Agenda Item Wording:
title
Receive the Annual Comprehensive Financial Report (ACFR) for the City of Visalia for the 2020-21 fiscal year.
body
Deadline for Action: 1/18/2022
Submitting Department: Finance and Technology Services
Contact Name and Phone Number: Kari Williams 713-4298
Department Recommendation:
It is recommended that the City Council acknowledges receipt of the ACFR for the year ended June 30, 2021 and provide comments as appropriate.
Background Discussion:
The attached Fiscal Year (FY) 2020-21 ACFR represents the City’s financial, operational, and current economic condition for the fiscal year ending June 30, 2021. The City’s financial statements for this period have been audited by The PUN Group, Certified Public Accountants, the City’s independent auditing firm. Their Independent Auditors Report has been incorporated into the ACFR document. This item is presented to the City Council each year for review and acknowledgement.
State law requires the City of Visalia to prepare a complete set of audited financial statements. The attached 2020-21 ACFR fulfills this requirement.
The City’s Independent Auditors, The PUN Group, have audited the City’s financial statements prepared by Finance staff for the fiscal year ended June 30, 2021 and have provided an unqualified (clean) opinion. An unqualified opinion concludes that the ACFR presents 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; and the respective changes in financial position.
The ACFR is prepared annually in accordance with generally accepted accounting principles (GAAP) and reporting standards established by the national Governmental Accounting Standards Board (GASB), as verified during the independent auditor’s examination. The June 30, 2021 ACFR continues to comply with the GASB reporting standards.
The financial statement information and audit opinion, as well as additional narrative and statistical information, is presented within the ACFR. Below is a listing of the different sections in the report:
• Transmittal Letter by the City Manager and Finance Director
• Independent Auditor’s Report
• Management’s Discussion and Analysis
• Government-wide Financial Statements
• Fund Financial Statements
• Notes to Basic Financial Statements
• Required Supplementary Information
• Supplementary Information: Combining Statements and Budgetary Comparison Schedules
• Statistical Section
• Compliance Section
The City issues copies of its ACFR to financial institutions and credit rating agencies for use in evaluating the City’s financial position, as well as to the City Council, City Management, and interested citizens. The City’s ACFR will also be available on the City’s web site.
The Government Finance Officers Association of the United States and Canada (GFOA) awards a Certificate of Achievement for Excellence in Financial Reporting which is only valid for a period of one year. The City recently received this award for the prior fiscal year (2019-20) and has now received the award for excellence in financial reporting for 35 consecutive years. The current report has been submitted and is under consideration for award. City staff believes the current report continues to exceed financial reporting standards.
New Reporting Requirements
The following Governmental Accounting Standards Board (GASB) Statements have been implemented in the current financial statements:
GASB Statement No. 84, Fiduciary Activities.
The objective of the Statement is to improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported. The City has implemented this statement for the June 30, 2021 year end.
GASB Statement No. 90, Majority Equity Interests.
The primary objectives of this statement are to improve the consistency and comparability of reporting a government’s majority equity interest in a legally separate organization and to improve the relevance of financial statement information for certain component units. The provisions of this statement are effective for fiscal year 2020-21. There was no effect on the financial statements as a result of implementing this statement.
GASB Statement No. 93, Replacement of Interbank Offered Rates (IBOR)
objective of this statement is to address those and other accounting and financial reporting implications that result from the replacement of an IBOR. The provisions of this statement are effective for fiscal year 2020-21. There was no effect on the financial statements as a result of implementing this statement.
GASB Statement No. 98, The Annual Comprehensive Financial Report
This Statement establishes the term annual comprehensive financial report and its acronym ACFR. That new term and acronym replace instances of comprehensive annual financial report and its acronym in generally accepted accounting principles for state and local governments. Those provision are effective for fiscal years ending after December 15, 2021. The City has elected early implementation. Application of this statement did not have a material effect on the City’s financial statements for the fiscal year ending June 30, 2021.
Financial Statements
The financial statements are separated into Governmental and Enterprise (Business) type funds. Governmental Funds and Enterprise funds have different methods of accounting. Table 1 - Governmental and Enterprise Funds shows these differences.
