Title
Subject: Comprehensive Annual Financial Report (CAFR)
From: Financial Services Agency
Recommendation: Receive an informational report regarding the Fiscal Year 2001-2002 Comprehensive Annual Financial Report (CAFR) and Oakland Redevelopment Agency Financials
Body
,FFICE CIF THE CIT f CLERK
I @ 4.!.@
CITY OF OAKLAND I - 1
2903 JUN 12 PM 6: 1 1
Agenda Report
TO: Office of the City Manager
ATTN: Robert C. Bobb
FROM: Financial Services Agency
DATE: June 24, 2003
RE: FY 2001-02 Comprehensive Annual Financial Report and Oakland
Redevelopment Agency Financials
SUMMARY
The attached City of Oakland Comprehensive Annual Financial Report (CATR) and Oakland
Redevelopment Agency Financials are herewith presented to the Finance and Management
Committee. The CAFR incorporates the Oakland Municipal Employees' Retirement System
(OMERS), the Police and Fire Retirement System (PFRS), the Oakland Redevelopment Agency
(ORA) and the Port of Oakland financial statements. The City and Agency implemented the
Governmental Accounting Standards Board (GASB) Statements 34, 37 and 38 and
Governmental Accounting Standards Board Interpretation 6. A description of these new
pronouncements be-ins on page 29 of the CA-FR. Also attached are the Management Letter from
the City's outside auditors, KPMG, LLP and the auditor's letter of SAS 61 required
cominunications. The Management Letter notes no material weaknesses in the City's internal
controls and financial operations.
FISCAL IMPACT
This is an informational report only; there is no fiscal impact.
BACKGROUND
The Comprehensive Annual Financial Report is presented in three sections.
The Introductory Section includes information about the organizational structure of the
City, its accounting and budgetary systerns, and its fund structure. This section also has
summarized data reflecting the City;s financial condition, including an overview of the
City and its economy, general government operations, enterprise and internal service
fund operations, and debt administration.
The Financial Section includes the General Purpose Financial Statements as an overview
of the City's entire financial operations. A new requirement under GASB 34 is the
inclusion of a Management's Discussion and Anahsis, which provides a high level
it
Itern lo-Vp (Y-D
ORA/Council Fi gaernent
july 15,2003 C ee
Page 2
FY2001-02 Comprehensive Annual Financial Report
overview of the City's financial activities. The new Goverrinient-wide statements provide
a consolidated view of the City's financial activities and condition on a full accrual basis.
Separate information is provided for the City's governmental funds and business-type
activities (Sewer Service Fund and Golf Courses). Revenues are recognized when earned
and expenses are recognized when incurred. Capital Assets, including infrastructure, and
the liability for the City's long-term debt are included in the Statement of Net Assets.
Combining- and individual fund and account 9(up statements present the separate funds
and account groups that are material. Schedules provide other information and details of
data summarized in the financial statements. These statements and schedules pertain to
those operations which, when taken together, make up the reporting entity of the City.
These financial statements also include the financial activities of the Oak-land Municipal
Employees' Retirement System (OMERS), the Police and Fire Retirement System
(PFRS), the Oakland Redevelopment Agency (ORA), the Port of Oakland, and the
Oakland-Alameda County Coliseum Authority. Also included in the financial section of
the CAFR is the Independent Auditor's Report that states, in the opinion of the auditors,
the financial statements accurately represent the financial condition of the City as of June
30, 2002.
The audit of the City of Oakland's financial records was performed by the accounting
firm of KPMG,LLP under the ten-ns of an extension to their original two-year agreement.
The audits of the OMERS, PFRS, Oakland Redevelopment Agency and Port of Oakland
were separately audited by other independent accounting firms.
The Statistical Section provides ten years of summary financial data as well as various
demographic, economic and statistical information related to the City and its operations.
The Management Letter contains comments and recommendations from the City's outside
auditors, KPMG, LLP. In the current year, no material weaknesses were noted. Also attached is a
letter of required communications from KPMG, LLP.
ACTION REQUESTED OF THE FINANCE COMMITTEE
Staff recommends that the Finance and Management Committee accept the June 30. 2002
CAYR, ORA Financials and Management Letter.
