Staff Report
PREPARED BY: STEPHEN CONWAY
Finance Director
Reviewed by: Town Manager, Assistant Town Manager, and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 12/19/2018
ITEM NO: 6
DATE: DECEMBER 13, 2018
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR
ENDED JUNE 30, 2018
A. ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR
THE FISCAL YEAR ENDED JUNE 30, 2018; AND
B. APPROVE A RESOLUTION CONFIRMING JUNE 30,2018 FUND
BALANCES IN ACCORDANCE WITH FISCAL YEAR 2017/18 FINAL
AUDIT AND THE TOWN COUNCIL GENERAL FUND RESERVE POLICY
RECOMMENDATION:
Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2018
1. Accept the Comprehensive Annual Financial Report for the fiscal year ended June 30,
2018; and
2. Approve a resolution confirming June 30,2018 fund balances in accordance with fiscal
year 2017/18 final audit and the Town Council General Fund Reserve Policy.
BACKGROUND:
The Town contracts with an independent certified public accountant to examine the books,
records, inventories, and reports of all officers and employees who receive, handle, or disburse
public funds each fiscal year. The FY 2017/18 audit was performed by Badawi Associates, an
experienced firm specializing in audit services for California public agencies. The firm also
prepared the CAFR for the Town of Los Gatos (see Attachment 1). The Town’s auditor
conducted an audit in accordance with Generally Accepted Auditing Standards (1994 Revision),
issued by the Comptroller General of the United States. These st andards require that they plan
and perform the audits to obtain reasonable assurances as to whether the financial statements
are free of material misstatement.
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SUBJECT: COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED
JUNE 30, 2018
DATE: DECEMBER 13, 2018
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BACKGROUND (continued):
Staff from both the Town and Badawi Associates met with the Council Finance Committee on
Monday, December 10, 2018 for a review of the draft Fiscal Year (FY) 2017/18 CAFR. The
Committee was advised by staff and Mr. Badawi that the audited statements for the year
ended June 30, 2018 received an unqualified or “clean” opinion for the year, meaning the
financial statements are fairly presented and contain no material misstatements. At this
meeting, the Council Finance Committee heard public testimony, reviewed, discussed, and
recommended to refer the CAFR for the fiscal year ended June 30, 2018 to the Town Council.
The redline version of the attached CAFR represents adjustments to final typographical and
footing error corrections, and the addition of clarification language recommended by the
Committee members.
DISCUSSION:
The basic structure and contents of a CAFR are set by authoritative accounting and financial
reporting standards. Most state and local governments are required by law to issue basic
audited financial statements and some legally require a CAFR as well. Though a CAFR is not
required under California law, many local governments like the Town of Los Gatos issue a CAFR
because it represents best practice in government finance. The Town has prepared its CAFR to
meet the technical reporting standards and contents as set forth by the Governmental
Accounting Standards Board (GASB).
The information contained in the CAFR provides detailed financial information which the Los
Gatos community and others can use to better understand the fiscal standing of the Town. In
addition to the CAFR, the Town’s website provides additional information available to the
public to review the Town’s financial information including the Town budget. The financial
information contained in the document is reviewed by the credit rating agencies annually and
used to affix a credit rating for the Towns outstanding debt obligations. In 2018, Moody’s
rating service affirmed the Town’s general credit rating of Aaa. The Aaa rating is well above the
median rating of Aa3 for similar sized cities nationwide.
At the meeting, Finance staff presented to the Town Council Finance Committee the draft
audited Comprehensive Annual Financial Report (CAFR) dated June 30, 2018. Town staff and
the auditor discussed the audited financial results with the Committee focusing on the
following:
Financial Section. The auditor gave the Town’s financial statements a “clean” audit opinion for
the year ended June 30, 2018 (see the fourth paragraph of the auditor’s opinion on Page 13 of
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SUBJECT: COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED
JUNE 30, 2018
DATE: DECEMBER 13, 2018
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DISCUSSION (continued):
the Financial Section of the report) giving reasonable assurance that the financial statements
are fairly presented and “free of material misstatement.”.