Table 1- Governmental and Enterprise Funds
Governmental Funds
Governmental funds are prepared on the modified accrual basis of accounting, which means they measure only current financial resources and uses. This basis focuses on (1) how cash and other financial assets can be readily converted to available resources and (2) the balances left at year-end that are available for spending. Capital assets and other long-lived assets along with long-term liabilities are not presented in the Governmental Fund Financial Statements. The City uses governmental funds to account for the General Fund (which includes the Emergency Reserve Fund), Measure N, Housing and Community Grants, Housing Successor, American Rescue Plan, as well as many other special revenue and capital project funds such as Measure T and Measure R.
2020-21 ACFR Summary
Surprisingly, fiscal year 2020-21 saw significant growth in all revenue categories for Visalia despite the restrictions and impact on the economy from the continuation of the COVID-19 pandemic. We can only surmise that the record breaking stimulus packages issued by the Federal and State government, combined with the gradual reopening in the early part of 2021 from the historic lockdowns, contributed to this growth. Nationally, for June 2021, Gross Domestic Product (GDP) came in at 6.7% reflecting the continued economic recovery, reopening of establishments, and continued government stimulus support. GDP refers to a country’s economic growth rate. A 2-3% GDP is generally considered a healthy GDP. The national unemployment rate as of June 2021 was at 5.9%, a very good improvement compared to the 14.7% we saw in April 2020. The Federal Reserve likes to see a natural unemployment rate of 4%.
Fiscal year 2020-21 ended the year with an overall increase of $7.6 million in the total economic-sensitive revenue category for the General Fund as shown in Table 2 - Economic Sensitive Revenues.
Table 2 - GF Economic Sensitive Revenues
Sales Tax grew at 14% for fiscal year 2020-21, partially due to the Federal stimulus money issued which allowed consumers to continue to spend as well as the reopening of establishments. The main areas of the growth in Sales Tax for Visalia were in General Retail (department stores, apparel stores) which grew $1.5 million; Business to Business (office equipment, industry) which grew $1.4 million; and Transportation (auto sales, service stations) which grew $.8 million. Property Tax maintained its growth trend increasing 6% as existing houses sales, new development, and property values increased in Visalia. The ending of the shelter in place and reopening of things in California really was evident in Transient Occupancy Tax (TOT) revenue as fiscal year 2020-21 had an increase of 22% as compared to last year. Fiscal year 2019-20 had a large decrease in revenue due to the COVID-19 travel restrictions and historic shutdowns imposed by the State of California. If fiscal year 2019-20 would have had normal growth levels, this year’s growth in TOT would be an estimated 5%. Franchise Fee revenue had an increase of 5% in fiscal year 2020-21 mainly due to increases in gas and electric revenue. Business License revenue increased 22% as compared to last fiscal year as several businesses remitted current and prior year delinquencies in order to bring their accounts current in fiscal year 2020-21. Businesses had to have a current business license which meant delinquencies had to be paid in order to qualify for various COVID-19 relief programs.
Visalia has 12,505 licensed businesses operating in the City, an increase of 190 as compared to last year. These businesses include private manufacturing, technology research, retail and service businesses, educational services, healthcare and social assistance, consulting, arts and entertainment, hospitality services, along with non-profit institutions.
Fiscal year 2020-21 ended with strong growth in the main General Fund revenue categories of Sales Tax, Property Tax, and Other Taxes, which consists of Transient Occupancy Tax and Franchise Fee revenue. The COVID-19 pandemic continued to affect the economy across the state and nation for most of the fiscal year, however, with continued stimulus support from the Federal and State government and the gradual reopening from the historic lockdowns, consumers continued to spend the extra funds available to them and returned to a fraction of their normal life with travel, retail, and restaurant patronage. For most of the fiscal year, staffing levels were reduced where needed and staff continued to monitor expenses. With careful management, the City was able to continue to provide limited-service enhancements, infrastructure improvements, and increases in employee compensation. As shown in Table 3 - General Fund Statement of Revenues & Expenditures, the General Fund ended the year with a change in fund balance and surplus of $13.02 million. The City received Coronavirus Relief Funds (CARES Act) of $1.7 million which helped offset expenses and contributed to the General Fund surplus. The large surplus is also due to vacancies throughout the City, especially in Public Safety, where a large number of vacancies for fiscal year 2020-21 were actively being recruited for.
