December 13, 2005

SUBJECT: FY 2004/2005 Budgetary Year-End Financial Report and Comprehensive Annual Financial Report

REPORT IN BRIEF

This report is intended to present the audited Comprehensive Annual Financial Report (CAFR) and the year-end financial condition of the City on a budgetary basis for the fiscal year ended June 30, 2005. 

Annually, the Budgetary Year-End Financial Report presents the year-end results of the City’s various funds for the previous fiscal year.  The report provides analysis of the changes between the projected year-end position contained in the City Manager's Recommended Budget, which is developed in March, and the actual year-end status.  The scope of this report does not include an update on the current year’s budget and economic indicators.  Those items will be covered in the upcoming Fiscal Issues Workshop.  The results contained in the report are calculated on a budgetary basis, rather than the accounting basis used for the CAFR.  Overall the City’s General Fund ended the year in a better financial position from that estimated in the Recommended Budget by approximately $6.5 million. In the Recommended Budget, we had anticipated drawing down on the reserves about $9.2 million for FY 2004/2005, while actual results were a draw down of approximately $2.7 million.  While this does have a positive financial impact for the City, the results are primarily due to one-time revenues and expenditure savings.  Therefore, this does not address the City’s ongoing structural imbalance between recurring revenues and expenditures.

The CAFR is the City’s external reporting medium.  This report is audited by our independent auditors, Caporicci & Larson, who have issued an unqualified opinion on the report. In conjunction with the opinion rendered on the CAFR, the independent auditors also issue a Management Letter in which any financial or internal control deficiencies are noted.  For the fourth consecutive year, we have had no deficiencies noted in this year’s management letter. 

BACKGROUND

Each year as part of the year-end closing process, staff presents the audited Comprehensive Annual Financial Report and the year-end financial condition and results of operations on a budgetary basis for the preceding fiscal year using audited financial results.  As a point of reference, last year, the City’s General Fund ended FY 2003/2004 in better financial position than estimated in the Recommended Budget by approximately $4.8 million.  When revised estimates were developed, it was anticipated that reserves would need to be drawn down by about $13.5 million; however, actual results were a draw down of $8.7 million.

EXISTING POLICY

Action Statement 7.1D.1g of the Fiscal Sub-Element of the General Plan states that staff shall “prepare and provide the City Council with periodic summary financial reports by fund, comparing actual revenues and expenditures to budgeted amounts.”  This Year-end Financial Report is in accordance with this action statement.

In addition, the City Charter Section 1318 requires that “At the end of each fiscal year, a final audit and report shall be submitted by [a Certified Public Accountant] to the City Council.”  The Comprehensive Annual Financial Report is presented in accordance with this section.

DISCUSSION

Bases of Accounting – CAFR

The Government-Wide Financial Statements of the CAFR and the Proprietary Fund Financial Statements are presented on an “economic resources” measurement focus and the accrual basis of accounting.  Revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred.

The Governmental Fund Financial Statements of the CAFR are accounted for on a spending or “current financial resources” measurement focus and the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become measurable and available to finance expenditures of the current period.  Expenditures are recorded in the accounting period in which the fund liability is incurred.

Interfund loan or loan repayment transactions that resulted in cash flows but were recorded as balance sheet transactions on the CAFR, are included in this report since the budgetary fund balances are affected by such transactions.  In addition, change in the fair value of investments was included in the CAFR but excluded from this report since the budgetary fund balances are not affected by such transactions.

Fiscal Year 2004/2005 Year-End Financial Update

Staff has reviewed the City’s year-end financial results and hereby provides an analysis of the changes between the projected revenues and expenditures estimated in the recommended budget and the actual year-end results.

General Fund

Revenues

General Fund revenues for FY 2004/2005 are shown in the table on the following page. Total revenues were higher than the City Manager’s Recommended Budget, which were developed in March and presented to Council in May, by 5%, or $5.1 million.  The revised budget estimates were based on trends and analysis from the first half of the fiscal year.