Respe mitted
EDGERLY
ancial Services Agency
William E. Noland
APPROVED AND FORWARDED TO Cnntrollcr
THE FINANCE AND MANAGEMENT
COMMITTEE Item 10-24ce-
ORAiEnuneil
July 15, 2003
Office of the City Manager
MM
Three Embarcaderc Center
San Franc sco, CA 9411 1
Mav 2, 1-00,
The Honorable Members of the City Council
Oakland, California:
We have audited the basic financial statements of the City of Oakland, California, (the Citv) for the year
ended June 30, 20011, and have issued our report thereon dated May 2. 2003. In plarinin.- and performing
our audit of the basic financial statements of the City we considered internal control in order to determine
our auditing procedures for the purpose of expressing our opinion on the basic financial statements. An
audit does not include exan-Linin.- the effectiveness of internal control and does not provide assurance on
internal control. The maintenance of adequate internal control desi.-ned to fulfill control objectives is the
responsibility of mana,gement. Because of inherent limitations in internal control, errors or fraud mav
nevertheless occur and not be detected. Also, controls found to be frinctionin- at a point in time may later
be found deficient because of the performance of those responsible for applyin.- them. and there can be no
assurance that controls currently in existence will prove to be adequate in the future as charges take place
in the or.-anization.
However, we noted certain matters involvin.- internal control and its operation that we consider to be
reportable conditions Linder standards established by the American Institute of Certified Public
Accountants. Reportable conditions are matters comin.- to our attention that, in our jud-ment, relate to
sionificant deficiencies in the design or operation of internal control and could adversely affect the
or-Lyanization's ability to record, process, summarize, and report financial data consistent with the
assertions of management in the financial statements. Our consideration of internal control would not
necessarily disclose all matters in internal control that mi-Int be reportable conditions. Furthermore,
reportable conditions do not include potential future internal control problems; that is, control problems
cornin.- to our attention that do riot affect the preparation of financial statements for the period under audit.
The reportable conditions noted during our audit, all of which have been discussed with the appropriate
members of mana.-enient, are storrmarized as follows:
Year-End Closing and Financial Reporting Process
The City completed its Comprehensive Annual Financial Report (CAFR) approximately 10 months after
the end of Its fiscal year. This delav appears to have been caused by:
• The reliance by the Financial Services Agency on other departments to record certain transactions
which were not reported in accordance with generally accepted accounting principles,
• The implementation of Governmental Accounting Standards Board (GASB) Statement No. 34 which
dramaticallv chan2ed the City's data accumulation and financial statement presentation processes. and
• A lack of skilled resources in the Financial Services A,-encv to respond to the challenges that routine
accountiriL @ornetinies presents and to the unique challenges presented by GASB No. 334.
Iternlo-v,*da
ORA/Council
3uly 15, 2003
The Honorable Members of the City Council
City of Oakland, California
Mav 2, 2001
PaLe 2
From a control standpoint, the inability to effectively closeout the financial accounts and records in a
timely manner could result in material errors -oin,a undetected for extended periods of time. We
recommend that the City:
• Consider its decentralized accounting structure and deternume if it can be improved or if it should be
chan.-ed to allow for more centralized oversi.aht and control of key accountin.- areas,
• Evaluate the process used to prepare its GASB No. 34 compliant CAFR and define key milestones
necessary to accelerate the year end closin.- process, and
• Evaluate its resource needs and fill any gaps between existin.- resources and the needs of the Financial
Services Agency.
Management's Response:
The implementation ofGASB No. 34 was responsible Jor a majorit-v of the delay in reportin o. The Cm, is
asseniblin.- a checklist of the required inforination under the new reporting model and assigning
responsibilitY and due dates for each itent, iii order to assure a inore tintel -v closing. Kev staff inembets
will receive reftesher and niore advanced irainin,g on the new model. The Cin, will also revievs- its
deceritialiZeel accounting structure and inake up of its accoiiritin,g staff tit determine where improvements
can be niade.
Reconciliation and Review of Cash and Investments on a Timely Basis
The City's cash and investments are deposited in approximately forty different bank or trust accounts
which require rnorritorm,g and monthly reconciliations to the City's records. We noted that the City did not
perform the majority of their monthly cash and investment reconciliations on a timely basis. Furthermore,
the Citv's June ',O, 2002 unrestficted cash and investments were not reconciled until November 2002.
