HomeMy WebLinkAboutItem 11 - Acceptance of the TDA and Federal Single Audit for FY 2019-20Item #11
GtT Y Ofi
rn O Council AgendaReport
CIS O
Department Name:
Cost Center:
For Agenda of:
Placement:
Estimated Time:
FROM: Brigitte Elke, Finance Director
Prepared By: Debbie Malicoat, Accounting Manager/Controller
Finance
2001
March 2, 2021
Business
30 minutes
SUBJECT: ACCEPTANCE OF THE TRANSPORTATION DEVELOPMENT ACT (TDA)
AND FEDERAL SINGLE AUDITS FOR FISCAL YEAR 2019-20
RECOMMENDATION
Review and accept the TDA and Single Audits for Fiscal Year 2019-20 including auditor's
finding and management's responses.
DISCUSSION
On January 19, 2021, the City Council reviewed and accepted the City's audited financial
statements for the fiscal year that ended June 30, 2020. As discussed in that report, the City's
independent auditors were finalizing the Single Audit Report (Attachment B) and TDA annual
audit (Attachment A) for review at a later meeting. Both audits are now complete and ready
for Council review.
TDA Report and Financial Statements
This document provides information on the revenues received by the City pursuant to the TDA.
The City receives funding from the TDA for two specific purposes:
1. The development and construction of local streets and roads, including
pedestrian and bicycle facilities. Since these funds are legally restricted to the
aforementioned purpose, the City has a special revenue fund created to account
for this portion of TDA revenues. The City received $48,608 in TDA funding during
the 2019-20 fiscal year. These revenues were unspent at the end of the fiscal year and
will be utilized in a transportation project that was delayed due to COVID-19 in
FY2021.
2. Transit Operations and Associated Activities Supporting Public
Transportation. The Transit Fund is an enterprise fund to account for the revenues
received pursuant to the TDA, the Federal Transit Authority (FTA), and revenues
from transit operations. These revenues are allocated under specific statues and are
legally restricted to pay for transit operations, the development of public
transportation systems, and transportation planning. The Transit Fund received
$779,666 in TDA operating grants during the fiscal year. These funds were also
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Item #11
unspent at fiscal year-end due to CARES Act funding received for Transit and will be
available for future use in support of transportation activities.
In addition, this report demonstrates the City's compliance with applicable TDA regulations
pertaining to acceptable fare revenue ratios. For the fiscal year ended in 2020, the City was
required to maintain a fare revenue ratio of 20%, but the actual ratio for 2019-20 amounted to
18%. There is no effect on TDA-related allocations in the first year of non-compliance, as this
year is considered a "grace" year due to the unprecedented loss of riders from the pandemic. In
addition, the State legislature passed AB 90 which would prohibit the imposition of a penalty on
an operator that does not maintain the required ratio of fare revenues to operating cost during the
2019-20 or 2020-21 fiscal years. This mandate is discussed further in Note 7 of the report.
Single Audit Reports
This document provides several items. First, it provides a report on the City's internal control
when it comes to financial reporting. Second, it provides a schedule of expenditures that were
funded by Federal Grants and the City's compliance with applicable Federal regulations. Third,
it provides a schedule of findings and questioned costs, if any. The findings are areas of
improvement for the City when it comes to the internal controls that are designed to manage the
risk with which the City's assets are safeguarded, and its finances are accurately reported which
then translates into the proper administration of federal funding.
As previously presented to the City Council, there are six findings and no questioned cost,
meaning that there are six items identified by the auditors as weaknesses that the City should
correct or mitigate the risks, and there are no cost items that were identified as inconsistent with
grant requirements. The City's responses to the auditor's findings are incorporated into the
document under Attachment B. City staff remain committed to continuous improvements and
addressing the concerns raised by the auditors. The findings are areas of improvement and none
of them put the City's revenues in jeopardy or appropriate accounting of expenditures in
question.
Policy Context
The City's Charter under Section 810 requires the employment of an independent certified public
account to examine the City's financial statements.
Public Engagement
The City's annual audit and issuance of the financial reports fulfills a legal requirement and does
not have a public engagement component outside the required presentation before Council
during a public session.
ENVIRONMENTAL REVIEW
The California Environmental Quality Act does not apply to the recommended action in this
report, because the action does not constitute a "Project" under CEQA Guidelines Sec. 15378.
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Item #11
FISCAL IMPACT
Budgeted: Yes
Funding Identified: Yes
Fiscal Analysis:
Funding Sources
General Fund
State
Federal
Fees
Other:
Total
Total Budget
Available
$75,Oa
$75,000
Current
Funding
Request
$61,310
$61,310
Budget Year: 2020-21
Remaining
Balance
13
$13
Annual
Ongoing Cost
$75,000
$75,000
The City budgets the cost for the auditing firm annually. The cost is appropriated with the annual
budget adoption and encompasses the CAFR, TDA, Single Audit, and the Whale Rock Reservoir
audit. The current fiscal year contains a budget of $75,000 for the previous fiscal year audit. The
City had received a five-year fee schedule with the audit contract and for this fiscal year, the cost
is $61,310.
