TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Finance Director
PREPARED BY: Jennifer Terry, Finance Manager
SUBJECT:
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Presentation and Review of the City of Murrieta’s Fiscal Year 2022/23 Annual Comprehensive Financial Report and Single Audit Report
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RECOMMENDATION
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Receive and file the Fiscal Year 2022/23 Annual Comprehensive Financial and Single Audit Reports.
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PRIOR ACTION/VOTE
On April 18, 2023, the City Council awarded an agreement to Rogers, Anderson, Malody, and Scott, LLP for independent audit services (Vote: 4-0-1).
On May 2, 2023, the Fiscal Year 2021/22 Comprehensive Annual Financial Report and Single Audit Report were received and filed with the City Council.
On December 5, 2023, the City Council received year-end pre-audit results as the City Council and Board of Directors, approving appropriations adjustments for carryover of unspent amounts from Fiscal Year 2022/23 to Fiscal Year 2023/24 (Vote: 5-0).
CITY COUNCIL GOAL
Maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency.
BACKGROUND
The City of Murrieta (City) has prepared its Comprehensive Annual Financial Report (Financial Statements) for the Fiscal Year ending June 30, 2023. The independent auditing firm of Rogers, Anderson, Malody, and Scott, LLP (RAMS) has issued an unmodified (clean) opinion on the City’s financial statements, indicating they are free from material misstatement and present fairly the financial position and results of operations of the various funds and account groups of the City. The Financial Statements were completed on February 29, 2024.
In addition to the annual independent audit of the City’s financial statements, the City is required to complete a Single Audit as a condition of spending federal assistance in excess of $750,000.
As a result of their annual independent audit of the City’s financial records and statements, the audit firm has rendered an unmodified (clean) opinion on the City’s financial statements. That is, RAMS believes the financial statements are fairly presented in accordance with generally accepted accounting principles. With this item, staff brings forward the City’s audited financial position for Fiscal Year 2022/23 in the form of the financial statements.
Financial Statements
The government-wide financial statements (Statement of Net Position and Statement of Activities) report information on all activities of the City and its component units. The statement of net position presents information on all of the City’s assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating.
The City’s combined net position as of June 30, 2023 is $559,084,667. The City’s net position increased by $29,334,162 or approximately 5.54% compared to the prior fiscal year. This increase occurs when spending is less than the revenues received. There were several reasons for the increase in net position, including improved property taxes, investment earnings, a slight increase in sales & use tax revenue, operating and capital grant revenues, development impact fees, and increased activity services.
Current assets increased by $32,360,909 or 12.1% compared to prior year balances. The increase is mostly attributable to the following items: an increase in cash and investments of $23,029,355, and an increase in receivables totaling $6,237,654.
The capital assets net of accumulated depreciation has decreased by $6,096,589. The decrease represents the difference between additions, deletions, and depreciation in the current year. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Governmental activities' capital assets are discussed in more detail in the capital asset section of the financial statements and Notes to the Financial Statements (Note 6 - Capital Assets).
Changes in the various components associated with Governmental Accounting Standards Board (GASB) statement 68 Accounting and Financial Reporting for Pension, statement 75 Accounting and Financial Reporting for Postemployment Benefits Other than Pension (OPEB), and statement 87 Leases impacted deferred outflows and inflows, and changes in pension, OPEB and leases liabilities for the year. GASB 68 and GASB 75 pronouncements required the City to record the net pension and OPEB liabilities on the books. The deferred outflow of resources increased by $23,854,080, while the deferred inflows of resources decreased by $17,169,327.
Current liabilities increased by $6,060,429, or 16.8%. The increase is primarily attributable to the liability valuation of claims and judgments (Workers’ Compensation) offset by a reduction in unearned revenue. The current liabilities categories include a reclassification of the long-term debt within one year of $8,946,381. In prior years, this obligation was previously reported as long-term debt for more than one year category. The reduction of unearned revenue is associated with revenue recognition for the State and Local Fiscal Recovery Fund of $16,463,101 from the American Rescue Plan Act, which was not spent by the end of last fiscal year.
Long-term liabilities such as outstanding debt, leases, employee benefit accruals, claims and judgments, OPEB, and net pension liability increased by $40,839,517, an increase of approximately 22.3% from the prior year. The most significant addition is attributable to the increase in actuarial valuation for OPEB liability of $5,689,198 and net pension liability of $37,703,167. All other outstanding debt and other liabilities decreased by $2,552,848 combined as a result of debt within one year now being reported separately from long-term debt.
Approximately 78.0% of the City's net position is net investment in capital assets (i.e., land, construction in progress, buildings, land & building improvements, parkland improvement, vehicles, equipment, and infrastructure), less any related outstanding debt used to acquire those assets. The City uses these capital assets to provide services to citizens; therefore, these assets are not available for future spending.
The restricted net position represents resources subject to external restrictions and earmarked for a specific purpose. The unrestricted net position represents the resources that may be used to meet the government's ongoing obligations to creditors and services to residents. The negative unrestricted net position is primarily due to the inclusion of the pension and OPEB net liability.
Governmental Funds
For Financial Statement presentation purposes, the City maintains twenty-four (24) individual governmental funds. As of June 30, 2023, the City’s governmental funds reported combined ending fund balances of $249,792,261, a decrease of $37,733,076 or approximately 12.6% when compared to last year's balance of governmental funds. The most significant change in fund balance is in the General Fund column, totaling $21,908,251.
