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Report regarding a resolution accepting the Annual Comprehensive Financial Report (ACFR) and other related miscellaneous reports for Fiscal Year 2023-24 (Karen Chang, Finance Director)
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RECOMMENDATION
Recommendation
Staff recommends that the City Council review and accept the Audited Financial Statements for the City of South San Francisco for the fiscal year ended June 30, 2024.
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BACKGROUND/DISCUSSION
Summary
Each year, the City of South San Francisco is required to prepare audited financial statements in addition to a number of related reports. This action requests that City Council formally accept these reports. A copy of the Annual Comprehensive Financial Report (ACFR) is available for public inspection on the City’s website.
For FY 2023-24, the City has received an unmodified or clean opinion on the financial statements from its auditors Maze & Associates (Maze). In addition, all requirements have been met to achieve the highest standard in government accounting and financial reporting: the Certificate of Achievement for Excellence in Financial Reporting issued by the Government Finance Officers Association (GFOA) of the United States and Canada. The City of South San Francisco has received this certificate annually for the last 21 consecutive years.
Background
The City’s independent auditors, Maze, have completed the audit of the City’s financial transactions and internal controls for FY 2023-24. The following reports are prepared by the City of South San Francisco and audited by the City’s independent auditors. Maze also reviewed the City’s Appropriations Limit Calculation for fiscal year 2023-24.
• Annual Comprehensive Financial Report (ACFR) is the overall financial report for the entire city organization and provides information about the financial results of operations and numerous required disclosures. This is the financial report prepared by the City and audited by the independent auditors to provide reasonable assurance that the financial statements are fairly presented in accordance with generally accepted accounting principles (GAAP) in the United States. This report contains the Independent Auditors’ Report, which is prepared by the auditors based on their examination of the City’s financial transactions for the fiscal year ending June 30, 2024.
The ACFR shows the total of all financial accounting for the fiscal year. The financial reporting provided in the ACFR is in greater detail than the basic financial statements and is made up of three primary sections:
• Introductory Section: provides general information about the City, including the letter of transmittal, list of principal officers, and an organization chart.
• Financial Section: provides the overall financial information for the City, including the report of the independent auditor, management’s discussion and analysis (MD&A), the basic financial statements, notes to the basic financial statements, required supplementary information, and other supplementary statements and schedules.
• Statistical Section: provides a broad range of operational, economic, and historical data providing context for assessing the City’s fiscal condition. This section provides information about general financial trends, revenue and debt capacities, economic and demographic trends, and operating information.
• San Mateo County Measure A Funds financial statements and Independent Auditors’ Report is required by the San Mateo County Transportation Authority. Measure A funds, the one-half of one percent sales and use tax approved by the San Mateo County voters in 1988 to provide funding for improvements of local transportation. Copies of the report are submitted to SamTrans to show that the City is in compliance with the requirements governing expenditures of Measure A funds for the year ending June 30, 2024.
• San Mateo County Measure W Funds financial statements and Independent Auditors’ Report is required by the San Mateo County Transportation Authority. Measure W funds, the one-half of one percent sales and use tax approved by the San Mateo County voters in 2018 to provide funding for local safety, pothole, and congestion relief improvement program that includes transportation and public transit. Copies of the report are submitted to SamTrans to show that the City is in compliance with the requirements governing expenditures of Measure W funds for the year ending June 30, 2024.
• Independent Accountants’ Report on Agreed-Upon Procedures Applied to Appropriations Limit Schedule is required by the State of California in Section 1.5 of Article XIIIB of the California Constitution. Article XIIIB of the California Constitution limits the amount that governmental agencies can annually appropriate from proceeds of taxes. An annual calculation, factoring in population and inflation changes, is performed each year to determine the new appropriation limit. The appropriation limit for FY 2023-24 was approved by the City Council by resolution in June 2023.
• The Auditors’ Required Communications Letter includes the auditors’ letter, addressed to the City, communicating their responsibilities in performing the audit and if any, significant findings and issues detected during the course of the audit. The report references the City of South San Francisco Management Representation Letter, addressed to the auditors, communicating management’s opinion of the City’s financial condition, internal controls, and adherence with laws and regulations.
• The Independent Auditors’ Memorandum on Internal Control report includes a review of the City’s internal controls, based on the audits of the ACFR and Measure A and W financial reports. If the auditor identifies deficiencies, they identify recommendations to improve internal controls.
Discussion
Financial Highlights
Maze found the City’s financial statements present fairly, in all material ways, the respective financial position of the City as of June 30, 2024 (Independent Auditor’s Report, Opinions).
The audited financial statements include the statement of net position, statement of activities and changes in net position, balance sheets, statement of revenues, expenditures, and changes in fund balance, and statements of cash flows.
