City Council Regular Meeting


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Meeting Date: 03/19/2019  

It is recommended that the Finance Department submit to the City Council the following letters and financial reports for the year ended June 30, 2018:
  • Comprehensive Annual Financial Report;
  • Government Auditing Standards Letter;
  • Audit Communication Letter;
  • West Covina Housing Authority Fund Financial Report;
  • West Covina Housing Authority Fund Addendum to the Annual Progress Report; and
  • Air Quality Improvement Fund Financial Statements.
Annually, the Finance Department prepares and publishes the City’s Comprehensive Annual Financial Report (CAFR) following the completion of an independent and certified audit.  Attached is the June 30, 2018, CAFR, which is officially transmitted herewith to the Audit Committee (Attachment No. 1).  This document is an extensive report summarizing the financial activities of the City that occurred from July 1, 2017 through June 30, 2018.
The CAFR is prepared in compliance with the Governmental Accounting Standards Board (GASB) standards.  Pursuant to GASB guidelines, the City’s CAFR is divided into three sections: Introductory, Financial, and Statistical. The Introductory section contains a Letter of Transmittal. This letter includes a brief overview of the City, the economic outlook, operational controls and major initiatives.
The Financial section contains the independent auditors’ opinion letter, Management’s Discussion and Analysis (MD&A), and the Basic Financial Statements.  The audit firm of Rogers, Anderson, Malody, & Scott, LLP has issued an unmodified (‘clean’) opinion on the financial statements for the year ended June 30, 2018.  This means that their examination, testing and audit procedures allowed them to conclude that the financial statements fairly present the financial position of the City.  This is the best opinion the City can receive from its auditors.
The MD&A provides a narrative of how the financial report is presented and key highlights of some of the changes in financial position.  The MD&A provides tables showing comparative information from the year ended June 30, 2017 to the year ended June 30, 2018. 
The final section of the CAFR is the Statistical section.  This section presents data useful in analyzing the City’s financial and operational history for comparative purposes.  Some of the statistics tracked include financial trends, revenue capacity, and debt capacity which are useful for evaluating the City’s financial stability. Additional statistics include operating indicators.
Financial Highlights
The CAFR represents the City of West Covina’s financial position at June 30, 2018 and includes financial statements for all of its component units.  Financial highlights of the fiscal year are noted in the Financial Section of the CAFR and include the following:
  •  At June 30, 2018, the City’s total net position (assets plus deferred outflows of resources less liabilities and less deferred inflows of resources) was $2.8 million. 
  • The City’s total net position decreased $56.8 million from the prior year.  This is mostly due to the implementation of Governmental Accounting Standards Boards Statement No. 75 (GASB 75), which amended prior guidance with respect to the reporting of post-employment benefits other than pensions (OPEB) and establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expenses/expenditures. 
  • The City’s total governmental funds reported a combined ending fund balances of $73.3 million, an increase of $0.4 million in comparison with the prior fiscal year of $72.9 million.  Of this, $10 million, or 13.7% of this total is non-spendable (not available for new spending).  The restricted fund balance categories of $50.3 million or 68.6% is spendable for restricted purposes.  The assigned fund balance of $2.3 million or 2.7% represents amounts that are intended to be used for specific purposes, but are not formally restricted or committed.  The unassigned fund balance category of $10.9 million or 14.9% represents the City’s fund balance reserves. 
  • The City’s business-type computer service enterprise activity (West Covina Service Group) had an operating loss for Fiscal Year 2017-18 of $22,674, compared with $116,660 in operating loss in Fiscal Year 2016-17.  The total net position for the computer service enterprise fund is ($275,010).  The net position in the prior year was ($252,336). 
  • At the end of the current fiscal year, the City had debt outstanding of $66.4 million.  Of this amount, $41.2 million represents outstanding bonds and $25.2 million represents other debt such as compensated absences payable, claims and judgments payable, capital lease obligations, and the Successor Agency note.  All of the outstanding bonds are lease revenue bonds secured by leases from the General Fund. 
 Government Auditing Standards Letter
The Government Auditing Standards Letter (Attachment No. 2) notes any identified deficiencies or weaknesses in internal control over financial reporting that could lead to material misstatements in the City’s financial statements as well as any other compliance findings.   
A deficiency in internal control 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 and correct, misstatements on a timely basis.  A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the City’s financial statements will not be prevented or detected and corrected on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.  The auditors did not identify any deficiencies in internal control over financial reporting that they considered to be material weaknesses.  Furthermore, the results of the tests performed disclosed no instances of non-compliance or other matters that are required to be reported under Government Auditing Standards.
Audit Communication Letter
The Audit Communication Letter (Attachment No. 3) provides certain information related to the audit of the City’s financial records, including the following:
  •  Qualitative Aspects of Accounting Practices – The letter notes that City management is responsible for the selection and use of appropriate accounting policies.  The letter indicates that there have been no significant changes in accounting policies or their application during the fiscal year.  The letter also noted that there were no transactions entered into by the City during Fiscal Year 2017-18 for which there was a lack of authoritative guidance, and that all significant transactions were recorded in the proper accounting periods. 
  • Significant Difficulties Encountered during the Audit – The letter communicates the auditors encountered no significant difficulties in dealing with management relating to the performance of the audit. 
  • Uncorrected and Corrected Misstatements – The letter communicates the auditors’ responsibility to note all known and likely misstatements identified during the audit.  The auditors noted no such misstatements that were material, either individually or in aggregate, to the financial statements taken as a whole. 
  • Disagreements with Management – The auditors are required to communicate any disagreements with management related to an accounting, reporting or auditing matter, whether resolved or not, in the Audit Communication Letter.  No such disagreements arose during the course of the audit for Fiscal Year 2017-18. 
West Covina Housing Authority Annual Financial Report  

