10 Staff Report - Accept 2007/08 Annual Financial Report
)0 MEETING DATE: 4/6/2009 ITEM NO: COUNCIL/AGENCY AGENDA REPORT DATE: MARCH 25, 2009 TO: FROM: SUBJECT: MAYOR AND TOWN COUNCIL! CHAIR AND MAMBERS OF THE REDEVELOPMENT AGENCY . GREG
LARSON, TOWN MANAGERlEXECUTIVE DIRECTOR ACCEPT THE 2007/08 COMPREHENSIVE ANNUAL FmANCIAL REPORT (CAFR) AND MANAGEMENT LETTER RECOMMENDATION: Accept the 2007/08 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, 2008. The 2008 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 fmancial statements. The auditor's report found the Town's internal control structure to have no reportable material weaknesses. DISCUSSION: STEP WAY Finance and Achllinistrative
Services Director PREPARED BY: 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. SDC:pg N:IFINANCEICAFRIFY 2007-Q8ICAFR Agend a Rcport2007 -Q8 .doc Reviewed by:
Town ManagerlDeputy Director__Town Attorney/General Counsel Clerk Administrator/Secretary __Finance __Community Development
PAGE 2 MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: ACCEPT THE 2007/08 COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) AND MANAGEMENT LETTER MARCH 25, 2009
Staff and Town's auditors, C.G. Uhlenberg LLP, met with the Council Finance Committee on Wednesday, February 24, 2009 to review this year's CAFR report. The Committee was advised by
staff that the audited statements for the year ended June 30, 2008 received an unqualified or "clean" opinion for the year, meaning the fmancial statements are fairly presented and contain
no material misstatements. The Finance Committee's discussion also included a review of Town assets. The June 30, 2008 CAFR repOited that the Town's assets exceeded liabilities by $109
million. Of the $109 million, $66 million are capital infrastructure assets, which are considered non-cash assets. The remaining $43 million reflect a comprehensive accounting of all
of the working capital, restricted funds, funds used to ensure responsible fiscal management, and and funds designated for specific purposes. The $43 million is classified into 3 reserve
categories: Restricted/Obligated, Financial Best Practices, and Designated. Restricted/Obligated funds represent a mix of restricted reserves that have been legally appropriated for
a specific use and obligated cash to cover outstanding operating costs or legally binding contracts for services. The Financial Best Practices category recognizes the prudent use of
"pre-funding" methods for ongoing business needs like vehicle replacement or the establishment of emergency reserves for catastrophic events. Designated funds are those that have been
dedicated for specific purposes via Council policy. Examples of designated reserves include capital and special projects, land acquisition, and revenue stabilization to preserve basic
services to the community while making incremental organizational adjustments to align services with revenues over time. 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 1 to this report. 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 Govermnent Finance Officers Association (GFOA), Certificate of Achievement for Excellence in Financial Reporting, for the last thirteen years. This report
is the Town's fifth 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, 2008 fmancial 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, 2008.
PAGE 2 MAYOR AND TOWN COUNCIL/CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY SUBJECT: ACCEPT THE 2007/08 COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) AND MANAGEMENT LETTER MARCH 25, 2009
ENVIRONMENTAL ASSESSMENT: Is not a project defined under CEQA, and no further action is required. Attachments: I. Audit Management Letter 2. Comprehensive Annual Financial Report (CAFR)
-Available for viewing in the Clerk Department and at the Los Gatos Public Library.
TOWN OF LOS GATOS CALIFORNrA REPORT TO MANAGEMENT AND TOWN COUNCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2008 Submitted by: C. G. UHLENBERG LLP 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 February 19, 2009
TOWN OF LOS GATOS REPORT TO MANAGEMENT AND TOWN CONCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2008 TABLE OF CONTENTS TITLE PAGE Transmittal Letter............................................