Statement of Net Position. The Statement of Net Position (page 34) serves as a useful indicator
of a government’s financial position. The Town had net assets of $109.2 million at fiscal year
end as compared to $117.0 million the prior year, an overall decrease of 6.6% for the fiscal
year. The Town’s net position decreased by $7.8 million during the fiscal year largely as a result
of the beginning FY 2017/18 net position being restated and reduced by approximately $8.5
million as required by the implementation of GASB 75 regarding the financial reporting of other
post-employment benefits (OPEB). Prior to the implementation of GASB 75 , the Town was only
required to report its Net OPEB Obligation (NOO) in the notes section of its CAFR.
The largest portion of the net assets, $102.1 million, represents the Town’s investment in its
capital assets and infrastructure. Restricted assets of $7.0 million are resources that are subject
to external restrictions on how they may be used. The remaining $0.2 million in net assets are
unrestricted legally, but have been designated as to use in various reserve accounts or held in
Internal Service Funds. Again, this is an overall financial position indicator and is not the
amount of current resources available for budgetary purposes.
Management’s Discussion and Analysis (MD&A) (pages 18 through 29). Page 18 of the CAFR
begins the MD&A section of the report wherein summaries are presented for the Town on an
entity-wide basis and fund type basis. Information is provided in this section with a year-to-
year view, explaining how fund balances have changed between fiscal years ending June 30,
2017 and June 30, 2018. Information is also presented on the adopted General Fund budget
and any significant budget adjustments made during FY 2017/18 (page 25).
Basic Financial Statements (pages 31 through 89, including footnotes). Located within this
section are basic financial statements, including the “entity-wide” Statement of Net Position
and Statement of Activities, financial statements for the fund types including Governmental
Funds (such as the General Fund), Proprietary Funds, and the Private Purpose Trust Funds
(Redevelopment Successor Agency). An important item for consideration is the General Fund
Budget and Actual presented on page 42. Presented in this statement is a $4.2 million excess of
revenues over expenditures for the fiscal year. This result for the fiscal year provided a source
to fund the Budget Stabilization and Catastrophic Reserves at 25% of operating expenditures,
provide an additional $690,000 of funding to the Pension/OPEB Reserve, and allocate $3.7
million to the Capital Projects Reserve per the Town’s adopted General Fund Reserve Policy.
The footnotes section provides details on significant items such as the Town’s cash and
investments (Note 2 beginning on page 63), its long-term obligations (Certificates of
Participation) related to bonded debt (Note 6 page 69), the net pension liability for both the
Town’s miscellaneous and safety pension plans (Note 9 page 73), and a discussion of the
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SUBJECT: COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED
JUNE 30, 2018
DATE: DECEMBER 13, 2018
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DISCUSSION (continued):
Town’s other post-employment benefit plan (Note 10 page 79).
Required Supplementary Information (pages 92 through 96). The Schedules of Pension Plan
Contributions are provided in this section.
Supplementary Information (pages 98 through 113). This section provides budget to actual
information for “non-major” funds which represent less than 10% of the Town’s total
assets/liabilities/revenues or expenditures.
Statistical Section (pages 117 through 133). This section presents demographic statistics and
ten-year historical financial data for the Town, including information on assessed valuations,
fund balances, debt, property tax rates, personnel (full-time equivalent) history, principle
employers, and other financial and demographic disclosures.
CONCLUSION:
As noted in the auditor’s opinion, the CAFR fairly presents the fiscal year ending June 30, 201 8
financial activity for the Town of Los Gatos.
FISCAL IMPACT:
There is no fiscal impact to provide recommendation to the Town Council for this report.
Attachments:
1. Draft Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2018
2. Fund Balance Resolution Establishing June 30, 2018 Fund Balances
3. Independent Auditor Presentation to the Council Finance Committee
4. Public Comments received by 11:00 a.m. December 13, 2018