Staff Report
PREPARED BY: STEPHEN CONWAY
Finance Director
110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 02/7/2017
ITEM NO: 7
DATE: FEBRUARY 2, 2017
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE
FISCAL YEAR ENDED JUNE 30, 2016 AS RECOMMENDED BY THE COUNCIL
FINANCE COMMITTEE
RECOMMENDATION:
Accept the Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30,
2016 as recommended by the Council Finance Committee.
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 2015/16 audit was performed by Chavan & Associates, LLP
CPA’s, 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 auditors
conducted an audit accordance with Generally Accepted Auditing Standards (1994 Revision),
issued by the Comptroller General of the United States. These standards require that they plan
and perform the audits to obtain reasonable assurances as to whether the financial statements
are free of material misstatement.
Staff from both the Town and Chavan Associates, LLP, met with the Council Finance Committee
on Monday, January 23, 2017 for a review of the Fiscal Year (FY) 2015/16 CAFR. The Committee
was advised by staff that the audited statemen ts for the year ended June 30, 2016 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 the Town
PAGE 2 OF 6
SUBJECT: ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL
YEAR ENDED JUNE 30, 2016 AS RECOMMENDED BY THE COUNCIL FINANCE
COMMITTEE
DATE: FEBRUARY 2, 2017
S:\COUNCIL REPORTS\2017\02-07-17\CAFR\FY 2015-16 CAFR Staff Report FINAL.docx 2/2/2017 3:24 PM
BACKGROUND (cont’d):
Council to accept the CAFR for the fiscal year ended June 30, 2016 subject to a second review
and recalculation of the Town’s net pension liability.
Public comments submitted to the Council Finance Committee are contained in Attachment 2.
Staff and the Town’s auditor verbally provided the responses to the Committee at its meeting.
Additional information is contained in this report which also addresse s issues raised by the
public; however, the public’s requested reconciliations are not required as explained to the
Council Finance Committee.
The CAFR is a critically important document in that it is reviewed by the credit rating agencies
annually and the financial data gleaned from this document is one of the primary reasons for
the high ratings the Town is currently enjoying. In 2016 Moody’s rating service upgraded the
Town’s credit rating from Aa1 to Aaa. Moody’s press release in August 30, 2016 made the
following comment: “The credit position for Los Gatos is extremely strong, and its Aaa rating is
well above the median rating of Aa3 for cities nationwide. Key credit factors include a superior
socioeconomic profile with a substantial tax base, and a very healthy financial position. The
rating also incorporates a sizable pension burden with an exceptionally low debt liability.”
DISCUSSION:
Revised Net Pension Liability
As mentioned above, the Finance Committee requested another review of the Town’s net
pension liability calculated for June 30, 2016 by the Town and its independent auditor. Because
of the complexity of calculating the Town’s net pension liability to comply with the
requirements of Governmental Accounting Standards Board Statement # 6 8 (Accounting and
Financial Reporting for Pensions) and based on feedback from the Council Finance Committee
and public comments received from the community, the Town contracted with the actuarial
consulting firm Bartel and Associates to confirm or if necessary modify the calculation of net
pension liability.
Bartel and Associates reviewed the calculations and issued a report (Attachment 3) to the Town
and its auditor recommending changes to the calculation of the net pension liability , which
have been incorporated into the final CAFR report. Per the Bartel report, which focused on the
liability calculated for the Safety pooled plan , the net pension liability presented on the
Statement of Net Position has been reduced from $37,651,871 to $33,382,870. This reduction
of pension liability increases the Town’s net position presented on the Statement of Net
Position from $109,663,676 to $112,514,506 (see page 29 of Attachment 1). A reduction was
PAGE 3 OF 6
SUBJECT: ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL
YEAR ENDED JUNE 30, 2016 AS RECOMMENDED BY THE COUNCIL FINANCE
COMMITTEE
DATE: FEBRUARY 2, 2017
S:\COUNCIL REPORTS\2017\02-07-17\CAFR\FY 2015-16 CAFR Staff Report FINAL.docx 2/2/2017 3:24 PM
DISCUSSION (cont’d):
also made to the pension expense for the year as presented on the Statement of Activities
(page 30 of Attachment 1), the reductions affecting only the amounts shown as expense for
public safety. The reduction was made to agree to the revised liability amount reported for the
Town’s safety pension plan’s proportionate share of plan assets and liabilities as proscribed by
the GASB 68 implementation guide and Bartel’s recalculations. There were also changes made
to adjust the disclosures on pensions (footnote 9 in the CAFR, beginning on page 69 of
Attachment 1) to agree to the revised and corrected amounts per the Bartel report.
Bartel and Associates recommended approach to the calculation followed the suggested
methods and journal entries found in the GASB 68 Implementation Guide for Public Agency
Cost-Sharing Multiple Employer Defined Benefit Pension Plans. The Implementation Guide
identifies preferred methods for allocating pooled amounts using proportionate shares, which
differs from those used by CalPERS in its GASB 68 Valuation Accountability reports. Previously,
the Town and its auditor followed the allocation methodology similar to that used by CalPERS,
which was also allowed by GASB 68 but was not as widely used by local governments in
California. Bartel has prepared similar calculations for approximately 99 California cities and
has used this standard methodology for all of its California government clients.
