CC - Item 6A - Interim City Financial SummaryROSEMEAD CITY COUNCIL
STAFF REPORT
TO: THE HONORABLE MAYOR AND CITY COUNCI
FROM: JEFF STEWART, INTERIM CITY MANAGER
DATE: MAY 12, 2009
SUBJECT: INTERIM CITY FINANCIAL SUMMARY
SUMMARY
Councilmember Ly has requested a brief overview of the City's finances. This staff
report focuses on fund balance and its relation to cash and investments of the General
Fund. A Comprehensive Annual Financial Report (CAFR) for the fiscal year ended
June 30, 2008 is available upon request and provides a much more detailed
presentation than this report; it also includes the independent auditor's opinion. For
fiscal year 2007-2008 the City received an unqualified opinion from its independent
auditor, Mayer Hoffman McCann P.C.
As stated previously, this report will concentrate on the General Fund, the City's
principal operating fund. The City also has 13 special revenue funds, including an
equipment replacement fund and a technology replacement fund. Special revenue
funds are legally restricted as to their use. Except for approving specific qualified uses
of special revenue funds, City Council has fairly limited discretion as to how these funds
can be used and will not be discussed in this report. There is also one capital projects
fund which is used to account for capital improvement projects which are approved by
the City Council on a project by project basis, they will also be exempted from
discussion in this report.
As of March 31, 2009 all City funds have total cash and investments of $22.3 million.
Out of the $22.3 million the General Fund's portion is $15.2 million.
Staff Recommendation
Staff recommends that the City Council receive and file this report.
ANALYSIS
Cash and Investments
Cash and investments include operating cash, surplus cash, which is invested in local
APPROVED FOR CITY COUNCIL AGENDA: ITEM NUMBER:
City Council Meeting
May 12, 2009
Page 2 of 4
banks, as well as investments in the California Local Agency Investment Fund (LAIF).
LAIF is a State Treasurer's Office managed investment pool used by California and
many governments throughout the State. The State is prohibited from borrowing or
withholding payments from LAIF. It is a very safe investment and while interest rates
are low, it has not lost value, other than lower yield rates, in the current recessionary
economy. Treasurer's reports, which summarize cash balances by institution, are
presented as separate items for the City, the Community Development Commission
(CDC) and the Housing Development Corporation (HDC) on their respective agendas.
They are reported separately because they are independent legal entities, known as
component units of the City.
It is important to note that cash and investment balances in themselves are not
necessarily good predictors of fiscal health. They rise and fall from one year to the next
as they are used for operations, loans that will be paid back at a later time or are
susceptible to timing issues. The Garvey Bridge reconstruction is a typical example of
timing affects. The contractor requires monthly progress payments from the City but the
State grant that paid for most of the construction was not available to the City on the
same monthly basis. Additionally, the State withheld 20% retention payments until
after the project was completed and accepted by the City Council. The timing of those
payments spanned three fiscal years yet cash disbursements by the City only spanned
two.
As can be seen in the graph on Exhibit "B", cash and investments have remained
relatively stable over the past five years. After a spike in FY 2005-06, caused by a
delayed payment by the State, cash and investments returned to its FY 2004-05 levels
in FY 2005-06 and declined in FY 2007-08 primarily due to a $2.5 million loan from the
City to the CDC which was necessary to establish debt for Project Area 2. Having debt
qualifies a project area for tax increment revenue from Los Angeles County, for the first
time ever Project Area 2, in FY 2007-08, received $921 thousand in tax increment
revenue for the first time. Additionally, $1 million was spent for various capital projects
including Council Chamber renovations and other necessary facility repairs.
Fund Balance
Fund balance is a better predictor of overall fiscal health. It is defined as total assets
minus total liabilities. It reflects a measure of resources available for spending but it is
not equivalent to cash. Fund balance includes assets that are non-spendable items
such as accounts and notes receivable, prepaid expenses and advances to other funds.
Liabilities include items that restrict the amount of spendable resources such as
accounts and notes payable, accrued liabilities, deposits and deferred revenue. Fund
balance is segregated further into reserves that restrict spendable resources. Reserves
can include items such as fund balance reserved for encumbrances, notes receivable,
advances to other funds and various types of "rainy day reserves." What's left over is
known as unreserved, undesignated fund balance and is roughly equivalent to cash
available for spending.