Table 3 - General Fund & Emergency Reserve Summary
(in millions)
The General Fund revenues came in over expenditures by $16.9 million. The Expenditures category included capital projects which totaled $1.6 million. The category Other Financing Sources and Uses of $3.9 million includes transfers out for debt payments of $2.4 million (Convention Center $1.1 million, Animal Control $0.6 million, 2015 COP $0.6 million and VPFA 2014 Refunding COP $0.1 million) and subsidies for Enterprise Funds operations of $1.9 million (Animal Control $0.9 million, Convention Center $0.7 million, and Baseball $0.3 million).
Once you take Revenues minus Expenditures less Other Financing Uses, the General Fund had a change in fund balance/surplus of $12.6 million. Of the surplus, $0.4 million was transferred to the Emergency Reserve Fund and $12.2 million was transferred to the Civic Center Reserve Fund as per the current Council Policy on surpluses. The current General Fund emergency reserves replenishment policy states that any revenues in excess of actual expenditures would continue to be deposited in the emergency reserve to maintain the reserve at 25% of operating expenditures and then all remaining surplus is to be deposited into the Civic Center Reserve Fund.
This is the eighth consecutive year that the General Fund has ended the year with a surplus. However, history has shown that the balance between revenues and expenditures in the General Fund can be volatile from year to year. The City must continue to monitor increasing operating costs (i.e. rising pension costs, health, technology), the economy for a possible downturn (recession) due to the ending of COVID-19 stimulus packages and rising inflation, and continue to seek new opportunities to increase tax base revenues to maintain fiscal sustainability.
The General Fund’s fund balance (including the emergency reserve) is $53.1 million at fiscal year-end. It is important to remember that fund balance is not cash. Fund balance is the amount left after liabilities are subtracted from assets. A positive fund balance means that there are more assets than liabilities; a negative fund balance means just the opposite. The General Fund’s fund balance is split into the following categories (2020-21 ACFR pg 82):
Ø Nonspendable Fund Balance - $3.5 million for items such prepaids, deposits, supplies, long term receivables and advances to other funds.
Ø Restricted Fund Balance - There are currently no restricted fund balances.
Ø Committed Fund Balance - $16.6 million for Council authorized encumbrances (contracts awarded that are not paid out) and specific purposes such as the Emergency Reserve (currently at $16.4 million, 25% of the General Fund’s operating costs).
Ø Assigned Fund Balance - $27.6 million for advances to custodial funds, capital projects that have been budgeted but not started, CalPERS unfunded liability payment for FY 2021-22 and the Successor Agency Note.
Ø Unassigned Fund Balance - $5.4 million is primarily used for three reasons:
1. Grants - To temporarily advance one time expenditures which are awaiting grant funds. The City receives many grants, and typically, funds that have grants will need a cash advance due to the timing of the grant reimbursements and the crossing of fiscal years. Grant advances are typically paid back within 1-2 years.
2. Impact Fees - To advance money in order to keep moving forward on large projects. When advances happen, the amount of the advance is transferred out of unassigned fund balance to assigned fund balance. When the advances are paid back to the general fund those amounts are transferred back to the unassigned fund balance. If the money is not available to advance from the unassigned funds then the money would need to come from the committed funds that have been set aside for emergency reserves or capital projects. This is not ideal because this could postpone projects or cause there to not be enough in reserves for when it is needed. Advances for capital projects are typically paid back over larger periods of time (5-10 years). For example, the fire impact fees assisted with the construction of stations 55 and received an advance that was recently paid back. Also, the police impact fees are projected to need an advance of $1.5 million to make the VECC debt payments for the life of the debt which will be fully paid off in 2029.
3. Prior Year Adjustments - The City financial statements are a summary of the year and are comprised of many numbers, categories, funds, objects and task numbers. As staff continues to audit numbers and compare to prior years, accounting errors are found and need to be adjusted. For example, expenditures for FY 2020-21 may have been coded to FY 2021-22 and are found when reviewing FY 2021-22. In addition, the Financials include receivables that may be written off due to bad debt or fees waived once they have complied with City regulations. If the Unassigned Fund Balance category did not exist, these adjustments would need to come from the committed funds that have been set aside for emergency reserves or capital projects.