The Council Finance Committee received public testimony requesting a reconciliation of the
Town’s safety pooled plan similar to that presented in the footnote for the miscellaneous
employees non-pooled plan (page 71 of Attachment 1). Staff advised it would attempt to add a
similar disclosure in the footnotes for the safety pooled plan. Bartel and Associates advised
staff and the auditor that because of the nature of the CALPERS pooled plans, using different
bases for allocations of proportionate pool shares of assets and liabilities (such as age and
payroll), that such reconciliation is not practically feasible and would be cost prohibitive. Bartel
also advised that such reconciliation is not required for pooled plans under GASB 68. Bartel and
Associates have prepared these calculations for over 99 California cities and were unaware of
any city or government that provides such reconciliation for pooled plans. For these reasons,
no reconciliation of the pooled plan is included in the report.
Financial Section/Audit Opinion
The auditors have given the Town’s financial statements a “clean” audit opinion for the year
ended June 30, 2016, (see the fourth paragraph of the auditor’s opinion on page 11 of
Attachment 1) giving reasonable assurance that the financial statements are “free of material
misstatement.” The Council Finance Committee was advised by the independent auditor that a
control deficiency was noted during the audit period related to the temporary delay of timely
bank reconciliations due to a staff vacancy leading to an error on the cash balance being under
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SUBJECT: ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL
YEAR ENDED JUNE 30, 2016 AS RECOMMENDED BY THE COUNCIL FINANCE
COMMITTEE
DATE: FEBRUARY 2, 2017
S:\COUNCIL REPORTS\2017\02-07-17\CAFR\FY 2015-16 CAFR Staff Report FINAL.docx 2/2/2017 3:24 PM
DISCUSSION (cont’d):
reported on the Town’s quarterly investment reports for the quarters ending March and June
2016. The Finance Committee was advised that all Town bank reconciliations are now up to
date and fully reconciled through December 31, 2016.
Statement of Net Position
The Statement of Net Position (page 29 of Attachment 1) may serve as a useful indicator of a
government’s financial position. The Town had net assets of $112.5 million at fiscal year end as
compared to $106.5 million the prior year, an overall increase of $6 million for the fiscal year.
The Town’s Net position increased due primarily to General Fund revenues above expenditures
of approximately $3.3 million offset by use of governmental funds for capital expenditures in
the Town’s General Fund Appropriated Reserve (GFAR) capital projects fund.
The largest portion of the net assets, $93.4 million, represents the Town’s investment in its
capital assets and infrastructure. Restricted assets of $6.4 million are resources that are subject
to external restrictions on how they may be used. The remaining $12.7 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 14 through 25)
Page 15 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, 2015 and June 30, 2016. Information is also presented on the adopted
General Fund budget and any significant budget adjustments made during the FY 2015/16 fiscal
year (page 22).
Basic Financial Statements (pages 26 through 80, 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, Fiduciary Funds
(Library Trust and Parking Assessment District), and the Private Purpose Trust Funds
(Redevelopment Successor Agency). An important item for consideration is the General Fund
Budget and Actual presented on page 35. Presented on this statement is a $5.5 million excess
of revenues over expenditures for the fiscal year. This result for the fiscal year provided a
source of funding to restore the reserve for compensated absences to fully funded status and
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SUBJECT: ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL
YEAR ENDED JUNE 30, 2016 AS RECOMMENDED BY THE COUNCIL FINANCE
COMMITTEE
DATE: FEBRUARY 2, 2017
S:\COUNCIL REPORTS\2017\02-07-17\CAFR\FY 2015-16 CAFR Staff Report FINAL.docx 2/2/2017 3:24 PM
DISCUSSION (cont’d):
the Budget Stabilization reserve equal to the prior year level of $6.6 million, leaving
approximately $2.6 million in funds available from FY 2015/16 to fund the proposed Strategic
Priorities reserve for Council consideration in late January 2017.
The footnotes section provides details on significant items such as the Town’s cash and
investments (Note 2 beginning on page 59), its long term obligations (Certificates of
Participation) related to bonded debt (Note 6 page 65), the net pension liability is discussed in
for both the Town’s miscellaneous and safety pension plans (Note 9 page 69), followed by a
discussion of the Town’s other post-employment benefit plan (Note 10 page 75).
Required Supplementary Information (pages 82 through 86)
The Schedules of Pension Plan Contributions are provided in this section.
DISCUSSION (cont’d):
Supplementary Information (pages 88 through 109)
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 112 through 128)
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, full -time
equivalent history in terms of personnel, 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, 2016
financial activity for the Town of Los Gatos.
FISCAL IMPACT:
There is no fiscal impact associated with the Town Council’s acceptance of the CAFR.
PAGE 6 OF 6
SUBJECT: ACCEPT THE COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL
YEAR ENDED JUNE 30, 2016 AS RECOMMENDED BY THE COUNCIL FINANCE
COMMITTEE
DATE: FEBRUARY 2, 2017
S:\COUNCIL REPORTS\2017\02-07-17\CAFR\FY 2015-16 CAFR Staff Report FINAL.docx 2/2/2017 3:24 PM
Attachments:
1. Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2016.
2. Public comment provided to the Finance Committee
3. Bartel Report
4. Additional public comment received after the Finance Committee meeting