Once completed, the reconciliation of the unrestricted cash and investments revealed several material
items that required adjustment in the Chy's Vneral ledger.
The periodic reconciliation of the balances recorded in the general led.-er to the statements provided bv the
financial mSLi[Uti0nS is not only a key control over this significant asset of the City, but also over other
sismificant accounting processes such as procurement and employee compensation.
We reconimerid that all monthly cash and investment accounts be reconciled and reviewed on a timelv
basis to ensure that adequate controls are maintained to detect and/or prevent the occurrence of material
errors.
Management Response:
The Cin agrees that timeh, cash teconciliarions tit e kev to properfinancial contiols. The Cirv is currenih
peifonnin,g its cash reconciliations on a rimeiv basis. Item
-10.
OP-VCouncil Pac,
July 15, 2003
-l"M
The Honorable Members of the Citv Council
City of Oakland, California
May 2, 2003
PaP 3
AlthouLh not considered to be reportable conditions, we also noted certain matters involving internal
control and other operational matters that we would like to present for your consideration. These
comments and recommendations, all of which have been discussed with the appropriate members of
mana.-ement, are intended to improve internal control or result in other operatima efficiencies and are
summarized as follows:
Accounting for Non Routine Transactions
Non-routine transactions are transactions that are unusual, either due to size or nature, or that occur
infrequently. Due to the nature of non routine transactions, they often involve complex calculations or
accounting principles which may require:
0
• Greater management intervention to specify the appropriate accounting treatment
• Greater manual intervention for data collection and processma
• Greaterjud.-ment in determirim.a amounts
The nature of non-routme transactions may make it difficult for management to implement effective
controls to prevent or detect and correct a si.-nificant muisstatement as compared to routine transactions.
Durin.g the year, the City experienced difficulties in accountin,g for certain non routine types of
transactions, such as:
Recording the Issuance of'Debt - For purposes offinaticial reporting:
In accordance with GASB Statement No. 34, transactions derived from the issuance of debt related to
g 0
governmental activities should be reported in the -, vernmental funds as follows:
• The cost of issuin2 debt should be reported as an expenditure:
• The face amount of the debt should be reported as an other financin,,, source: and,
• Any discount or prenuum incurred should be reported as an other financing use/source.
The City had not properly segregated certain transactions involvin.- the issuance of debt related to
.overturnental activities. Specifically, certain bond proceeds were initially reported net of issuance costs.
discounts and premiums as an other financin.- source. In other instances, debt issuance costs were included
with other expenditures instead of being reported separately.
Recording Debt Seivice Activifies - For purposes of fund level reporting, the payment of principal and
interest on debt administered by goverrurnental activities are to be reported individually as debt service
expenditures. During the vear, the Citv had incorrectly reported certain interest payments as "principal
retirement" expenditures and cemam principal payments as "interest and fiscal charges" expenditures. The
principal balance of certain notes payable had also been inappropriately reduced for payments that had no[
been renutted to the lender, and the defeasance of certain notes payable had riot appropriatelv recorded in
the vear in which the defeasance occurred. We understand that the Citv's decentralized orl-anizational
structure contributed to the occurrence of these errors.
IMPTIM
The Honorable Members of the City Council
City of Oakland, California
May 2, 1-001
Pa!ae 4
The above discrepancies resulted in several audit adjustments to properly report the outstandin-2 balance of
the City's loa,-term debt as of June 30, 1-002.
Long-term Loon Receivables - Allowtince for Poientialtv Uncollectible Loan5
In conjunction with the housin.- and community development programs, the City frequently sponsors Ion--
term loans to low income families and developers of low income housin.- or other desired community
development projects. Certain loans contain clauses which effectively defer the repayment of the loaned
amount for an extended period of time. In accordance with generally accepted accounting principles, the
City is required to establish a reserve for potentially uncollectible loans based on known facts and prior
collection experience. Prior to fiscal year 2001-02. the City had met this requirement by establishin.- a
deferred credit (liability) equal to the total OUtstandin.- loan receivable balance. With the implementation
of GASB Statement No. 34, the City had to estimate the potentindly uncolleCtible portion of the loan
receivables, and establish an allowance which effectively reduces the loan receivable and deferred credit
balances by equal amounts.