4. However, these funds may be considered a part of the Emergency Reserves and at the end of the fiscal year, at Council’s discretion, can be added to the Emergency Reserves or any other designation. Staff does not recommend depleting this category because, in the end, using committed funds that have been set aside for emergency reserves or capital projects is not ideal for advancing for grant reimbursements, capital projects, and prior year adjustments. This would cause the Emergency Reserves or any other fund to increase and decrease as accounting adjustments are made and money is borrowed leaving uncertainty in the amount available at any given time.
Emergency Reserves for FY 2020-21 meets the policy level of 25% or $16.4 million as shown in Table 4 - General Fund Emergency Reserves. A General Fund surplus transfer of $0.4 million and interest earnings of $65K increased the Emergency Reserves to $16.4 million (25% of operating expenditures).
Table 4 - General Fund Emergency Reserves
Other Governmental Funds
• The Measure N (FY 2020-21 ACFR: page 30 & 34) fund is used to account for the half-cent sales tax override approved by the citizens of Visalia in November 2016 which funds increased City essential services such as Police, Fire, Streets and Parks. Measure N saw an overall increase in revenues of $2.6 million. The increase includes sales tax of $3.0 million offset by a decrease in investment related activity of $0.5 million due to the annual adjustment for fair market value allocation and investment gain or loss. The Measure N Fund’s fund balance increased $6.4 million to $29.7 million as a result of revenues exceeding expenditures for the year. Measure N Fund’s fund balance increased $6.4 million from $23.3 to $29.7 million as a result of revenues exceeding expenditures for the year.
• The Housing & Community Grants (FY 2020-21 ACFR: page 30 & 34) This fund accounts for the Community Development Block Grants (CDBG), Home Investment Partnership Program (HOME) and Neighborhood Stabilization Program (NSP) Grant funds. Also included are the Substandard Housing and Vehicle Abatement funds. The fund’s assets include $12.7 million in notes and loans receivable. The notes and loans receivable are for housing assistance through the various grant programs as well as past rental rehabilitation loans. Expenditures exceeded revenues by $0.1 million for the year. The net change in fund balance increased $1.0 million from last fiscal year to $15.3 million.
• The Housing Successor (FY 2020-21 ACFR: page 31 & 35) was part of the former Redevelopment Agency. The principal assets of the housing successor are notes from past loans from the City to receiving parties for affordable housing projects. The majority of these notes will be forgiven if the receiving party maintains the projects built with those monies at affordable levels for 45 years for single family units and 55 years for multi-family units. Revenues of $0.5 million included residual payments and regular scheduled note payments. This money is used for programs as intended or used for future programs or projects.
The Housing Successor will receive two types of limited payments in the future. One of the payments will be for a loan given from the Low/Mod funds to Redevelopment from past State take-aways of $1.2 million to be paid back based on availability of residual receipts. There were $320K in residual receipts for FY 20/21. The other limited revenue source will be 20% of any loan repayments the City receives for past advances made to the former Redevelopment Agency by the General Fund until those advances are paid off. Otherwise, the Housing Successor has no significant ongoing revenues.
• The American Rescue Plan fund (FY 2020-21 ACFR: page 31 & 35) is used to account for the American Rescue Plan Act federal grant funding. Monies can only be used according to the plan guidelines. In June of 2021 this fund received $14.7 million in grant funding and earned $3K in interest.
• All Other Governmental Funds (FY 2020-21 ACFR: page 31 & 35), (referred to as Non-Major Funds, such as Special Revenue Funds and Capital Project Funds) are not presented separately in the Basic Financial Statements but are individually presented in the Supplemental Information Section. Combined they received $46.4 million in revenue and have a combined Fund Balance at year-end of $125.4 million. The larger funds in this category include Special Service Districts at $10.8 million, Measure T Fire at $5.9 million, Measure R local at $5.5 million, Highway Users at $8.1 million, Government Facilities Impact Fee at $7.0 million, Transportation $15.5 million and Civic Center Fund at $32.7 million. These are restricted funds that will be used for future capital projects.
