08 Staff Report - 2005/06 Comprehensive Annual Financial Report~rj N OF MEETING DATE: 3/19/2007
ITEM NO:
~o os COUNCIL/AGENCY AGENDA REPORT
S G AZ
DATE: MARCH 19, 2007
TO: MAYOR AND TOWN COUNCIL/
CHAIR AND MAMBERS OF THE REDEVELOPMENT AGENCY
FROM: DEBRA J. FIGONE, TOWN MANAGER/EXECUTIVE DIRECTO
SUBJECT: ACCEPT THE 2005/06 COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR)
AND MANAGEMENT LETTER
RECOMMENDATION:
Accept the 2005/06 Comprehensive Annual Financial Report (CAFR) and Management Letter.
BACKGROUND:
This CAFR presents the Town of Los Gatos and Town of Los Gatos Redevelopment Agency's financial
condition, results of operations and current economic condition, for the fiscal year ended June 30, 2006.
The 2006 CAFR received an unqualified opinion from C.G. Uhlenberg LLP, the Town's external
auditors. An unqualified opinion indicates the financial data of the Town is fairly presented according
to general accounting principles. Additionally, C.G. Uhlenberg LLP issued a Management Letter on
internal control structure to report on any material weaknesses in the Town's internal controls. A
material weakness is a significant deficiency which could lead to a material misstatement of the
financial statements. The auditor's report found the Town's internal control structure to have no
reportable material weaknesses.
DISCUSSION:
C.G. Uhlenberg LLP, the Town's auditors, conducted an audit in accordance with generally accepted
auditing standards and the standards for financial audits contained in the Government Audit 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 assurance as to whether the financial statements
are free of material misstatement.
PREPARED BY: STEPHEN D. CONWAY
Finance and Administrative S' ices Dir r
SDC:pg
C\Documents and Settings\GUngvariADesktop\Gitta\CARFICARF2005-06\CAFR Repor12005-06.doc
Reviewed by: Assist
ant Town Manager/Deputy Director- -Town Attorney/General Counsel
Clerk Administrator/Secretary Finance
Community Development
r I
PAGE 2
MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT
AGENCY
SUBJECT: ACCEPT THE 2005/06 COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR)
AND MANAGEMENT LETTER
MARCH 19, 2007
Staff and Town's auditors, C.G. Uhlenberg LLP, met with the Council Finance Committee on
Wednesday, March 14, 2007 for an in-depth review of this year's reports to the Finance Committee.
The Committee was advised by staff that the audited statements for the year ended June 30, 2006
received an unqualified or `'clean" opinion for the year, meaning the financial statements are fairly
presented and contain no material misstatements.
The Committee also confirmed with staff and the independent auditor that the $38.6 million of
Unrestricted Net Assets shown on page 12 of the CAFR is terminology mandated by the Governmental
Accounting Standard Board Statement 434. The amount presented as $38.6 in unrestricted net assets is
accurate, but misleading. Although current accounting practices require the use of the term "Unrestricted
Net Assets," these funds are in fact designated for specific purposes. They are an overall financial
position indicator and not the amount of current resources available for budgetary purposes.
In addition, C.G. Uhlenberg LLP reviewed the Management Letter with Town staff and the Council
Finance Committee. One current year finding was reviewed with the Committee and staff explained its
response to the auditor's comments. The audit Management Letter and the Town's response are
included as Attachment I to this report. The internal control comments were of a more routine financial
housekeeping nature. The Town's response to each finding describes how staff will address each issue
this fiscal year.
The Town has applied for and received the Government Finance Officers Association (GFOA),
Certificate of Achievement for Excellence in Financial Reporting, for the last eleven years. This report
is the Town's fourth CAFR prepared under the new reporting format required by the Governmental
Accounting Standards Board (GASB) Statement #34.
CONCLUSION:
As noted in the auditor's opinion, the CAFR fairly presents the fiscal year ending June 30, 2006
financial activity for the Town of Los Gatos and Redevelopment Agency. After reviewing the financial
documents with the Town's external auditors and Town staff, the Committee recommends that the
Council accept the CAFR and audit Management Letter for year ending June 30, 2006.