At our request, the City had conducted an analysis of the long-term loans for purposes of estimating the
uncollectible portion, and recorded a significant adjustment to establish an allowance for potentially
uncollectible loans.
We recommend the City examme staff tramin.g requirements, lines of interdepartmental corrununication,
and the existin.- oroanizational structure to ensure adequate controls are in place to detect or prevent
material errors fromoccurfina.
Management's Response:
The Financial Semces Agenci - Accounting Division has now taken over priman, responsibilin, for the
recording oJ' debt related aciii-ines, which should eliminate the need for adjustments in the fimue.
Accounting has also instituted regulatIv scheduled ineetings with the Community and Economic
Development Agencv, which admini3tets the Citv's loans, to review loan receivables and collectibilin.
along with other accounting aems.
Reconciliation of Payroll Registers to General Ledger on a Timelv Basis
The City utilizes its Oracle system to process payroll transactions. For each payroll cycle, reports and
re.-isters detailing all payroll arriounts are generated and reviewed by the Payroll Department and all of the
City's aLencies for reasonableness.
Once the payroll reports and re.aisters a-re reviewed for reasonableness. the data is then uploaded and
recorded into the @eneral ledaer system. Because the payroll registers lack- subtotal information, the City
does not reconcile the detailed payroll data to the amounts recorded in the .-eneral IedErer System LO \erifv
the completeness and accuracy of the data recorded in the gerieral ledger.
The Honorable Members of the City Council
City of Oakland, California
May 2. 2003
Pa.@e 5
As payroll is an significant expense category for the City, we recommend the City consider performing a
monthly reconciliation of the detailed payroll registers to the Lencral ledger system to ensure the
completeness and accuracy of the payroll expenditures/expenses and corresponding liabilities reported in
the City's basic financial statements.
11anagement Response:
The Cirv currently petforms limited reconciliations oj'its payroll dater to the general ledger entries. The
Cir.v will devetop improved pit qvroll reporting, following the current upgrade to its financial systems. to
enable more thorough reconciliations oj'pavroll infonnation.
Accounting for Capi(al Assets
Due to certain system liniitations within the City's existing capital asset accounting system, rnarraoement
elected to acquire a standalone capital asset accountin,u software packa.ge to record and inana.ge the City's
capital assets. We understand mana.-ement intends to transfer this data into the capital asset module of the
City-wide financial accounting system once the system limitations have been addressed.
We believe the use of a stand alone capital assets packa,ge was the ri.ght short terni solution to address the
City's immediate needs. However, having a system that is not integrated with the general ledger
introduces additional inefficiencies and control risks. Therefore, we recornmend that the Citv examine
lon.aer terni solutions to further intel-rate its capital asset data with its general ledger system.
Alanagement's Response:
The current telease of the Cin"s corporate accounting system did not provide suitable fleribiliA, to
incorporate, value. categorize and depreciate tire over 20 years of capital asset information requited
ander GASB 34. For this reason, tire Citv used a third parAl firiancial package to assemble this
information. The Cit 'v is currentl-v implementing an upgrade to a neiv release ol'its corporate accounting
.@vstenz. 0iice this upgrade is completed, the infoi mation will be uploaded into the capital asser system.
These conditions were considered in determinina the nature, finumi, and extent of the audit tests applied in
our audit of the -1002 basic financial statements, and this report does riot affect our report on these
financial statements dated May 2, 1-003. We have riot considered internal control since the date of our
report.
The Honorable Members of the Citv Council
City of Oakland. Califorrfia
May 2, 2003
Pa.ae 6
Our audit procedures are designed primarily to enable us to form an opinion on the basic financial
statements, and therefore may not brin.- to li,ght all weaknesses in policies or procedures that may exist.
We airn, however, to use our knowledge of the City gained during our work to make comments and
su,-,-estions that we hope will be useful to you.
We would be pleased to discuss these comments and recommendations with you at any time.
This report is intended solely for the information and use of the City Council, mana.-ement, and others
within the or.-anization and is not intended to be and should not be used by anyone other than these
specified parties.