Business Type Funds
Enterprise Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for the Water Reclamation Facility, Storm Sewer Maintenance, Solid Waste, Transit, which are considered to be Major Funds of the City and Convention Center, Airport, Building Safety, Animal Control and Baseball which are considered to be Non-Major Funds of the City.
Enterprise funds also recognize the net pension liability as required by GASB 68. As a result, annual adjustments are required to adjust to the net pension liability being reported by CalPers for our employee retirement plans. Changes in the net pension liability occur as a result of annual actuarial valuations performed by CalPers on our plans, investment earnings for the year, and changes to pension formula assumptions made by CalPers. These annual GASB 68 adjustments to the net pension liability affect the Salaries, Wages and Employee Benefits line item reported under Operating Expenses (pages 42 and 43). Below is a brief summary of changes for each Enterprise Fund's revenues and expenditures. These summaries are comparing each Fund to last fiscal year.
• Water Reclamation Facility (FY 2020-21 ACFR: page 40 & 42) Operating revenues increased $0.3 million due to a combination of increases in industrial fees of $0.4 million, front footage fees of $0.2 million, user charges of $0.3 million, treatment connection fees of $0.2 million and septage receiving fees of $0.1 million. These increases were offset by decreases in commercial fees of $0.1 million and residential fees of $0.9 million which are mainly due to a change in utility bill due dates for all accounts to the 30th of the month which took place in FY19/20.
Operating expenses increased by $0.7 million mainly due to increases in utilities of $0.1 million, chemical expenses of $0.2 million, capital related activity of $1.1 million. These increases were offset by decreases in maintenance and operating costs of in equipment supply and maintenance repair of $0.4 million, instrument repair/replacement of $0.1 million, allocated expenses and services provided of $0.1 million and salaries and benefits of $0.2 million due to vacancies
• Storm Sewer Maintenance (FY 2020-21 ACFR: page 40 & 42) Operating revenues had a slight increase of $39K.
Operating expenses increased by $0.6 million due to increases in salaries and benefits of $47K due to wage and benefit increases, deprecation of $61K and capital related activity of $0.5 million.
• Solid Waste (FY 2020-21 ACFR: page 40 & 42) Operating revenues increased $1.2 million mainly due to increases in single family fee revenue of $0.3 million, multifamily fee revenue of $0.1 million, commercial recycling fee revenue of $0.1 million and commercial fee revenue of $0.8 million. These increases were offset by a decrease in CNG fuel rebates of $0.2 million due to the timing of receiving the fuel rebate.
Operating expenses increased by $0.8 million mainly due to an increase in salaries and benefits of $0.1 million due to wage and benefit increases and capital related activity of $1.2 million. These increases were offset by decreases in maintenance and operations costs for allocated expenses and services provided of $0.4 million
• Transit (FY 2020-21 ACFR: page 41 & 43) Operating revenues decreased $2.2 million from last year. Charges for services decreased $1.5 million as ridership fees were suspended due to the COVID-19 pandemic resulting in decreases in Sequoia shuttle ticket sales of $0.6 million, farebox sales of $0.3 million, ticket sales of $0.5 million and CNG sales of $0.3 million due to a timing issue of federal reimbursements. Operating grant revenue decreased $0.8 million due to a decrease in the current years operating expenses. The decreases were offset by an increase in carbon credits of $0.2 million.
Operating expenses decreased by $0.4 million mainly due to a decrease in maintenance and operations for allocated expenses and services provided of $0.3 million, contract bus services including cancellation of Sequoia shuttle bus service of $0.3 million, depreciation of $0.3 million and salaries and benefits $47K due to vacancies. These decreases were offset by an increase in capital related activity of $0.5 million.
• Convention Center (FY 2020-21 ACFR: page 40 & 42) Operating revenues decreased by $1.4 million and operating expenses decreased by $1.9 million mainly as a result of the facility shutdown due to the COVID-19 pandemic. These decreases were in salaries and benefits and operations. The state guidelines allowed for reopening of the Convention Center June 15, 2021.