ENVIRONMENTAL ASSESSMENT:
Is not a project defined under CEQA, and no further action is required.
Attachments:
1. Audit Management Letter
2. CAFR
Distribution:
CAFR and audit Management Letter are available in the Clerk Department, and on file in the library.
TOWN OF LOS GATOS
MANAGEMENT LETTER
FOR THE FISCAL YEAR
ENDED JUNE 30, 2006
Submitted by:
C. G. UHLENBERG LLP
1 Certified Public Accountants
333 Twin Dolphin Rd., Ste. 230
Redwood Town, CA 94065
Phone: (650) 802-8668
Fax: (650) 802-0866
Contact: Jeffrey J. Ira
March 7, 2007
ATTACHMENT I
TOWN OF LOS GATOS
MANAGEMENT LETTER
TABLE OF CONTENTS
FOR THE FISCAL YEAR ENDED JUNE 30. 2006
TITLE
Transmittal Letter
Current Year Findings and Recommendations
Prior Year Findings and Recommendations
Required Communications
PAGE
1 - 2
3
4
5-7
C. G. UHLENBERG LLP
CERTIFIED PUBLIC ACCOUNTANTS
ROBERT E. BARSANTI, CPA (RETIRED) . PEGGY H CHEN, CPA . JEFFREY J. IRA. CPA. KATHERINE CHAO. CPA . JULIE LIN CPA . SHELDON CHAVAN, CPA
March 7, 2007
The Honorable Mayor
Town of Los Gatos, California
We have audited the basic financial statements of the Town of Los Gatos California (the
``Town'), as of and for the year ended June 30, 2006, and have issued our reports thereon dated
December 20, 2006.
In planning and performing our audit of the basic financial statements of the Town, we
considered internal control in order to determine our auditing procedures for the purpose of
expressing our opinion on the basic financial statements and not to provide assurance of internal
control. As part of our audit, we made a study and evaluation of internal controls, including
applicable internal administrative controls used in administering federal award programs, to the
extent we considered necessary to evaluate such controls as required by auditing standards
generally accepted in the United States of America; Government Auditing Standards, issued by
the Comptroller General of the United States; and Office of Management and Budget Circular A-
133, Audits of States, Local Governments and Non-Profit Organizations.
A description of the responsibility of the management for establishing and maintaining the
internal control structure, and of the objective of inherent limitations in such a structure, is set
forth in the attached Appendix 1, and should be read in conjunction with this report.
We did not note any matters involving the internal control and its operation that we consider to
be reportable conditions. Reportable conditions involve matters coming to our attention relating
to significant deficiencies in the design or operation of the internal control over financial
reporting and compliance that, in our judgment, could adversely affect the Town's ability to
record, process, summarize and report financial data consistent with the assertions of
management in the financial statements.
A material weakness is a reportable condition in which the design or operation of the specific
internal control structure elements does not reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material, in relation to the basic financial statements
being audited, may occur and not be detected within a timely period by employees in the normal
course of performing their assigned functions.
We did not note any matters involving the internal control structure and its operations that we
consider to be material weaknesses as defined above. The following comments present our
findings with suggested solutions for your consideration and possible implementation. These
comments and recommendations, all of which have been discussed with the appropriate
1 333 Twin Dolphin Dr, Suite 230, Redwood City, CA 94065, Phone (650) 802-8668, Fax (650) 802-0866
C. G. UHLENBERG LLP
CERTIFIED PUBLIC ACCOUNTANTS
ROBERT E. BARSANTI, CPA (RETIRED) . PEGGY H. CHEN, CPA. JEFFREY J IR.A. CPA. KATHERINE CHAO.. CPA . JULIE LIN, CPA . SHELDON CHAVAN, CPA
members of management, are intended to improve internal control or result in other operation
efficiencies.
Our comments contained herein are based solely on observations made during our audit of the
Town's 2005-2006 basic financial statements and, accordingly, are not based on the results of
any special studies designed to report on these matters. Accordingly, additional information and
study may be required before acting on our suggestions.