City Council Meeting
May 12, 2009
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Changes in Unreserved Fund Balance
Unreserved fund balance is the sum of fund balance less any fund balance reserves
and designations. At the end of FY 2007-08 the general fund had an unreserved fund
balance of $18.6 million which compares favorably with prior fiscal years. Over the past
five years unreserved fund balance ranged from a low of $8.9 million in FY 2004-05 to a
high of $22.5 million in FY 2006-07. It is important to keep in mind that unreserved fund
balance can vary from year to year due to excess or deficiency of revenues and
transfers over expenditures (net changes in fund balance), money loaned or advanced
to other funds and the extent that projects are undertaken using "saved" money.
FY 2003-04
In FY 2003-04 total fund balance was $20.4 million. When designations (a form of
reserves) of $6.8 million and long-term receivables of $354 thousand are deducted from
total fund balance the remainder, unreserved fund balance is $13.0 million. Operating
income for the same year was $756 thousand.
FY2004-05
In the subsequent year, FY 2004-05, total fund balance was $21.6 million with
designation reductions of $11.0 million and a reserve for long-term receivable of $1.7
million. Designations for building and equipment increased $2.2 million, designations
for litigation increased by $1.0 million and designations for self insurance increased
$700 thousand during the year making total designations $11.0 million. Also, long-term
receivables increased $1.4 million, primarily representing payments that were due from
the State; the receivable from the State was also accrued in the Intergovernmental
revenue account. Net changes in fund balance for the year were $1.2 million; the
increase over the prior year was due mostly from the intergovernmental revenue accrual
just described.
FY2005-06
The FY 2005-06 total fund balance was $22.5 million. During the year the long-term
receivable declined to $257 thousand because the State paid the receivable that was
due to the City. The affect of the cash payment from the State was to increase
unreserved fund balance to $11.2 million from $8.9 million the previous year.
Designations remained at $11.0 million at year end and unreserved fund balance
jumped to $22.5 million from $11.2 million at the end of the fiscal year, an $11.3 million
increase. The increase came about because designations of $11.0 million were
inappropriately included in previous year's financial reports. Designations should only
be used to show management's plans to use current resources on planned
expenditures, not as a contingency for the unexpected.
FY2006-07
Total fund balance for FY 2006-07 was $22.6 million which consist of a reserve for
encumbrances of $150,000 and unreserved fund balance of $22.4 million. Net change
City Council Meeting
May 12, 2009
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to fund balance for the year was $125 thousand. After the spike in cash and
investments in FY 2005-06, caused by a deferred payment from the State, the cash and
investment balances returned to pre FY 2005-06 averages. The year was otherwise un-
noteworthy.
FY2007-08
FY 2007-08 fund balance was $21.7 million and unreserved fund balance dipped to
$18.6 million. The decline in unreserved fund balance can be explained by: 1) Net
changes to fund balance of $(932) thousand. The negative change was the deliberate
expenditure of $967 thousand of fund balance resources for capital projects. 2) The
reserve for encumbrances account increased to $342 thousand. 3) Reserves for notes
receivable was $232 thousand and prepaid expenses was $2.8 thousand. 4) $2.5
million was advanced to CDC Project Area 2 to establish debt and therefore qualify it for
tax increment revenue. Operating revenues declined in FY 2007-08 by 1.4%. The
decline, which was primarily a decrease in licenses and permits revenue, was a preview
of the weakening economy that we are now experiencing. Operating expenditures, net
of capital improvements, have grown steadily but not excessively. Revenues, other than
recent declines in licenses and permits, have also consistently grown. Five years of
revenue and expenditure trends can be seen on the chart in Exhibit "A."
Summary
Exhibit "B" illustrates the comparison of cash and investments to fund balance; the
underlying data used in Exhibit "B" is presented in the CAFR extract in Exhibit "C." It is
important to keep in mind that cash and investments ebb and flow depending on uses
and timing variances and should not be considered important but not an absolute
predictor of fiscal health.