ALTERNATIVES
The City Council could decide to revise or not accept the presented reports for fiscal year 2019-
20. This is not recommended as the reports have been prepared in conformance with a variety of
accounting, federal, and state reporting requirements and represent the professional evaluation
and analysis by the City's independent auditors.
Attachments:
a - SLO TDA 2020 - FINAL
b - SLO Single Audit 2020 Report
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h : City of San Luis Obispo
Transportation
Development Act Funds
Report and Financial
Statements Year End
June 30, 2020 and 2019
y
M
lid
Item #11
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Item #11
City of San Luis Obispo,
California
Transportation Development Act Funds
Report and Financial Statements
Years Ended June 30, 2020 and 2019
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Item #11
City of San Luis Obispo, California
Transportation Development Act
Funds Report and Financial
Statements
Year Ended June 30, 2020 and 2019
Table of Contents
Page
Independent Auditors' Report 1
Balance Sheets —June 30, 2020 and 2019 5
Statements of Revenues, Expenditures and Changes in Fund Balance —
Years Ended June 30, 2020 and 2019 6
Statements ofFund Net Position —June 30, 2020 and 2019 7
Statements of Revenues, Expenses and Changes in Fund Net Position —
Years Ended June 30, 2020 and 2019 8
Statements of Cash Flows —Years Ended June 30, 2020 and 2019 9
Notes to Financial Statements 11
TDA Fund Supplementary Information
Schedule of Revenues and Expenditures — Budget and Actual —
Years Ended June 30, 2020 and 2019 21
Report on Internal Control over Financial Reporting and on Compliance and Other
Matters Based on an Audit of Financial Statements Performed in accordance with
Government Auditing Standards 23
Independent Auditor's Report on Transportation Development Act Compliance 25
Schedule of Findings and Responses 27
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Item #11
A&
1 �o� ► BADAWI&ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Report on the Financial Statements
We have audited the accompanying financial statements of the Transportation Development Act (TDA)
Fund and the Transit Fund of the City of San Luis Obispo, California (City), as of and for the years ended
June 30, 2020 and 2019, and the related notes to the financial statements as listed in the table of contents.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express opinions on these financial statements based on our audit. We conducted
our audit in accordance with auditing standards generally accepted in the United States of America and the
standards applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity's preparation
and fair presentation of the financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinions.
Address: 2855 Telegraph Avenue, Suite 312 Berkeley fA 94705 - Phone: 510.768.8251 • Fax: 1; n WA R7da
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Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the Transportation Development Act (TDA) Fund and the Transit Fund of the City as of June 30,
2020 and 2019, the changes in financial position and cash flows where applicable for the years then ended in
accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 1, the financial statements present only the Transportation Development Act (TDA)
Fund and the Transit Fund and do not purport to, and do not, present fairly the financial positions of the
City as of June 30, 2020 and 2019, the changes in its financial position or where applicable, its cash flows for
the years then ended in accordance with accounting principles generally accepted in the United States of
America. Our opinion is not modified with respect to this matter.
Other Matters
Other Information
Our audit was conducted for the purpose of forming opinions on the financial statements that collectively
comprise the Transportation Development Act (TDA) Fund and the Transit Fund's basic financial
statements. The supplementary information are presented for purposes of additional analysis and are not a
required part of the basic financial statements.
The supplementary schedules on page 21 are the responsibility of management and were derived from and
relate directly to the underlying accounting and other records used to prepare the basic financial statements.
Such information has been subjected to the auditing procedures applied in the audit of the basic financial
statements and certain additional procedures, including comparing and reconciling such information
directly to the underlying accounting and other records used to prepare the basic financial statements or to
the basic financial statements themselves, and other additional procedures in accordance with auditing
standards generally accepted in the United States of America. In our opinion, the supplementary schedules
are fairly stated in all material respects in relation to the basic financial statements as a whole.
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Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 3
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our report dated February 15, 2021
on our consideration of the City's internal control over financial reporting and on our tests of its compliance
with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The
purpose of that report is to describe the scope of our testing of internal control over financial reporting and
compliance and the results of that testing, and not to provide an opinion on internal control over financial
reporting or on compliance. That report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering City's internal control over financial reporting and
compliance.