Changes in state law require the Housing Authority, as the Housing Successor, to prepare an annual report regarding the low and moderate income housing asset fund (Report) of the former West Covina Redevelopment Agency (RDA).  The law also requires the completion of an independent audit of the low and moderate-income housing asset fund (Fund).  The attached annual report includes both the Report and the audit mentioned above (Attachment No. 4).
Senate Bill 341 (SB 341), which is partly codified in Health and Safety Code Section 34176.1 and became effective on January 1, 2014, requires each housing successor that assumed the housing functions of a former redevelopment agency, to post a report on its website that contains information regarding the Fund of the former redevelopment agency for the previous fiscal year.  Each housing successor is also required to present this report to its governing body.  In this case, the City Council designated the Community Development Commission (CDC) as the governing body of the Housing Authority.  Because the CDC’s membership is the City Council, the Housing Authority, as the Housing Successor, is required to present the Report on the Fund to the City Council pursuant to SB 341.
In addition, the Housing Successor is required to conduct and provide to the City Council an independent financial audit (Audit) of the Fund.  Similar to the above, the West Covina Housing Authority assumed the housing functions of the former RDA.  The transfer of the functions included the transfer of formerly designated RDA low and moderate-income housing funds together with any funds generated by former RDA housing assets.  The funds must be maintained by the Housing Authority in a separate Fund and expended in accordance with Health and Safety Code section 34176.1 ("Section 34176.1").  To ensure that the monies in the Fund are expended in accordance with the law, Section 34176.1(f) requires an independent financial audit of the Fund. SB 341 also requires annual reporting and website posting of additional housing information related to the Fund.  As noted above, the CDC is the governing body of the Housing Authority and the City Council serves as the membership of the CDC.  During their review of our compliance with Senate Bill 341 (Attachment No.5), the auditors noted no instances of non-compliance for Fiscal Year 2017-18.
Air Quality Improvement Fund Financial Statements
California Assembly Bill 2766 authorizes air pollution control districts to levy fees on motor vehicles. Fees are to be used to reduce air pollution.  Under this program, the Department of Motor Vehicles collects the fees and provides the amounts to the South Coast Air Quality Management District (SCAQMD) for vehicles registered in the South Coast District.  Forty cents of every dollar provided to SCAQMD is allocated to the cities and counties in the South Coast District proportionately based upon population.  The amounts attributable to the City of West Covina (the City), are maintained in the City’s Air Quality Improvement Special Revenue Fund (Attachment No. 6).  The audit firm of Rogers, Anderson, Malody & Scott, LLP has issued an unmodified (‘clean’) opinion on the financial statements for the year ended June 30, 2018.
Prepared by: Todd H. Owens, Accounting Manager
Additional Approval: Marcie Medina, Finance Director

Fiscal Impact
There is no fiscal impact associated with this item.
Attachment No. 1 - Comprehensive Annual Financial Report for the Year Ended June 30, 2018
Attachment No. 2 - Government Auditing Standards Letter
Attachment No. 3 - Audit Communication Letter
Attachment No. 4 - West Covina Housing Authority Fund Financial Report
Attachment No. 5 - West Covina Housing Authority Fund Addendum to the Annual Progress Report
Attachment No. 6 - Air Quality Improvement Fund Financial Statements



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