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Home My WebLink AboutItem No. 13 - Annual Comprehensive Financial Report Page 1 of 2 REPORT TO CITY COUNCIL To:Honorable Mayor or Members of the City Council From:Jason Simpson, City Manager Prepared by:Shannon Buckley, Assistant City Manager Date:January 10, 2023 Subject:Annual Comprehensive Financial Report for the Fiscal Year Ended June 30, 2022 Recommendation Receive and file the Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2022 and related year-end reports. Discussion The Annual Comprehensive Annual Financial Report (Report) is the summarization of the City’s financial activity for the previous fiscal year ending June 30, 2022. The report includes summarization of significant milestones that were accomplished during the year by department, fiscal policies, and statistical information. Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Lake Elsinore for its Reports for the fiscal year ended June 30, 2015 through 2021 consecutively. In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized Report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and have submitted it to GFOA to determine its eligibility for another certificate. Also included, please find copies of the Auditor’s Communication Letter, and the Auditor’s Internal Control Report. Annual Comprehensive Financial Report Page 2 of 2 Fiscal Impact No fiscal impact. Attachments Attachment 1- 2022 Annual Comprehensive Financial Report Attachment 2- 2022 Auditor's Communication Letter Attachment 3- 2022 Auditor's Internal Control Report Cover photo features former pitcher of the Lake Elsinore Storm, MacKenzie Gore, who was drafted by the San Diego Padres with the third overall pick. 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Revenue increased by $12 million overall with a significant increase in funding from contributions and charges for services. 2021 2022 2021 2022 2021 2022 Revenues: Program revenues: Charges for services $20,054 $27,340 $3,729 $3,385 $23,782 $30,684 Operating contributions and grants 16,800 22,059 - - 16,800 22,001 Capital contributions and grants 14,107 14,438 - - 14,107 14,438 General revenues: Property taxes 9,678 10,228 - - 9,678 10,228 Transient occupancy taxes 551 763 - - 551 763 Sales taxes 18,068 32,788 - - 18,068 32,788 Franchise taxes 2,763 2,919 1 - 2,764 2,919 Investment earnings 7,206 3,563 15 -15 7,221 4,106 Miscellaneous 2,809 2,416 - 25 2,809 2,441 Gain/(loss) on sale of capital assets - - - -19 - -19 Transfers -653 -1,827 653 1,827 - - Total revenues 91,382 114,687 4,397 5,202 95,779 120,349 Expenses: General Government 7,192 5,108 - - 7,192 5,108 Public Safety 22,583 25,502 - - 22,583 25,502 Community Development 5,675 8,050 - - 5,675 8,050 Community Services 2,359 3,555 - - 2,359 3,555 Public Services 24,953 26,550 - - 24,953 26,550 Interest on long-term debt 5,152 7,722 - - 5,152 7,722 Launch Pointe RV Resort - - 3,967 5,940 3,967 5,940 Total expenses 67,914 76,486 3,967 5,940 71,882 82,426 Changes in net position 23,452 38,201 430 -738 23,882 37,463 Restatement of net position 2,697 - - -764 2,697 -764 Net position, beginning of year 221,840 247,989 16,615 17,044 238,455 265,033 Net position, end of year $247,989 $286,190 $17,044 $15,543 $265,033 $301,733 TotalBusiness-Type Activities Governmental Activities City of Lake Elsinore Table 2 Statement of Activities (in thousands) 0DQDJHPHQW¶V'LVFXVVLRQDQG$QDO\VLV -XQH *29(510(17:,'(),1$1&,$/$1$/<6,6±&RQWLQXHG 11 0DQDJHPHQW¶V'LVFXVVLRQDQG$QDO\VLV -XQH ),1$1&,$/$1$/<6,62)7+(*29(510(17¶6)81'6 *RYHUQPHQWDO)XQGV $VQRWHGHDUOLHUWKH&LW\XVHVIXQGDFFRXQWLQJWRHQVXUHDQGGHPRQVWUDWHFRPSOLDQFHZLWKILQDQFHUHODWHG OHJDOUHTXLUHPHQWV7KHIRFXVRIWKH&LW\¶Vgovernmental fundsLVWRSURYLGHLQIRUPDWLRQRQQHDUWHUP 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*RYHUQPHQWDO *RYHUQPHQWDO )XQGV )XQGV 3XEOLF )LQDQFLQJ $XWKRULW\ 5HFUHDWLRQ $XWKRULW\ )DFLOLWLHV )LQDQFLQJ $XWKRULW\ 'HEW6HUYLFH)XQGV 6HH1RWHVWR)LQDQFLDO6WDWHPHQWV25 CITY OF LAKE ELSINORE RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2022 Net change in fund balances - total governmental funds 53,067,341$ Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the costs of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. Capital outlay 14,833,297$ Depreciation (7,766,210) Gain/(loss) on sale of capital assets (123,633) 6,943,454 Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net position. Principal repayments 22,028,960 Equipment Purchase Financing Issued (3,371,468) Issuance of new bonds (44,570,000) Premiums/discounts from new debt issuance (616,576) Amortization of bond premiums/discounts 585,309 Deferred gain on refunding 796,095 Amortization of deferred charges (844,988)(25,992,668) Accrued interest for long-term liabilities. This is the net change in accrued interest for the current period.