This letter is intended solely for the information and use of management, the Mayor, and Town
Council and should not be used for any other purpose. However, this restriction is not intended
to limit the distribution of this letter, which is a matter of public record.
We would be pleased to discuss these matters in greater detail at your convenience.
Very truly yours,
2, 4&_1? &_11F
.Jeffrey J. Ira, Partner
C. G. UHLENBERG LLP
2
333 Twin Dolphin Dr, Suite 230, Redwood Citv, CA 94065, Phone (650) 802-8668, Fax (650) 802-0866
CURRENT YEAR FINDINGS
AND RECOMMENDATIONS
TOWN OF LOS GATOS
CURRENT YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30. 2006
TOWN OF LOS GATOS REDEVELOPMENT AGENCY (THE AGENCY)
Finding 06-01 - Pursuant to Health and Safety Code Section 33334.12(g), "excess surplus"
means any unexpended and unencumbered amount in an agency's Low and Moderate Income
Housing Fund that exceeds the greater of. one million dollars ($1,000,000), or the aggregate
amount of tax increment deposited into the Low and Moderate Income Housing Fund during the
agency's preceding four fiscal years (pursuant to Sections 33334.2 and 33334.6). It was
determined that the Agency retained an excess surplus of approximately $518,803 for the fiscal
year ended June 30, 2006, based on the aggregate amount of tax increment deposited in the Low
and Moderate Income Housing Fund.
Recommendation - Pursuant to Health and Safety Code Section 33334.12(a)(1)(B), we
recommend that the Agency encumber the excess surplus within two years. The funds should be
encumbered to carry out activities consistent with a redevelopment agency as defined in Health
and Safety Code Sections 33334.2 and 33334.3.
Town Response - The Town agrees with this finding and acknowledges the need to expend and
encumber these funds. The Redevelopment Agency is actively pursuing options to expend and
encumber these funds. Within the next two years the Agency intends to initiate affordable
housing projects in the Project Area and work with local non-profit developers to produce
affordable housing units.
PRIOR YEAR FINDINGS
AND RECOMMENDATIONS
TOWN OF LOS GATOS
PRIOR YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
FORMAL PURCHASING POLICY
Finding 05-01 - The purchasing policy that the Town currently follows was issued in 1997.
Recommendation - This is a repeat recommendation from previous audits. We recommend the
purchasing policy be reviewed and updated to provide strict guidelines on current day issues
such as petty cash.. travel reimbursements, credit card purchases and the amount for which a
formal purchase order is required. It should also designate those individuals that are authorized
to have a Town credit card and who can approve purchases. Once these policies are established,
the rules and guidelines must be enforced and staff training should be provided.
Town Response - The Town agrees. An update to the Town's purchasing policies is listed as
item #3 in the Finance divisions Work Plan approved for FY 2006107. Staff anticipates
incorporating the updates as part of a proposed comprehensive Financial Systems Upgrade
planned for FY's 2006/07 & 2007/08.
Status - In progress.
CASH AND INVESTMENTS
Finding 03-01 - Check Stock Safety Features and Positive Pay - Currently, the only safety
feature on the Town's check stock is a watermark. First, and foremost. we once again
recommend that the Town consider utilizing the Positive Pay system offered by most
commercial banks. whereby the bank can only cash checks that are listed on the Town's check
register. Until the Town is ready to do this, we recommend that the next time checks are
ordered, other safety features are added, such as a "void clause," laser ink printing, etc.
Town Response - The Town agrees that fraud prevention is very important. The Town has is
working to identify a solution with a financial services vendor who we will put in touch with our
financial system vendor (Pentamation) to see if positive pay has a potential for being
implemented in the Town's system.
Status - Partially Implemented. New check stock safety features were implemented in early FY
2006/07, staff is intending on implementing Positive Pay in conjunction with the proposed
financial system upgrade project, the current project schedule spans FY 2006/07 & FY 2007/08.