Badawi & Associates
Certified Public Accountants
Berkeley, California
February 15, 2021
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund
Balance Sheets
June 30, 2020 and 2019
2020 2019
Assets
Total assets
Liabilities and Fund Balance
Total liabilities and Fund Balance
The accompanying notes are an integral part of these financial statements. Packet Page244
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund
Statements of Revenues, Expenditures and Changes in Fund Balance
June 30, 2020 and 2019
2020 2019
Revenues - intergovernmental allocations $ 48,608 $ 47,234
Other financing uses - operating transfers to City of San Luis Obispo (48,608) (47,234)
Excess of revenues over other financing uses - -
Fund balance - beginning of year - -
Fund balance - end of year $ - $ -
The accompanying notes are an integral part of these financial statements. Packet Page245
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Item #11
City of San Luis Obispo, California
Transit Fund
Statements of Fund Net Position
June 30, 2020 and 2019
2020 2019
Assets
Current assets:
Cash and investment $ 2,317,893 $ 1,250,475
Accounts receivable 26,115 166,100
Interest receivable 8492 6,391
Due from other governments 2,307:585 1,484,870
Total current assets 4,660,085 2,907,836
Capital assets:
Infrastructure
221,744
221,744
Buildings and improvements
5,101,506
5,101,506
Transit operating equipment
9,021,099
9,688,534
Construction in progress
1
27,600
Total capital assets
14,344,350
15,039,384
Less accumulated depreciation
(8,308,545)
(8,630,038)
Total capital assets, net of accumulated depreciation
6,035,805
6,409,346
Total assets
10,695,890
9,317,182
Deferred Outflows of Resources
Pension related
90,898
128,043
Other post -employment benefits related
14,698
5,762
Total deferred outflows of resources
105,596
133,805
Liabilities
Current liabilities:
Accounts payable
384,440
236,040
Accrued salaries and compensated absences
31,389
27,356
Unearned revenues
1,546,765
-
Total current liabilities
1,962,594
263,396
Noncurrent liabilities:
Compensated absences, net of current portion
6,650
5,888
Net pension liability
710,153
689,950
Net other post -employment benefits liability
47,123
62,523
Total noncurrent liabilities
763,926
758,361
Total liabilities
2,726,520
1,021,757
Deferred Inflows of Resources
Pension related
11,159
7,553
Other post -employment benefits related
17,104
1,432
Total deferred inflows of resources
28,263
8,985
Net Position
Net investment in capital assets
6,035,805
6,409,346
Restricted
2,010,898
2,010,899
Total net position
8,046,703
8,420,245
The accompanying notes are an integral part of these financial statements. Packet Page246
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Item #11
City of San Luis Obispo, California
Transit Fund
Statements of Revenues, Expenses and Changes in Net Position
Years Ended June 30, 2020 and 2019
2020
2019
Operating revenues:
Passenger fares
$ 196,892
$ 284,254
Special transit fares
433,175
475,196
Other revenue
3,500
17,358
Total operating revenues
633,567
776,808
Operating expenses:
Purchased transportation
2,358,879
2,373,784
Other transportation services
259,334
218,859
Fuel and lubricants
251,412
327,663
Other materials and supplies
43,562
56,254
Salaries and wages
202,741
216,425
Fringe benefits
154,977
141,763
General and administrative
276,806
416,773
Depreciation
592,039
569,455
Total operating expenses
4,139,750
4,320,976
Operating loss
(3,506,183)
(3,544,168)
Nonoperating revenues:
Transportation Development Act operating grants $ 779,666 1,850,608
Federal Transit Administration operating grants 2,307,585 1,484,870
Interest 58,438 44,300
Other nonoperating revenues (expenses) (13,048) 39,999
Total nonoperating revenues 3,132,641 3,419,777
Income (loss) before transfers (373,542) (124,391)
Transfers - (135,671)
Change in net position
Net position - beginning of year
Net position - end of year
(373,542) (260,062)
8,420,245 8,680,307
$ 8,046,703 $ 8,420,245
The accompanying notes are an integral part of these financial statements.
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Item #11
City of San Luis Obispo, California
Transit Fund
Statements of Cash Flows
Years Ended June 30, 2020 and 2019
Cash flows from operating activities:
Cash received from customers
Cash payments to suppliers for goods and services
Cash payments to General Fund for interfund services
Cash payments to employees for services
Net cash used in operating activities
Cash flows from noncapital financing activities:
Operating grants received
Transfers
2020 2019
$ 773,552 $ 686,866
(2,764,787) (3,011,145)
(276,806) (416,773)
(300,633) (321,546)
(2,568,674) (3,062,598)
3,811,301 3,332,227
- (135,671)
Net cash provided by noncapital financing activities 3,811,301 3,196,556
Cash flows from capital and related financing activities:
Acquisition and construction of capital assets (231,546) (373,058)
Net cash used in capital and related financing activities (231,546) (373,058)
Cash flows from investing activities:
Interest on investments 56,337 44,476
Net cash provided by (used in) investing activities 56,337 44,476
Net increase (decrease) in cash and cash equivalents and investments 1,067,418 (194,624)
Cash and cash equivalents and investments - beginning of year 1,250,475 1,445,099
Cash and cash equivalents and investments - end of year $ 2,317,893 $ 1,250,475
The accompanying notes are an integral part of these financial statements. Packet Page248
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Item #11
City of San Luis Obispo, California
Transit Fund
Statements of Cash Flows, Continued
Years Ended June 30, 2020 and 2019
2020
2019
Reconciliation of operating loss to net cash used in operating activities:
Operating loss
$ (3,506,183)
$ (3,544,168)
Adjustments to reconcile operating loss to net cash used in operating activities:
Depreciation
592,039
569,455
Changes in operating assets, deferred outflows, liabilities,
and deferred inflows:
Accounts receivable
139,985
(89,942)
Accounts payable
148,400
(34,585)
Accrued salaries and compensated absences
4,795
14,806
Pension related deferred outflows and inflows and net pension liability
60,954
22,516
OPEB related deferred outflows and inflows and net OPEB liability
(8,664)
(680)
Net cash used in operating activities
$ (2,568,674)
$ (3,062,598)
Reconciliation of cash and cash equivalents and investments to the statement
of fund net position:
Cash and investment $ 2,317,893 $ 1,250,475
Total cash and cash equivalents and investments $ 2,317,893 $ 1,250,475
Non cash transactions
Gain (loss) on sale of capital assets $ (13,048) $
The accompanying notes are an integral part of these financial statements. Packet Page249
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
NOTE 1- The Reporting Entity
The City of San Luis Obispo (the City) operates a fixed route public transportation system within the City limits and to the
California Polytechnic State University (Cal Poly). Vehicle operations and vehicle maintenance are provided under contract by a
private transportation company. Nonvehicle-related support and administrative services are provided by City staff.