1 -2 Current Year Control Deficiencies 3 Prior Year Control Deficiencies 4 Required Communication to the Council (SAS 114) 5 -7
C. G. UHLENBERG LLP CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS PEGGY H. CHEN, C.P.A. JEFFREY J. IRA, C.P.A. KATliERINE CHAO, O.PA JULIE T. LIN, C.P.A. February 19,2009 The Honorable
Mayor and Members ofthe Town Council Town ofLos 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, 2008, and have issued our reports thereon dated January 15,2009. In planning and performing our audit of the financial statements of the Town of Los Gatos as of and for
the year ended June 30, 2008, in accordance with auditing standards generally accepted in the United States of America, we considered the Town's internal control over financial reporting
as a basis for designing our auditing procedures 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 Governmental Unit's internal control. Accordingly, we do not express an opinion on the effectiveness ofthe Governmental Unit's internal control. Our consideration of internal
control was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies
or material weaknesses. A control deficiency 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 misstatements on a timely basis. Control deficiencies in internal control indentified in the audit are discussed on page 3 ofthis report. A significant
deficiency is a control deficiency, or a combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report fmancial
data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that
is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or a combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. We did not
identifY any deficiencies in internal control that we consider to be material weakness as defined above. Our comments contained herein are based solely on observations made during our
audit of the Town's 2007-2008 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. 333 Twin Dolphin Drive, Suite 230 • Redwood City, CA 94065 • Phone (650) 802-8668 • Fax (650) 802-0866 4117 Clipper
Court. Fremonr, CA 94538' Phone (510) 770-8680' Fax (510) 770-8685 1230 Midas Way, Suire 250. Sunnyvale, CA 94085' Phone (408) 331-6242' Fax (408) 331-6243 ErMail-info@cgucpa.com • www.cgucpa.com
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 ofthis 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, C.
G. UHLENBERG LLP By JJI/sc 2
CURRENT YEAR CONTROL DEFICIENCIES
-----------------_._----_. TOWN OF LOS GATOS REPORT TO MANAGEMENT AND TOWN COUNCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2008 CURRENT YEAR CONTROL DEFICIENCIES Deficiency 08-01: Repeat
Recommendation -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 Fnnd
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 detennined that the Agency retained an excess surplus of approximately $1,795,145 and $1,037,474 for the fiscal years
ended June 30, 2008 and 2007, respectively, 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)(l)(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. The excess surplus has been increasing since 2006, the Town should review and identify how mnch
of the excess surplus needs to be encumbered by the end of 2009 versus 20I O. Since the Agency's Low-Mod fund had an increase in fund balance of $1.784 million for the fiscal year ended
June 30,2008, only a portion of the excess surplus since 2006 may still be unencumbered. 3
PRIOR YEAR CONTROL DEFICIENCIES
TOWN OF LOS GATOS REPORT TO MANAGEMENT AND TOWN COUNCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2008 PRIOR YEAR CONTROL DEFICIENCIES TOWN OF LOS GATOS REDEVELOPMENT AGENCY (THE AGENCY) Deficiency
07-01: Repeat Recommendation -Pursuani 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 oftax 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 $1,037,474 and $518,803
for the fiscal years ended June 30, 2007 and 2006, respectively, 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)(l)(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 defmed in Health and Safety Code Sections 33334.2 and 33334.3. Since the excess surplus increased from 2006 to 2007, the Town should
review and identifY how much of the excess surplus needs to be encumbered by the end of 2008 versus 2009. Since the Agency's Low-Mod fund had an increase in fund balance of $1.445 million
for the fiscal year ended June 30,2007, only a portion ofthe excess surplus from 2006 may still be unencumbered. Town Response -The Town agrees with this finding and acknowledges the
need to expend and encumber these funds. The Redevelopment Agency (RDA) is working with Seifel Consulting to develop affordable housing strategies. Recently, the RDA negotiated an agreement
to loan $777,000 of RDA low and moderate housing funds to Senior Housing Solutions for very low-income senior housing. Within the next two years, the Agency intends to initiate affordable
housing projects and work with local non-profit developers to produce affordable housing units. Status -The implementation of our recommendation is in progress. However, we did note
an increase in the surplus of $757,671 during the fiscal year euded June 30,2008. See finding 08-01 on page 3 for our repeat recommendation. This was also included as a finding in the
Redevelopment Agency's audit report. FORMAL PURCHASING POLICY Deficiency 07-02: Repeat Recommendation -The purchasing policy that the Town currently follows was issued in 1997. Recommendation
-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 gnidelines must be enforced and stafftraining should be provided. Town Response -The Town agrees. An update to the Town's purchasing policies
is listed as item #3 in the Finance division's Work Plan approved for FY 2007/08. Staff anticipates incorporating the updates as part ofa proposed comprehensive Financial Systems Upgrade
planned for FY 2007/08. Status -Our recommendation was fully implemented by the end of the 2007/08 fiscal year. 4
REQUIRED COMMUNICATION TO THE COUNCIL (SAS 114)
TOWN OF LOS GATOS REPORT TO MANAGEMENT AND TOWN COUNCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2007 REQUIRED COMMUNICATION TO THE COUNCIL (SAS 114) Professional standards require that we
provide you with the following infonnation related to our audit. The Auditor's Respousibility under Anditing Standards Generally Accepted in the United States of America and Government
Auditing Standards We are responsible for fonning and expressing an opinion about whether the financial statements that have been prepared by management with the oversight of those charged
with governance are presented fairly, in all material respects, in confonnity with generally accepted accounting principles. The audit of the financial statements does not relieve management
or those charged with governance of their responsibilities. Planned Scope and Timing of the Andit We perfonned the audit according to the planned scope and timing previously communicated
to you in our meeting about planning matters in May of2009. Significant Accounting Policies Management has the responsibility for selection and use of appropriate accounting policies.