The remaining net changes in fund balances include the governmental funds, which include an increase of $12,424,950 for the Capital Project Development Impact Fee fund, $956,044 for the Federal Grants fund, and $2,653,773 for the Non-Major Governmental Funds. The Fire District fund had a decrease in fund balance of $256,817.
General Fund
For the financial statement presentation, the General Fund column includes the following funds: General Fund, Measure T Fund, General Capital Fund, Traffic Safety Fund, Crime Prevention Fund, and Vehicle Replacement Fund. At the end of the fiscal year, the General Fund had revenues over expenditures, including other financing sources (uses) of $21,908,251, thereby increasing the General Fund balance at the end of June 30, 2023, to $127,167,181.
Compared to the prior year, General Fund revenues increased by $10,444,289 to $100,133,019, including transfers. The increase is primarily attributable to property taxes of approximately $1,307,455, and $803,840 in sales & use tax. Taxes-related revenue generally aligns with the economic condition. The slight increase in Sales & Use Tax and Transaction Sales & Use Tax revenue were moderate, with an increase of 1.4% when compared to FY 2021/22. General consumer and restaurant/hotels spending improved while Autos & Transportation, fuel and service stations, and building & construction declined.
The intergovernmental revenue category increased by $3,432,472 combined for various intergovernmental service agreements as a result of revenue recognition during the current fiscal year. The use of Money and Property revenue category increased by $4,565,634. The increase in Use of Money & Property is primarily due to an increase in investment income associated with the City’s investment portfolio and short-term investment through the City’s sweep account. The investment income increase is approximately $1,472,918. The other component is associated with the accounting required by GASB 31 to recognize unrealized gain or loss of securities that weren’t sold or matured at year-end. The recognition of unrealized gain or loss of securities accounts for approximately $3,092,716. During the fiscal year, the value of fixed income securities, like the ones in the City’s portfolio, have an inverse relationship to the movement of interest rates. The value of a bond will increase as interest rates decrease. Conversely, the value of bonds decreases when interest rates rise. Lastly, the “charges for services” revenue category increased by $1,554,897, while the remaining revenue categories declined by approximately $1,012,239.
General Fund expenditures increased by $10,610,953 to $78,224,768 after transfers out and other financing uses. The increase in expenditures is mainly attributable to Public Safety operations and services, which increased by $3,827,291. Personnel-related expenditures increased by $2,774,673 due to new authorized positions and salary & benefit increases. The Public Safety operating costs increased by $1,058,618.
The General Government Category increased by $2,733,571. The increase in General Government expenditures is associated with personnel-related expenditures of $1,241,610 and increases in operating costs of $1,491,961 for legal and contract services, landscape maintenance, and animal control services. Public Works and Community Development increased by $1,522,955 and $1,500,866, respectively. All other expenditure categories increased by $1,026,270.
Capital Assets
At the end of FY 2022/23, the City had capital assets (net of accumulated depreciation) of $447,446,827, including land, construction in progress (CIP), buildings and improvements, improvements to land, parkland improvements, equipment (including vehicles), infrastructure, leased assets, and right-to-use subscriptions. Current year additions to all asset categories totaled $11,809,568, while deletions totaled $515,134. The accumulated depreciation increased by $17,391,023 net of deletions. Capital assets with the most significant increase was in Construction in Progress with $2,525,454. The capital asset category with the most significant decreases net of depreciation was infrastructure, with $6,941,803, followed by parkland improvements with $1,661,755. The remaining categories had an overall decrease of $484,400. The decreases were primarily due to current-year depreciation.
Long-Term Debt
At the end of the fiscal year, the City had bonded debt and leases outstanding, along with liability for claims and judgments, an obligation for employee post-employment benefits, compensated absences payable, and Net Pension liabilities totaling $193,256,129. The total outstanding debt increased by approximately 27.94% or $42,206,734 during FY 2022/23. The most significant increase is the change in Net Pension Liability, Claims and Judgments, and OPEB.
Pension (CalPERS) liability increased by $37,703,167 due to the reduction in the discount rate from 7% to 6.8%, coupled with lower-than-anticipated earnings for FY 2022/23. The adjusted discount rate was announced in November 2021 and was implemented with the Fiscal Year ending 2020/21 actuarial valuation reports that were available in the summer of 2022. Earnings for Fiscal Year 2022/23 came in lower, at 5.8%, one full percent lower than the newly adjusted discount rate.
The increase in OPEB liability of approximately $5,689,198 is attributed to less than favorable asset performance compared to expected. Claims and Judgments related to the City’s general liability and Workers’ Compensation increased approximately by $3,314,645 primarily due to an increase in the actuarial valuation of future liability. Compensated absences had an increase of $843,210 due to an increase in the number of employees and increases in the salary and compensation schedules. The remaining outstanding debt items had an overall decrease of $5,343,486.
Audit Findings
The Fiscal Year 2022/23 Financial Statement Audit and Single Audit Report have no findings.
Award
For Fiscal Year 2021/22, the City’s Financial Statements have been awarded the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association of the United States and Canada (GFOA). This prestigious national award recognizes the City’s use of the highest standards in preparing our annual financial report. This certificate of achievement is valid for a period of one year only. Staff believes the Financial Statements for fiscal year 2022/23 continue to meet the program’s requirements. Staff has submitted the financial statements to GFOA for award consideration for fiscal year 2022/23 as well.
FISCAL IMPACT
No fiscal impact is associated with accepting and filing this item.
ATTACHMENTS
1. Annual Comprehensive Financial Report for Fiscal Year ending June 30, 2023
2. Single Audit Report for Year Ending June 30, 2023