The Transportation Development Act (TDA) Fund (the Fund) of the City of San Luis Obispo, California (the City) is a special
revenue fund created by resolution of the City Council to account for the revenues received pursuant to the TDA. Such revenues
allocated under specific state statutes are legally restricted to financial expenditures made of the development and construction of
local streets and roads, including pedestrian and bicycle facilities.
The Transit Fund is an enterprise fund of the City created by resolution of the City Council to account for the revenues received
pursuant to the Transportation Development Act (TDA), Federal Transit Authority (FTA) and the revenues received from the
transit operations described above. Such revenues are allocated under specific statutes and are legally restricted to finance
expenditures made for transit operations, the development of public transportation systems and transportation planning. When both
restricted and unrestricted resources are available for the same purpose, it is the City's policy to use restricted funds first.
NOTE 2 - Summary of Significant Accounting Policies
Measurement Focus, Basis of Accounting and Basis of Presentation
The Transportation Development Act (TDA) Fund's financial statements are reported using the current financial resources
measurement focus and the modified accrual basis of accounting. Revenues are recognized when measurable and available.
Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay the
liabilities of the current period. For this purpose, the City considers interest and grant revenues earned but not received as
susceptible to accrual under this method. Expenditures are generally recognized at the time liabilities are incurred.
The Transit Fund's financial statements are reported using the economic resources measurement focus and the accrual basis of
accounting. Revenues are recognized when earned and expenses are recognized when incurred regardless of the timing of related
cash flows. The Fund distinguishes operating revenues and expenses from nonoperating items. Operating revenues and expenses
generally result from providing services in connection with the Fund's principal ongoing operations. The principal operating
revenues of the Fund are charges to customers for transit services. Operating expenses for the Fund include cost of services,
administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as
nonoperating revenues and expenses, including non -exchange transactions such as TDA and FTA grants.
Non -exchange transactions, in which the Transit Fund receives value without directly giving equal value in return, include grants.
Revenue from grants is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility
requirements include timing requirements, which specify the fiscal year when the resources are to be used or the fiscal year when
use is first permitted; matching requirements, in which the Transit Fund must provide local resources to be used for a specific
purpose; and expenditures requirements, in which the resources are provided to the Transit Fund on a reimbursement basis.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 2
NOTE 2 - Summary of Significant Accounting Policies, Continued
Measurement Focus, Basis of Accounting and Basis of Presentation, Continued
Annual Financial Statements
The financial statements of the Transportation Development Act (TDA) Fund and the Transit Fund are intended to reflect the
financial position; results of operations and cash flows where applicable in conformity with generally accepted accounting
principles and are not intended to present the financial position, results of operations, or cash flows of the City of San Luis Obispo,
California.
Special Revenue Fund — Transportation Development Act Fund
This fund is used to account for the City's share of Transportation Development Act (TDA) Article 3 funds that are legally
restricted for the improvement and maintenance of street systems including pedestrian and bicycle facilities. Under the City's
Financial Plan policies, all TDA Article 3 revenues are allocated for alternative transportation purposes. The purpose of this fund
is to account for these revenues.
Enterprise Fund - Transit
This fund is used to account for the operation and maintenance of the City's transit system. TDA Article 4 and FTA allocations
for transit operations are accounted for in this fund.
Cash, Cash Equivalents and Investments
Cash and cash equivalents consist of cash on hand, cash balances in checking and money market accounts and short- term
investments, with an original maturity of three months or less. Investments which are in the City's internal investment pool are
also treated as cash equivalents for the purposes of the statement of cash flows.
Amounts Due from Other Governments
Generally, amounts due from other governments are recorded as revenues when earned. However, when the use of funds is the
prime factor for determining eligibility for grants, revenue is accrued when the related expenses have been made on an approved
grant.
Capital Assets
Capital assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives, ranging from 5
to 20 years. Capital assets are defined by the City as assets with an initial, individual cost of more than $25,000. Detailed capital
assets can be found in Note 5.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 3
NOTE 2 - Summary of Significant Accounting Policies, Continued
Net Pension Liability, Deferred Outflows and Deferred Inflows
The City recognizes a net pension liability, which represents the City's excess of the total pension liability over the fiduciary net
position of the pension reflected in the actuarial reports provided by the California Public Employees' Retirement System
(Ca1PERS) plans (Plans). The City has allocated a proportionate share of the net pension liability, deferred outflows, deferred
inflows and pension expense to the Transit Fund. The net pension liability is measured as of the City's prior fiscal year-end.