(182,826) Compensated absences expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds.26,335 OPEB liability expenses is an expenditure in the governmental funds, but reduce the Total OPEB Liability in the statement of net position. (639,386) Pension obligation expenses is an expenditure in the governmental funds, (883,406) but reduce the Net Pension Liability in the statement of net position. Revenues reported as unavailable revenue in the governmental funds and recognized in the statement of activities. These are included in the intergovernmental revenues in the governmental fund activity.1,507,287 Internal service funds are used by management to charge the costs of certain activities, such as equipment management and self-insurance, to individual funds. 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the affordability of the government's current levels of outstanding debt and the government's ability to issue 192-198 Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which the government's financial activities take place.199-200 Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the government's financial report relates to the services the government provides and the activities it performs.201-204 The City of Lake Elsinore's annual comprehensive financial report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information say about the government's overall financial health. The statistical section offers operational, economic, and historical data that provide a context for assessing the City's economic condition. 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Brea Blvd., Suite203 Brea,CA92821Lance, Soll & Lunghard, LLP Phone: 714.672.0022 December 22, 2022 To the Honorable Mayor and Members of the City Council City of Lake Elsinore, California We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Lake Elsinore, California (the City) for the year ended June 30, 2022. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, Government Auditing Standards, the State Controller’s Minimum Audit Standards for California Special Districts, and the Uniform Guidance, as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated April 22, 2022. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Matters Qualitative Aspects of Significant Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during fiscal year 2021-2022. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the City’s financial statements were: Management’s estimates of its net pension liability, net other post-employment benefits (OPEB) liability, are based on actuarial valuation specialist assumptions. We evaluated the key factors and assumptions used to develop the net pension liability, net OPEB liability, in determining that they are reasonable in relation to the financial statements taken as a whole. The financial statement disclosures are neutral, consistent, and clear. Significant or Unusual Transactions Management is responsible for the policies and practices used to account for significant or unusual transactions. No significant unusual transactions have occurred during fiscal year 2021-2022. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. To the Honorable Mayor and Members of the City Council City of Lake Elsinore, California Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, we detected misstatements as a result of audit procedures which were material and were subsequently corrected by management. The details of these misstatements are described in a separate letter dated December 22, 2022 Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated December 22, 2022. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the City’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the significant events or transactions that occurred during the year, business conditions affecting the City and business plans and strategies that may affect the risks of material misstatements, the application of accounting principles and auditing standards, with management each year prior to retention as the City’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Matters We applied certain limited procedures to the management’s discussion and analysis, the budgetary comparison schedules, and the required pension and other post-employment benefits schedules, as listed in the Annual Comprehensive Financial Report’s table of contents, which are required supplementary information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. We were engaged to report on combining statements and individual fund statements, which accompany the financial statements but are not RSI. With respect to this supplementary information, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. To the Honorable Mayor and Members of the City Council City of Lake Elsinore, California We were not engaged to report on the introduction or statistical section, which accompany the financial statements but are not RSI. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. The following new Governmental Accounting Standards Board (GASB) pronouncements were effective for fiscal year 2021-2022 audit: GASB Statement No. 87, Leases. GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period. GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans. The following GASB pronouncements are effective in the following fiscal years’ audits and should be reviewed for proper implementation by management: Fiscal year 2023 GASB Statement No. 91, Conduit Debt Obligations. GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangement. GASB Statement No. 96, Subscription-Based Information Technology Arrangements. Fiscal year 2024 GASB Statement No. 99, Omnibus 2022. GASB Statement No. 100, Accounting Changes and Error Corrections. Fiscal year 2025 GASB Statement No. 101, Compensated Absences. Restriction on Use This information is intended solely for the use of City Council and management of the City of Lake Elsinore, California and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours, Brea, California 203 N. Brea Blvd., Suite203 Brea,CA92821Lance, Soll & Lunghard, LLP Phone: 714.672.0022 INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Honorable Mayor and Members of the City Council City of Lake Elsinore, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Lake Elsinore, California (the “City”), as of and for the year ended June 30, 2022, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated December 22, 2022. Report on Internal Control over Financial Reporting In planning and performing our audit of the financial statements, 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 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 possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We identified certain deficiencies in internal control, described in the accompanying schedule of findings and responses as item 2022-001 that we consider to be material weaknesses. Report on Compliance and Other Matters As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the financial statements. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and responses as item 2022-001. To the Honorable Mayor and Members of the City Council City of Lake Elsinore, California City of Lake Elsinore, California’s Response to Findings Government Auditing Standards requires the auditor to perform limited procedures on the City’s response to the findings identified in our audit and described in the accompanying schedule of findings and responses. The City’s response was not subjected to the other auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Brea, California December 22, 2022 To the Honorable Mayor and Members of the City Council City of Lake Elsinore, California SCHEDULE OF FINDINGS AND RESPONSES Reference No.: 2022-001 – Inadequate Controls Over Financial Reporting Evaluation of Finding: Material weakness. Criteria: Management is responsible for the preparation and fair presentation, as well as the accuracy of its financial statements, including disclosures in accordance with accounting principles generally accepted in the United States of America. This includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to error or fraud. Condition: During the audit, we found the following conditions that resulted in significant audit adjustments to the financial statements: Accuracy in External Financial Reporting The year-end closing process did not ensure that account balances were reconciled and accurate in advance of the audit requiring adjusting journal entries to correct the final financial statements. It appears these errors were primarily caused by the trial balance being prepared from data that was not always complete. The more significant entries identified include:  Adjustments to record assets not properly capitalized in the Launch Pointe Fund (approximately $19 million) and the City General Fixed Asset Fund (approximately $13.4 million).  Current year and prior period adjustments to record accumulated depreciation related to the assets previously mentioned in the Launch Pointe Fund (approximately $1.5 million) and the City General Fixed Asset Fund (approximately $562,000).  Adjustment to record unavailable revenues instead of revenues for grant programs (approximately $6.4 million) and for Prop 65 fees (approximately $1.1 million) for cash receipts that were not received within the revenue recognition period. Effect or Potential Effect of Condition: Unavailable Revenues: Revenues would have been overstated as of June 30, 2022. Capital Assets: Assets were overstated at FYE 2021 and expenses were understated. Assets would have been further overstated at FY 2022 and expenses would have been further understated. Recommendation: The City should include in their year-end close process a review of capital assets not being depreciate to ensure they have not been placed in service. In addition, the City should evaluate whether revenues were collected within the availability period to ensure proper revenue recognition. Client Response: Thank you for your review and recommendation of putting in place formalized year end close procedures. The City does have formalized year end close procedures for unavailable revenue and capitalization of assets; however, perhaps in these instances for the year ending 06-30-2022, our procedures need some details added to our list as well as additional instructional notes to help close the gap to mitigate errors.