Very truly yours,
LL-P
Itein 10.Z& M
ORA/Council
July 15, 2003
"I "
Three Ernbarcadeno Center
San Franc sco, CA 941 1 1
May S. 2001
The Finance and Management Committee
City of Oakland
Oak-land, Califor-nia
Members of the Finance and Manatement Conmuttee:
We have audited the basic financial statements of the City of Oakland (the City) for the year
ended June 30, 2002, and have issued our report thereon dated May 2, 2003. We did not audit
the financial statements of the Oakland Redevelopment A.-ency, the Oakland Muruicipal
Employees' Retirement System, the Police and Fire Retirement System, the Port of Oakland,
and the City of Oakland H0L1Sjn1- Finance Revenue Bonds Issue DI and D2. Those statements
were audited by other auditors whose reports have been furnished to us. Under -generally
accepted auditin.- standards, we ire providin.v you with the followin.- information related to the
conduct of our audit.
Our Responsibility Under Generally Accepted Auditing Standards
We have a responsibility to conduct our audit in accordance with auditing standards generally
accepted in the United States of America. In carrying out this responsibility. we planned and
performed the audit to obtain reasonable assurance about whether the basic financial statements
are free of material misstatement, whether caused by error or fraud. Because of the nature of
audit evidence and the characteristics of fraud, we are to obtain reasonable, not absolute,
assurance that material misstatements are detected. We have no responsibility to plan and
per-form the audit to obtain reasonable assurance that misstatements, whether caused by error or
fraud, that are not material to the financial statements are detected.
In addition, in plannin.g and perfornting our audit, we considered internal control in order to
determine our auditing procedures for the purpose of expressing our opinion on the basic
I, t,
financial statements. Art audit does not include exanuni[12 the effectiveness of internal control
and does not provide assurance on internal control.
Item 10
ww V2.4p %14@
ORA/Council
July 15, 2003
'III G11 I,- I, I., r1c
The Finance and Management Committee
City of Oakland
May 8. 2003
pl@-e 2
Significant Accounting Policies
The si.-nificant accountin,o policies used by the City are described in note 2 to the basic
financial statements. As described in note 2, the City has implemented a new financial reporting
model, as required by Governmental Accounting Standards Board (GASB) Statement No. 34.
Basic Financial Siatements - and Management's Discussion and Analysis -for State and Local
Goveniments, as of July 1. 2001. The City has also adopted the provisions of GASB Statement
No. 37, Basic Financial Statements - and Mana,@einent's Discussion and Analvsis - jbt- State
and Local GoVeMnients: Omnibus, GASB Statement No. 38, Cerrain Financial Statement Note
Disclosures@ and GASB Interpretation No. 6. Recognition and Measurement of Certain
Liabilities and Expenditures in Goveniniental Fund Financial Statements, as of July 1, 2001.
Management Judgments and Accounting Estimates
Accounting estimates are an inte.-ral part of the financial statements prepared by mana.-ement
and are based on manaacnient's current judgments. Certain accounting estimates are particularly
I I
sensitive because of their si.anificance to the financial statements and because of the possibility
that future events affectin.- them may differ markedly from mana,gement's current judgments.
Mana.gement's estimate of accrued workers' compensation is based on an analysis of historical
trends- The City also contracted to have an actuarial study performed with respect to the
sufficiency of the reserve. We compared the reserve amount to the amount actuarially
determined in order to evaluate the reasonableness of the reserve in relation to the basic
financial statements of the City taken as a whole.
Management's estimate of estimated litication reserves is based upon the individual case
reserves proposed by the City Attorney's Office. The City also contracted to have an actuarial
study performed with respect to the sufficiency of the reserve. We discussed si.anificant cases
with the City's attorneys and compared the reserve amount to the amount actuarially deterrairied
in order to evaluate the reasonableness of the reserve in relation to the basic financial statements
of the City taken as a whole.
Mana.-ement's estimate of the reserve for uncollectible loan receivables is based oil the
repayment ternis of the loan agreements, and an analysis of historical trends. We evaluated the
I
key factors and assumptions used to develop the reserves. and discussed significant loan
reserves with mana2enient in order to evaluate the reasonableness of the reserve in relation to
the basic financial statements of the City taken as a whole.