Changes in the net pension liability are recorded, in the period incurred, as pension expense or as deferred inflows of resources or
deferred outflows of resources depending on the nature of the change. The changes in the net pension liability that are recorded as
deferred inflows of resources or deferred outflows of resources (that arise from changes in actuarial assumptions or other inputs
and differences between expected or actual experience) are amortized over the weighted average remaining service life of all
participants in the respective pension plan and are recorded as a component of pension expense beginning with the period in which
they are incurred.
For purposes of measuring the net pension liability and deferred outflows/inflows of resources related to pensions, and pension
expense, information about the fiduciary net position of the City's Ca1PERS Plans and additions to/deductions from the Plans'
fiduciary net position have been determined on the same basis as they are reported by Ca1PERS. For this purpose, benefit
payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit
terms. Investments are reported at fair value. Projected earnings on pension investments are recognized as a component of pension
expense.
Other Post -Employment Benefits (OPEB) Liability, Deferred Outflows and Deferred Inflows
For purposes of measuring net OPEB liability, deferred outflows of resources and deferred inflows of resources related to OPEB,
and OPEB expense, information about the fiduciary net position of the City's plan (OPEB Plan), and additions to or deductions
from the OPEB Plan's fiduciary net position, have been determined on the same basis as they are reported by the California
Employer's Retiree Benefit Trust Program (CERBT). For this purpose, benefit payments (including refunds of employee
contributions) are recognized when currently due and payable in accordance with benefit terms. Investments are reported at fair
value.
Generally accepted accounting principles require that the reported OPEB results must pertain to liability and asset information
within certain defined timeframes. For this report, the following timeframes are used:
Valuation Date June 30, 2018
Measurement Date June 30, 2019
Measurement Period July 1, 2018 to June 30, 2019
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 4
NOTE 2 - Summary of Significant Accounting Policies, Continued
Fund Balance
The TDA Fund's financial statements report fund balance in classifications that comprise a hierarchy based primarily on the extent
to which the City is bound to honor constraints on the specific purpose for which amounts in the funds can be spent. The Fund
does not have a fund balance in the current fiscal year, therefore classification is not necessary. However, GASB Statement No.
54, Fund Balance Reporting and Governmental Fund Type Defmitions, identifies five components of fund balance —
nonspendable, restricted, committed, assigned and unassigned.
Nonspendable - This component includes amounts that cannot be spent because they are either (a) not in spendable form or (b)
legally or contractually required to be maintained intact.
Restricted - This component consists of amounts that have constraints placed on them either externally by third -parties (creditors,
grantors, contributors, or laws or regulations of other governments) or by law through constitutional provisions or enabling
legislation. Enabling legislation authorizes the City to assess, levy, charge or otherwise mandate payment of resources (from
external resource providers) and includes legally enforceable requirements (compelled by external parties) that those resources be
used only for the specific purposes stipulated in the legislation.
Committed - This component consists of amounts that can only be used for specific purposes pursuant to constraints imposed by
minute order authorized by the City Council. Also included in this component are encumbrances which represent legal and binding
obligations for the acquisition of future goods and services. Those committed amounts established by minute order cannot be used
for any other purpose unless the City Council adopts a new minute order so directing. With respect to encumbered amounts, the
City may take steps to cancel the order for goods or services and thereby terminate the obligation.
Assigned - This component consists of amounts that are constrained by the City's intent to be used for specific purposes, but are
neither restricted nor committed. The City Manager or Director of Finance are authorized to assign amounts to a specific purpose.
Constraints imposed on the use of assigned amounts can be removed with no formal Council actions.
Unassigned - This classification represents amounts that have not been restricted, committed or assigned to specific purposes.
Fund Balance Spending Policy
The City follows a practice in which restricted, committed, assigned, and unassigned fund balances are spent when more than one
amount is available for a specific purpose. When both restricted and unrestricted resources are available for use, it is the City's
policy to use restricted resources first, then unrestricted resources (committed, assigned and unassigned) as they are needed. When
unrestricted resources (committed, assigned and unassigned) are available for use, it is the City's policy to use committed
resources first, then assigned, and then unassigned as they are needed.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 5
NOTE 2 - Summary of Significant Accounting Policies, Continued
Budgets and Budgetary Accounting
The City has received national recognition for its use of a two-year Financial Plan and budgetary process that emphasizes long-
range planning and effective program management. Significant features of the City's two-year Financial Plan include the
integration of Council goal -setting into the budgetary process and the extensive use of formal policies and measureable objectives.
The Financial Plan includes operating budgets for two years and a capital improvement plan (CIP) for five years.
Under this multi -year approach, appropriations continue to be made annually; however, the Financial Plan is the foundation for
preparing the budget for the second year. Additionally, unexpended operating appropriations from the first year may be carried
over for specific purposes into the second year with the approval of the City Manager.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
NOTE 3 - Cash and Cash Equivalents and Investments
Transportation Act Development (TDA) Fund and Transit Fund are pooled with the City's cash and investments in order to
generate optimum interest income. The City pools its available cash for investment purposes. Cash and cash equivalents are
combined with investments and displayed as Cash and Investments.