In accordance with the tenns of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies
used by the District are described in Note I to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2008.
We noted no transactions entered into by the District during the year for which there is a lack of authoritative guidance or consensuS. There are no significant transactions that have
been recognized in the financial statements in a different period than when the transaction occurred. The following is a summary ofGASB statements to be implemented by the end ofJune
30, 2009: )-GASB Statement number 45 -Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This statement requires that governmental entities
evaluate their current and past service liabilities for other post employment benefits (OPEB), such as health or vision plans offered to retirees, to detennine the annual required contributions
for the postemployment benefits. Liabilities or assets may result from the difference between the actual payments and the annual required contributions. The past service liability will
be allocated prospectively, thus a liability will not be recorded for past service liabilities in the first year. We recommend that the District review its OPEB planes) offered to employees
upon retirement as well as OPEB offered to current retirees to detennine whether or not GASB 45 will have an impact. If the District pays a significant amount toward OPEB each year and
has a significant number of current and future participants, it should familiarize itself with GASB 45. In addition, the District should detennine the options available to calculate
the OPEB liability and annual required contribution. The District has the option of using a simplified method or obtaining an 5
TOWN OF LOS GATOS REPORT TO MANAGEMENT AND TOWN COUNCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2007 REQUIRED COMMUNICATION TO THE COUNCIL (SAS 114) actuarial study if there are less than
100 participants in the OPEB plan. We recommend the use of an actuary in most cases unless it is obviously not cost effective. This Statement is effective for periods beginning after
December 15,2006, for phase 1 governments (those with total annual revenues of $100 million or more); after December 15,2008, for phase 2 governments (those with total annual revenues
of $10 million or more but less than $100 million); and after December 15,2008, for phase 3 governments (those with total annual revenues ofless than $10 million). 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 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 financial statements were: • Valuation metilodology ofinfrastructure
assets • Accrual and disclosure of compensated absences • Depreciation estimates for capital assets, including depreciation metilods and useful lives assigned to depreciable property
Management's judgments and estimates were based on the following: • Valuation metilodology ofinftastmcture assets was based on tile 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 ofthe capital asset. We evaluated the key factors and assumptions used to develop the estimates in determining
that they they are reasonable in relation to the fmancial statements taken as a whole. Disclosures in the Financial Statements The disclosures in the financial statements are neutral,
consistent, and clear. Certain financial statement disclosures are particularly sensitive because of their significance to fmancial statement users. The most sensitive disclosure(s)
affecting the fmancial statements was (were): » The disclosure of cash and investments in Note 2 to the financial statements is sensitive because ofthe dollar amounts relative to the
financial statements as a whole. 6
TOWN OF LOS GATOS REPORT TO MANAGEMENT AND TOWN COUNCIL FOR THE FISCAL YEAR ENDED JUNE 30, 2007 REQUIRED COMMUNICATION TO THE COUNCIL (SAS 114) » The disclosure of capital asset activity
in Note 5 informs the reader about the use of Town resources for improvements throughout the year. » The disclosure oflong-term debt in Notes 6 and 7 reports the Town's debt balances
and activity. Significant Difficnlties in Performing the Audit We encountered no significant difficulties in dealing with management in performing our audit. Corrected and Uncorrected
Misstatements Professional standards require us to accumulate all known and likely misstatements ideutified 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, none of the misstatements detected as a result of audit procedures and corrected
by management were material, either individually or in the aggregate, to the financial statements taken taken as a whole. Disagreements with Management For purposes of this letter, professional
standards defme 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. Management Representations
We have requested certain representations from management that are included in the management representation letter dated December 4, 2008. Management's Consultations with Other Accountants
In some cases, management may decide to consult with other accouutants 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 District's financial statements or a determination ofthe 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. Significant Issues Discussed, or Subject to Correspondence, with Management 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 District's auditors. However, these discussions occurred in the normal course of our professional
relationship and our responses were not a condition to ourretention. 7 -.---_._--------