• Airport (FY 2020-21 ACFR: page 40 & 42) Operating revenues increased by $0.2 million mainly due to increases in fuel sales of $111K, fuel flowage fees of $12K, FOB revenues of $24K, and hanger rentals of $36K. These increases were offset by decreases for “into plane” fuel sales of $34K and terminal rent of $8K.
Operating expenses decreased by $0.1 million mainly due to decreases in allocated expenses and services provided of $0.1 million and a decrease in salaries and benefits of $23K due to vacancies.
• Building Safety (FY 2020-21 ACFR: page 41 & 43) Operating revenues increased by $0.4 million mainly due to an increase in single family dwellings permits compared to prior years activity.
Operating expenses decreased by $0.1 million due to a decrease of salaries and benefits of $0.1 million due to vacancies and decreases in credit card usage fees of $25K and allocated expenses and services provided of $70K. These decreases are offset by an increase in capital related activity of $0.1 million.
• Animal Control (FY 2020-21 ACFR: page 41 & 43) Operating revenues increased by $0.1 million as a result of increased activity in services for Dinuba of $55K due to the timing of the revenue collected in the prior year, adding new services for Tulare of $29K, and administration and other fines of $47K. These increases were offset by lower kennel fees of $15K, facility shelter fees of $22K, and license fees of $10K.
Operating expenses decreased by $46K due to a decrease in salaries and benefits of $26K due to vacancies and a decrease in allocated expenses and services provided of $49K. These decreases were offset by an increase in bad debt expense of $21K and capital related activity of $10K.
• Baseball Fund (FY 2020-21 ACFR: page 41 & 43) There are no operating revenues for the Baseball fund due to the current contract with Fast Pitch Entertainment, LLC, the organization that runs the Rawhide Baseball team. Operating expenses had an increase of $0.1 million mainly due to the 1st year of the depreciation for the video scoreboard.
• Internal Service Funds (FY 2020-21 ACFR: pages 142-145) There are several funds designed to set aside resources to pay for replacement of vehicles and computers as well as insurance costs. Fiscal Year 2020-21 revenues exceeded expenditures by $1.5 million which leaves fund balances of $35.1 million. A majority of the change in net position was due to the Information Technology (IT) Fund and Vehicle Replacement Fund receiving assets from other funds to be replaced in future years. The IT Fund holds assets for the General Fund and charges depreciation to the General Fund divisions for the assets being used for future replacement. Asset contributions totaled $0.3 million for Fiscal Year 2020-21 which included vehicle replacements, computer replacements, equipment, and software.
There are three business funds that have Council authorized subsidies, the Convention Center ($0.7 million operations + $0.2 million capital set-aside + $1.1 million debt), Animal Control ($0.9 million operations + $0.6 million debt), and Baseball ($0.3 million) which are shown on the financial statements and notes as transfers. Subsidies are not paid back. All other funds receive an advance when revenues don’t cover operations. Advances are made from the General Fund which requires reimbursement and charges the investment rate plus 1%. All advances are shown in the ACFR on page 82.
Summary
The City’s finances continue to grow even with the continuing COVID-19 pandemic. Governmental Funds had a change in fund balance of $42.5 million, Emergency Reserves continue to be at the policy level of 25% of operating expenditures with a balance of $16.4 million, and the Business Type Funds (excluding the Internal Service Funds) had an overall change in net position of $20.8 million. In addition, fiscal year 2020/21 met the City Council budget goals of gradually rebuilding the organization by restoring resources, increasing funding levels for Capital Improvement Projects, increasing resources directed at maintaining City facilities, maintaining Emergency Reserves, and handling increasing pension costs.
Overall, the City is in a good financial condition that will help us withstand a future recession.
Fiscal Impact:
N/A
Prior Council Action: N/A
Other: N/A
Alternatives: N/A
Recommended Motion (and Alternative Motions if expected):
recommendation
I move to accept the Fiscal Year 2020-21 Annual Comprehensive Financial Report (ACFR).
end
Environmental Assessment Status: N/A
CEQA Review: N/A
Attachments: Annual Comprehensive Financial Report (ACFR) for Fiscal Year Ended June 30, 2021.