At June 30, 2020 and 2019, cash and investment consisted of the following:
2020 2019
Cash and investment $ 2,317,893 $ 1,250,475
Investment Fair Value Measurements
The City categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting
principles. Investment securities classified in Level 1 of the fair value hierarchy are valued using prices quoted in active markets
for those securities. Investment securities classified in Level 2 of the fair value hierarchy are valued using matrix pricing or market
corroborated pricing. Matrix pricing is used to value securities based on the securities' relationship to benchmark quoted prices.
Custodial Credit Risk — Deposits
Custodial credit risk is the risk that in the event of a bank failure, the City's deposits may not be returned to it. Cash balances held
in banks are insured up to $250,000 by the Federal Depository Insurance Corporation. For custodial credit risk associated with
deposits, the City follows California Government Code, which requires California financial institutions to secure the City's
deposits by pledging government securities as collateral. The market value of the pledged securities must equal 110% of the City's
deposits. California law also allows financial institutions to secure the City's deposits by pledging first trust deed mortgage notes
equal to 150% of the City's deposits. All deposits held by financial institutions are fully insured or collateralized with securities,
held by the pledging financial institutions' trust departments in the City's name.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 6
NOTE 3 - Cash and Cash Equivalents and Investments, Continued
Custodial Credit Risk — Deposits, Continued
The City follows the practice of pooling cash and investments for all funds under its direct daily control. Funds held by outside
fiscal agents under provisions of bond indentures are maintained separately.
Interest earned on pooled cash and investments is allocated quarterly to the various funds based on the respective fund's average
quarterly cash balance. Interest earned from cash and investments with fiscal agents is credited directly to such funds.
Interest Rate Risk
This is the risk that the market value of securities in the portfolio will fall due to changes in general interest rates. In accordance
with its policies in the Investment Management Plan, the City mitigates interest rate risk by:
• Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby
avoiding the need to sell securities on the open market before maturity.
• Investing operating funds primarily in shorter -term securities.
The City's investment policy also includes portfolio maturity targets. A minimum of 20% of the portfolio will be invested in
securities maturing in one year or less. Up to 80% of the portfolio can be invested in securities with a maturity over one year, with
no more than 10% of the portfolio invested in securities with a maturity over five years.
Credit Risk
This is the risk of loss due to the failure of the security issuer or backer. The City's policies to mitigate credit risk include:
• Limiting investments to the safest types of securities. The California Government Code limits the investment vehicles
available to local agencies. The credit risk of these securities is measured by the assignment of a rating by a nationally
recognized statistical rating organization.
• Pre -qualifying the financial institutions, broker/dealers, intermediaries and advisors with which the City will do business.
Concentration of Credit Risk
The City's policies contained in the Investment Management Plan provide guidelines (by type of investment that limits either the
dollar amount, the percent of the portfolio or the maturity term) for diversifying the investment portfolio so that potential losses on
individual securities will be minimized.
The City's Investment Management Plan outlines the following criteria related to portfolio diversification:
• No more than 5% of the City's portfolio (exclusive of government agency issues or LAIF) shall be placed with any
financial institution.
• No more than 25% of the City's portfolio shall be invested in collateralized certificates of deposit issued by financial
institutions.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 7
NOTE 3 - Cash and Cash Equivalents and Investments, Continued
Concentration of Credit Risk, Continued
• Certificates of deposit (negotiable and collateralized) placed by the City shall not constitute more than 15% of the total
assets of the institution; and negotiable certificates of deposit will only be placed with institutions with total assets in
excess of $200 million and that maintain a ratio of equity to total assets of at least 5%.
Additional Cash and Investment Disclosures
See the City of San Luis Obispo June 30, 2020 and 2019 Comprehensive Annual Financial Reports for additional cash and
investment disclosures.
NOTE 4 - Due from Other Governments
At June 30, 2020 and 2019, the amounts due from other governments were as follows:
2020 2019
Federal Transit Administration - capital and
operating grants $ 2,307,585 $ 1,484,870
NOTE 5 - Capital Assets
Capital Assets activity for the fiscal year ended June 30, 2020, was as follows:
Capital assets not being depreciated:
Construction in progress
Capital assets being depreciated:
Infrastructure
Buildings and improvements
Transit operating equipment
Total capital assets being depreciated
Balance Deletions/ Balance
June 30, 2019 Additions Transters June 30, 2020
$ 27,600 $ - $ (27,599) $ 1
221,744 - - 221,744
5,101,506 - - 5,101,506
9,688,534 259,145 (926,580) 9,021,099
15,011,784 259,145 (926,580) 14,344,349
Less accumulated depreciation (8,630,038) (592,039) 913,532 (8,308,545)
Total capital assets, net of accumulated depreciation $ 6,409,346 $ (332,894) $ (40,647) $ 6,035,805
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 8
NOTE 5 - Capital Assets, Continued
Capital Assets activity for the fiscal year ended June 30, 2019, was as follows:
Capital assets not being depreciated:
Construction in progress
Capital assets being depreciated:
Infrastructure
Buildings and improvements
Transit operating equipment
Total capital assets being depreciated
Less accumulated depreciation
Total capital assets, net of accumulated depreciation
NOTE 6 - Intergovernmental Allocations
Balance
June 30, 2018 Additions
Deletions/ Balance
Transters June 30, 2019
$ 33,333 $ 373,058 $ (378,791) $ 27,600
221,744 - - 221,744
5,101,506 - - 5,101,506
9,309,743 - 378,791 9,688,534
14,632,992 - 378,791 15,011,784
(8,060,583) (569,455) - (8,630,038)
$ 6,605,743 $ (196,397) $ - $ 6,409,346
The City has been allocated the following funds from the State Transit Assistance Fund (STAF) , Local Transportation Fund (LTF)
and State of Good Repair (SGR) for the years ended June 30, 2020 and 2019. The amounts have been used for both operating
expenses and capital assets.