By looking at the total fund balance line on the chart in Exhibit "B" it becomes clear that
the City's fund balance, in spite of yearly ups and downs, remains relatively consistent
from year to year. This consistent long-term trend is a better indicator of the City's
financial health.
PUBLIC NOTICE PROCESS
This item has been noticed through the regular agenda notification process.
Submitted by:
Steven Brisco
Finance Director
Attachments: 1. Exhibit A: Revenue and Expenditure Trends. 2. Exhibit B: Cash/Fund Balance
Comparison. 3. Exhibit C: Fund Balances of Governmental Funds
EXHIBIT A
Revenue and Expenditure Trends
20,000
18,000
T 16,000
h 14,000
0
12,000
U
S 10,000
a 8,000
n
d 6,000
5 4,000
2,000
FY 03-04 FY 04-05 FY OS-06 FY 06-07 FY 07-08
-+--Revenues & Transfers -Expenditures
In FY 2005-06 the rate of revenue growth began to slow and the slowing increased in
FY 2007-08 as a decline in building permits revenue began to take hold. At the same
time, capital outlay of $1 million for major facility maintenance was expended. Capital
outlay for major renovations is often paid for with "saved" fund balance cash rather than
annual operating revenues and that is the case in FY 2007-08. If the capital outlays are
removed from of the expenditure line, the City experienced a very slight excess of
revenues over expenditures. The use of "saved" cash to pay for the renovation projects
explains why the expenditure line continued in an upward trend in FY2007-08 while the
revenue line began a flat slope. In this recessionary economy it is no surprise to see
that building permit revenues are continuing to slide in FY 2008-09.
EXHIBIT B
Cash/Fund Balance Comparison
25,000
T
h 20,000
0
U 15,000
S
a 10,000
n
d 5,000
S
FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08
(Total Fund Balance ---Unreserved FB * Cash & Invest
This graph illustrates that total fund balance has been relatively consistent from year to
year. Total fund balance is the sum of unreserved fund balance, including cash, loans
receivable and various reserves such as "rainy day reserves," contingency reserves,
reserves for encumbrances and so forth. A stable total fund balance, as we see in this
graph, represents an overall stable government.
The cash line reflects consistent cash flow in FY 2004-05 and a spike in cash during FY
2005-06 when the State paid deferred backfill payments to the City. The Cash balance
returned its previous level in FY 2006-07. In FY 2007-08 the General Fund loaned $2.5
million to the CDC and the loan will be recouped at a future date. In the same year $1
million of fund balance cash was spent on capital projects.
Finally, from FY 2003-04 to FY 2006-07 the unreserved fund balance line included
designations totaling $11 million. Designations are management's plan to use fund
balance cash at some future time and that reduces the amount of unreserved fund
balance. In FY 2006-07 new auditors removed the designations from fund balance and
that caused the unreserved fund balance line to jump up. In FY 2007-08, as described
above, cash was used for capital projects and a loan to the CDC thus lowering available
cash as reflected in the unreserved fund balance.
EXHIBIT C
CITY OF ROSEMEAD
Fund Balances of Governmental Funds
Last Five Fiscal Years
(modified accrual basis of accounting)
Fiscal Year
2004 2005 2006 2007 2008
General fund:
Reserved
5 353,616
1,719,044
256,765
150,000
3.074,496
Unreserved
20,053,506
19,896,581
22,228,341
22,460,545
18,633,154
Total general fund
520,407,122
21,615,625
22,485,106
22,610,545
21,707,650
All other governmental funds:
Reserved
5 3,195,415
-
7,693,216
4,947,087
9,000,561
Unreserved, reported in:
Special revenue funds
5,653,208
7,336,247
6,821,660
6,142,833
6,140,289
Debt service funds
32,835
2,354,835
-
552
692,475
Capital projects funds
6,264,457
8,433,842
6,435,798
7,397,454
2,490,553
Total all other governmental funds 515,145,915 18,124,924 20,950,674 18,487,926 18,323,878
The City of Rosemead has elected to show onlyfive years of data for this schedule.
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Source: City of Rosemead CAFR, Fiscal Year Ended June 30, 2008