Net position represents the difference between the City’s resources and its obligations. The Summary of Net Position table detailed below shows an overall net position of $450.9 million which is an increase of $80.7 million from the prior year.
The City’s financials are categorized as either governmental activities or business-type activities. The governmental activities include activities like Police, Fire, Public Works, Community Development, and general government. Governmental activities are financed by taxes, revenues from other governmental agencies, state/federal grants, and charges for services. The governmental activities revenue and expenses are detailed in the chart below. The revenue increased $31.4 million from fiscal year 2021 and the expenses decreased $15.3 million from fiscal year 2021, with a remaining revenue over expenses in the amount of $73.4 million for fiscal year 2022.
The business-type activities are services provided by the City that are funded by customer fees. The City’s water, wastewater, and cemetery services are examples of these activities. The business-type activities revenue and expenses are detailed in the chart below. The revenue increased $7.8 million from fiscal year 2021 and the expenses increased $5.5 million from fiscal year 2021 with a remaining revenue over expenses in the amount of $7.3 million for fiscal year 2022.
The City’s general fund decreased to $81.7 million from $104.5 million from fiscal year 2021. The general fund revenues for FY2022 increased to $132.9 million which is $28.4 million more than fiscal year 2021. The general fund expenses increased $26.9 million from fiscal year 2021.
Auditor’s Communication with Those Charged with Governance Letter
This letter communicates to the City Council any significant audit matters such as qualitative aspects of accounting practices, difficulties encountered in performing the audit, corrected and uncorrected misstatements, disagreements with management, management representations, and any other audit findings if they occurred during the audit process. The following items are presented in this letter:
• The financial statement disclosures are neutral, consistent, and clear
• No significant unusual transactions have occurred during fiscal year 2021-2022
• No significant difficulties were experienced by the auditors in dealing with management in the performance and completing of the audit.
• No Material misstatements were identified for correction by management.
• No disagreements arose during the audit in reference to financial accounting, reporting, or auditing.
Independent Auditors’ Report on Internal Control over Financial Reporting
This letter communicates to the City Council any significant deficiencies and material weaknesses in the City’s internal controls over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management of employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. LSL did identify one Material Weakness and one Significant Deficiency. All the Material Weaknesses and Significant Deficiencies from FY2021 and prior were corrected for the FY2022 audit.
1. 2022-001 - Three material checks totaling $1,183,169 related to FY2022-23 services were improperly recorded and accrued as accounts payable in FY2021-22. These items were also capitalized as construction work in progress.
2. 2022-002 - Material amounts of adjusting journal entries were completed for FY2021-22 after the start of the annual audit.
The Finance department over one fiscal year through training and planning has put procedures and policies in place to remove the reoccurring annual significant deficiencies and material weaknesses.
The significant deficiency and material weakness identified in FY2022 will be corrected through revisiting Accounts Payable accrual training along with implementing additional year-end reviews. The addition of new Finance department team members will allow for the complete closing of the General Ledger before the Annual audit begins.
ENVIRONMENTAL IMPACT
The action is exempt from California Environmental Quality Act (CEQA) pursuant to Section 15378(b)(5) of the CEQA Guidelines because of the preparation of the Audited Annual Financial Reports are governmental administrative activity that will not result in indirect physical changes in the environment.
GENERAL PLAN CONSISTENCY
General Plan Guiding Principle 3 - Rialto’s Economic Environment is Healthy and Diverse - specifically our City Government will lead by example, and will operate in an open, transparent, and responsive manner that meets the needs of the citizens is a good place to do business
LEGAL REVIEW
The City Attorney has reviewed and supports this staff report
FINANCIAL IMPACT
Operating Budget Impact
The Fiscal Year 2021-22 Audited Annual Financial Statements are recommended to be accepted and received and filed into the City records. There is no direct financial impact related to this action.
Capital Improvement Budget Impact
There is no financial impact to the capital improvement budget as a result of the approval of this item.
Licensing
A Business License is not required with the requested action
RECOMMENDATION
Staff recommends that the City Council, Rialto Housing Authority, Rialto Utility Authority and Successor Agency accept the Fiscal Year 2021-22 Audit Results and receive and file the fiscal year 2021-22 Annual Comprehensive Financial Report and related documents.