Applicable
Allocating TDA Statute
Article Section
LTF
3.0
99233.3
LTF
4.0
99260
STAF
6.5
99313
STAF
6.5
99314
SGR
6.5
99314
SGR
6.5
99314
Amount
2020 2019
$ 48,608 $
47,234
1,702,662
1,548,350
379,185
250,263
51,819
44,637
8,007
7,358
184,759
-
$ 2,375,040 $
1,897,842
For the years ended June 30, 2020 and 2019, the City also directly allocated $603,019 and $699,012, respectively, of LTF Article
4.0, Section 99260 funds to San Luis Obispo Regional Transit Authority (SLORTA). These funds are not shown in the
accompanying financial statements.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 9
NOTE 7 - Fare Revenue Ratios
For the years ended June 30, 2020 and 2019 the City had fare revenue ratios of 18% and 20%, respectively, computed as follows:
Operating revenues - fares
(a) Net Operating revenues - fares
(b) Net operating costs, net of depreciation and vehicle lease costs
(c) Fare revenue ratio [(a) / (b)]
2020 2019
$ 630,067 $ 759,450
630,067 759,450
$ 3,547,711 $ 3,751,521
18% 20%
The City is in compliance with the applicable TDA regulations for the year ended June 30, 2019, but not in compliance for the
year ended June 30, 2020, which require a minimum ratio 20% for both years. Due to the global pandemic, the California
legislature passed AB 90. This bill would prohibit the imposition of a penalty on an operator that does not maintain the required
ratio of fare revenues to operating cost during the 2019-20 or 2020-21 fiscal year.
NOTE 8 - Pensions
The City contributes to the California Public Employees' Retirement System (Ca1PERS) for its employees and participates in an
agent -multiple employer plan (Miscellaneous Plan) for its miscellaneous employees. The City has allocated a portion of the
Miscellaneous Plan that relates to the Transit Fund. The portion of the net pension liability allocated to the Transit Fund for the
years ended June 30, 2020 and 2019 were $710,153 and $689,950, respectively. The portion of the deferred outflows of resources
allocated to the Transit Fund for the years ended June 30, 2020 and 2019 were $90,898 and $128,043, respectively. The portion of
the deferred inflows of resources allocated to the Transit Fund for the years ended June 30, 2020 and 2019 were $11,159 and
$7,553, respectively. The portion of the pension expense allocated to the Transit Fund for the years ended June 30, 2020 and 2019
were $60,954 and $45,091, respectively, and is shown as a part of total salaries and wages in the related fiscal year.
Additional Pension Disclosures
See the City of San Luis Obispo June 30, 2020 and 2019 Comprehensive Annual Financial Reports for additional pension
disclosures as well as required supplementary information.
NOTE 9 - Other Post -Employment Benefits (OPEB)
The City's primary other post -employment benefits (OPEB) cost obligation is for retiree health benefits under its election to
participate in the CalPERS Health Benefit Program, an agent multiple -employer defined benefit OPEB plan, under the "unequal
contribution option." The City has allocated a portion of the plan that relates to the Transit Fund. The portion of the net OPEB
liability allocated to the Transit Fund for the years ended June 30, 2020 and 2019 were $47,123 and $62,523, respectively. The
portion of the deferred outflows of resources allocated to the Transit Fund for the years ended June 30, 2020 and 2019 were
$14,698 and $5,762, respectively. The portion of the deferred inflows of resources allocated to the Transit Fund for the years
ended June 30, 2020 and 2019 were $17,104 and $1,432, respectively. The portion of the OPEB expense allocated to the Fund for
the years ended June 30, 2020 and 2019 were $(5,165) and $8,026, respectively, and is shown as a part of total salaries and wages.
NOTE 9 - Other Post -Employment Benefits (OPEB), Continued
Additional OPEB Disclosures
See the City of San Luis Obispo June 30, 2020 and 2019 Comprehensive Annual Financial Reports for additional OPEB
disclosures as well as required supplementary information.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund and Transit Fund
Notes to the Financial Statements
June 30, 2020 and 2019
Page 10
NOTE 10 - Operating Transfers
The City expends all amounts for alternate transportation projects in its General Fund or Capital Outlay Fund. LTF monies
received by the City are initially deposited in the Transportation Development Act (TDA) Fund and subsequently transferred to the
General Fund, where such funds are expended or transferred to the Capital Outlay Fund to be expended on designated
transportation projects.