REQUIRED
COMMUNICATIONS
JUNE 30, 2006
TOWN OF LOS GATOS
REQUIRED COMMUNICATIONS
FOR THE FISCAL YEAR ENDED JUNE 30. 2006
Professional auditing standards require auditors to communicate with the audit committee, or its
equivalents, on a number of subjects. The following information satisfies these requirements, and
is solely for use of the Town Council and Town management.
The Auditor's Responsibility Under Auditing Standards Generally Accepted in the United
States of America and Government Auditing Standards
Our responsibility, as described by professional standards, is to plan and perform our audit to
obtain reasonable, but no absolute, assurance that the financial statements are free from material
misstatements and are fairly presented in accordance with accounting principles generally
accepted in the United States of America. Because an audit is designed to provide reasonable,
but not absolute assurance and because we did not perform a detailed examination of all
transactions, there is a risk that material misstatements may exist and not be detected by us.
As part of our audit, we considered the internal control of the Town. Such considerations were
solely for the purpose of determining our audit procedures and not to provide any assurance
concerning such internal control. As part of obtaining reasonable assurance about whether the
Town's financial statements are free of material misstatement, we performed test of its
compliance with certain provisions of laws, regulations, contracts and grants. However, the
objective of our tests was not to provide an opinion on compliance with such provisions.
Significant Accounting Policies
Management has the responsibility for selection and use of appropriate accounting policies. In
accordance with the terms of our engagement letter, we will advise management about the
appropriateness of accounting policies and their application. The significant accounting policies
used by the Town are described in Note I to the financial statements. As described in Note 1 to
the basic financial statements, the Town implemented Governmental Accounting Standards
Board (GASB) Statement No. 46, Net Assets Restricted by Legislation - an amendment of GASB
Statement No. 34.
We noted no transactions entered into by the Town during the fiscal year that were both
significant and unusual, and of which, under professional standards, we are required to inform
you, or transactions for which there is a lack of authoritative guidance or consensus.
Accounting Estimates
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.
TOWN OF LOS GATOS
REQUIRED COMMUNICATIONS
FOR THE FISCAL YEAR ENDED JUNE 30. 2006
The most sensitive estimates affecting the financial statements were:
Valuation methodology of infrastructure assets
Accrual and disclosure of compensate absences
Depreciation estimates for capital assets, including depreciation methods and useful lives
assigned to depreciable property
Management's judgments and estimates were based on the following:
Valuation methodology of infrastructure assets was based on the Town's consultant study
adjusted for annual capital asset activity.
Accrual and disclosures of compensated absences were based on accrued eligible hours
of vacation and sick leave at current pay rates for eligible employees.
Useful lives for depreciable property were determined by management based on the
nature of the capital asset.
We evaluated the key factors and assumptions used to develop the estimates in determining that
they are reasonable in relation to the financial statements taken as a whole.
Audit Adjustments
For the purposes of this letter, professional standards define an audit adjustment as a proposed
correction of the financial statements that, in our judgment, may not have been detected except
through our auditing procedures. An audit adjustment may or may not indicate matters that could
have a significant effect on the Town's financial reporting process (that is, cause future financial
statements to be materially misstated). In our judgment, none of the adjustments we proposed,
whether recorded or unrecorded by the Town, either individually or in the aggregate, indicate
matters that could have a significant effect on the Town's financial reporting process.
We are also required to inform you about uncorrected misstatements aggregated by us during the
current engagement that were determined by management to be immaterial, both individually
and in the aggregate, to the basic financial statements taken as a whole. There were no
unrecorded misstatements greater than $2,500 noted during the audit of the year ended June 30,
2006.
Disagreements with :Management
For purposes of this letter, professional standards define a disagreement with management as a
matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting,
or auditing matter 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.
7 no
3
TOWN OF LOS GATOS
REQUIRED COMMUNICATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
Consultations with Other 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 Town'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.
Issues Discussed with Management Prior to Our Retention
We generally discuss a variety of matters, including the application of accounting principles and
auditing standards, with management each year prior to retention as the Town's auditors.
However, these discussions occurred in the normal course of our professional relationship and
our responses were not a condition to our retention.
Difficulties in Performing the Audit
We encountered no significant difficulties in dealing with management in performing our audit.