"M
The Finance and Mann-ement Committee
City of Oakland
May 8. 2003)
Pa,ae 3
Mana.-ernent's estimates of the useful lives and capitalization criteria pertaining to capital assets
are based on prior experience with suvalar assets and industry standards. We evaluated the key
factors and assumptions used to deterrrune the expected useful lives and develop capitalization
criteria in order to evaluate the reasonableness of the underlying capital assets in relation to the
basic financial statements of the City taken as a whole.
Receipts from federal arid state gants and other similar programs are subject to audit to
determine if the funds were expended in accordance with appropriate statutes, -rant terms, and
re.-ulations. Maria.aernent records receivables based on an estimate of what will ultimately be
recoverable. Our procedures include evatuating the reasonableness of management's estimates.
Audit Adjustments
We proposed corrections relatin., to debt issuance costs, debt service expenditures, lon-term
debt, interest expenses and accrued interest on Ion.--term debt, cash, the valuation of
investments. the deferral of property tax revenues, the valuation of Ion,--tenn loan receivables,
the ValUaLlon of grant receivables, arid net asset classification. These corrections were
considered material to the basic financial statements and appear Lo have been caused by the
implementation of several new and complex accountin,o standards in the current year.
In connection with our audit of your basic financial statements, we have discussed with
mannement certain financial statement misstatements that have not been accounted for in your
books and records as of and for the year ended June 30, 2002. We have reported such
misstatements to trana.gentent on a Summary of Uncorrected Misstatements and have received
written representations from mana2ement that manaaernent believes the effects of the
uncorrected financial statement misstatements are inunaterial, both individualiv and in the
zi.g,gre,-ate, to the basic financial statements taken as a whole. Attached is a copy of the sturiniary
that has been provided to, and discussed with, management.
Other Information in Documents Containing Audited Financial Statements
Our responsibility for other information in documents containing the City's basic financial
statements and our report thereon does not extend beyond the financial information identified in
Our report, and we have no obli.-ation to perform any procedures to corroborate other
information contained in these documents. We have, however, read the other information
included in the City's Comprehensive Annual Financial Report, and no matters came to our
attention that cause us to believe that such information. or its manner of presentation, is
materially inconsistent with the information. or manner of its presentation. appearing in the
basic financial statements.
1"M
The Finance and Martaqernent Committee
City of Oakland
Mav 8. 2003
Pa2e 4
Disagreements with Management
There were no disal-reements with mana,@einent on financial accountin.- and reportin.a matters
that, if not satisfactorily resolved, would have caused a modification of our report on the City's
basic financial statements.
Consultation with Other Accountants
To the best of our knowled,@e, management has not consulted with or obtained opinions, written
or oral, front other independent accountants dorm-. the past year that were subject to the
requirements of AU 625, "Reports on the Application of Accounting Principles."
Major Issues Discussed with Management Prior to Retention
We -enerallv discuss a variety of matters, including the application of accounting principles and
auitin.- standards, with management each year prior to retention as the City's auditors. However.
these discussions occurred in the normal course of our professional relationship and our responses
were not a condition to our retention.
Difficulties Encountered in Performing the Audit
Our audit of the City's basic Financial statements was not completed in our expected timeframe.
This delay was caused by the City's implementation of several new and complex accountin.-
standards for the vear ended June 30, 2002.
This report is intended solely for the information and use of the Finance and Management
Committee and is not intended to be and should not be used bv anvone other than this specified
partv.
Very truly yours,
O>MC, LL-P
6W
65
,
Am
SUPPORTING DOCUMENTATION FOR
FISCAL YEAR 2001-2002
COMPREHENSIVE ANNUAL
FINANCIAL REPORT AND
OAKLAND REDEVELOPMENT
AGENCY FINANCIALS
THIS DOCUMENT IS ON FILE AND
AVAILABLE FOR REVIEW AT THE
OFFICE OF THE CITY CLERK.
Location of Office:
Office of the City Clerk
15t Floor, Records Section
One Frank Ogawa Plaza
Oakland, Ca. 94612
Office Hours 8:30 A.M. - 5:00 P.M.
Closed During Lunch Hour (12:00 P.M. - 1:00 P.M.)
item 10. 2.& CC,
ORA/Council
July 15, 2003