Please refer to the Management’s Discussion and Analysis section in the ACFR for detailed discussion regarding the City’s financial performance and position. All references to the General Fund within the ACFR include Measure W. Please refer to pages 114-116 for financials relating only to the main general-purpose fund. Key financial highlights for the year ended June 30, 2024, are as follows:
• Total Net Position for Governmental activities in FY 2023-24 increased by $59.3 million, or 13.7%, from $434.3 million in the prior year, to $493.6 million. The reduction in other assets was due to drawing down from bond proceeds to fund capital projects, such as Orange Memorial Park and Civic Campus. The growth in assets of $52.8 million is primarily due to street, library, and parks projects of approximately $31.8 million, as well as increased cash received from impact fees of $18.8 million. Additionally, while the net pension liability grew by approximately $10 million, this was offset by a decrease of $11.2 million in the OPEB liability, which further augmented the increase in net position during the fiscal year.
• Total Net Position for Business-Type activities in FY 2023-24 increased by $4.1 million, or 2.9%, from $142.9 million in the prior year, to $147 million. The growth in Net Position was a result of increased contributions from partner cities relating to sewer services as well as repayments on cost-sharing for improvements.
• As of June 30, 2024, the City’s Governmental Funds reported combined fund balances of $328.3 million, an increase of $16.3 million, or 5.2%, compared to the prior year. This was primarily due to near completion of the bond-funded capital improvement projects, such as the Civic Campus, the Police Station, and various street projects. The General Fund ending fund balance, which includes Measure W, was $106.3 million, reflecting an increase of $17.7 million, or 20.0%, over the prior year primarily due to stronger revenues in most major revenue categories and from the replenishment of revenue loss from American Rescue Plan Act.
• As of June 30, 2024, the General Fund total fund balance was $106.3 million, $20.7 million of which was attributable to Measure W. Of the remaining fund balance, $29.67 million was held in reserve in accordance with City policy, which is aligned with the Governmental Finance Officers Association (GFOA) recommended reserve practice of between 15-20 percent of General Fund operating revenue. The remaining $56.0 million was held in designation/reserve accounts for various purposes, including unassigned fund balance (available for operational use), encumbrances (committed expenditure items), capital projects, and land held for development.
• Combined General Fund revenues, excluding transfers in and special items, were $164.0 million, which was $14.0 million, or 9.3% higher than the final amended budget. The increase was largely due to higher investment earnings as well as recognized grant revenue from the American Rescue Plan Act. There were also increases in revenue from charges for services. The favorable budget variance also reflected higher than expected residual tax allocation from the Successor Agency. The general-purpose General Fund revenues, excluding transfers in and special items, were $148.3 million.
• Combined General Fund expenditures, excluding transfers but including encumbrances, were $139.7 million, which was $5.2 million, or 3.4%, lower than final budget due to lower expenditures in various departments and carryover of a significant number of purchase orders.
• Overall, the general-purpose General Fund experienced a $13.8 million surplus in FY 2023-24, including all transfers and one-time special items but excluding encumbrances, compared with a projected $9,150 in the original adopted budget. However, if the $7.8M deferred encumbrances had been spent, the general-purpose General Fund would end up with only a $6.0 million surplus.
• The Sewer Enterprise Fund reported operating revenue (before non-operating revenues and operating transfers) of $34.6 million in FY 2023-24, an increase of $4.6 million, or 15.3%, from $30.1 million in the prior year. This increase in revenue is due to increased water usage and therefore larger sewer effluent volumes on which service charges are based. In addition, the revenue increase was due to other cities’ increase in participation of operating and maintenance cost sharing. Operating expenses increased $3.0 million, or 8.0%, from $ 27.9 million to $30.9 million, due to higher payroll-related expenses.
Auditors’ Communication with Those Charged with Governance
Professional auditing standards require the auditors to communicate in writing to management and those charged with governance. Maze and Associates has issued the Memorandum on Internal Control and Required Communications, and these are attached to this staff report.
Maze considers the City’s internal controls over financial reporting as a basis for designing audit procedures. At the conclusion of the audit, the firm expresses an opinion on the effectiveness of the internal controls.
Staff are pleased to inform the Council that there were no material weaknesses that resulted from the audit. There was one significant deficiency included in the memorandum that staff intends to resolve with the Fiscal Year 2024-25 audit.
Staff and Maze will issue a Single Audit Report on or before March 2025. The Single Audit Report is the audit report required by the Single Audit Uniform Guidance. This report contains a schedule of Federal Financial Assistance that summarizes Federal grant activity in the City of South San Francisco for the fiscal year.
CONCLUSION
In summary, Maze found the basic financial statements present fairly the City’s financial position as of June 30, 2024. This is the highest-level opinion that can be rendered by the auditors. This opinion assures that the City’s financial statements are in conformity with accounting principles generally accepted in the United States and was rendered on all City funds. Other reports such as Measure A and W also meet the compliance requirements.
Staff recommends that the City Council formally accept these reports.