NOTE 11- Commitments and Contingencies
Regional Transit Authority Pension Expense
The City is presently a member agency of the San Luis Obispo Regional Transit Authority (see CAFR Note 10), a duly established
Joint Powers Authority (JPA) comprised of all local cities and the County of San Luis Obispo. The City's contractual contribution
to that entity is approximately 18% of the total expense. The City was advised that the Regional Transit Authority was working
with Ca1PERS to determine whether it is required to enroll certain previously unenrolled transit employees in the Ca1PERS
pension system and whether the entity may be liable for obligations related to the failure to enroll those employees and make
contributions on their behalf. On December 10, 2019 the County Board of Supervisors approved a contract for participation of the
JPA in the San Luis Obispo County Pension Trust and the Employees Retirement Plan. The current amount of potential Ca1PERS
unfunded liability for the JPA may reach as high as $4 million. It is not anticipated that the City's annual payment to the JPA will
increase to satisfy this unfunded liability.
NOTE 12 - Subsequent Events
Events subsequent to June 30, 2020 have been evaluated through February 15, 2021, which is the date the financial statements
were available to be issued. Management did not identify subsequent events that required disclosure.
NOTE 13 - COVID-19 PANDEMIC
During December 2019, the Novel Corona Virus Disease (COVID-19) was discovered and subsequently declared a world-wide
pandemic by the World Health Organization on March 11, 2020. On March 4, 2020, California State Governor Gavin Newsom
proclaimed a State of Emergency as a result of the threat of the COVID-19 in the State of California, leading to the San Luis
Obispo County Health Officer issuing a shelter -at-home order on March 18, 2020 and the City Council declaring a health on
March 17, 2020. This halted all business within San Luis Obispo County outside of essential activities and largely stifled economic
activity in the last quarter of the 2019-20 fiscal year, impacting ridership of the transit system. In addition, The Coronavirus Aid,
Relief, and Economic Security (CARES) Act provided $25 billion to transit agencies to help to prevent, prepare for and respond to
the COVID-19 pandemic. Of this, nearly $1.4 million was received by the Transit Fund during the fiscal year.
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Item #11
City of San Luis Obispo, California
Transportation Development Act (TDA) Fund
Supplementary Information
Schedules of Revenues and Expenditures - Budget and Actual
June 30, 2020 and 2019
2020
Revenues - intergovernmental allocations
Other financing uses - operating transfers
to City of San Luis Obispo
Excess of revenues over other financing uses
2019
Revenues - intergovernmental allocations
Other financing uses - operating transfers
to City of San Luis Obispo
Excess of revenues over other financing uses
Budget
Original Final
$ 45,000 $ 45,000 $
Variance with
Final Budget
Positive
Actal (Negative)
48,608 $ 3,608
(45,000)
(45,000)
(48,608)
(3,608)
Budget
Original Final
Variance with
Final Budget
Actal Positive
$ 45,000 $ 45,000 $ 47,234 $ 2,234
(45,000) (45,000) (47,234) (2,234)
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Item #11
BADAW1 &ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND
OTHER MATTERS BASED ON AN
AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS
INDEPENDENT AUDITOR'S REPORT
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards issued
by the Comptroller General of the United States, the financial statements of the Transportation
Development Act (TDA) Fund and the Transit Fund (TDA Program) of the City of San Luis Obispo,
California (City), as of and for the year ended June 30, 2020, and the related notes to the financial statements,
and have issued our report thereon dated February 15, 2021.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City's internal control
over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in
the circumstances for the purpose of expressing our opinions on the financial statements, but not for the
purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not
express an opinion on the effectiveness of the City's internal control.
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 entity'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.
Our consideration of internal control was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any
deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses
may exist that have not been identified.
Address: 2855 Telegraph Avenue, Suite 312 Berkeley, CA 94705 • Phone; 510.768.8251 ° Fax: 10 7rR.-VAn
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Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the TDA Program's financial statements are free
from material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and material
effect on the financial statements. However, providing an opinion on compliance with those provisions was
not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests
disclosed instances of noncompliance or other matters that are required to be reported under Government
Auditing Standards, and which are described in the Schedule of Findings and Responses as item 2020-001.
Management's Response to Findings
Management's response to the findings identified in our audit is described in the accompanying Schedule
of Findings and Responses. Management's response was not subjected to the auditing procedures applied
in the audit of the financial statements and, accordingly, we express no opinion on it.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance
and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal
control or on compliance. This report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this
communication is not suitable for any other purpose.
Badawi & Associates
Certified Public Accountants
Berkeley, California
February 15, 2021
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Item #11
A&
1 �o� ► BADAWI&ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT ON TRANSPORTATION
DEVELOPMENT ACT FUNDS COMPLIANCE
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Report on Compliance
We have audited the City of San Luis Obispo's (City) compliance with the types of compliance
requirements described in Section 6666 and 6667 of the Rules and Regulations of the California Administrative
Code in the Transportation Development Act Statutes and Administrative Code for 1987 (the Act) and the
allocation instructions and resolutions of the San Luis Obispo Council of Governments applicable to the
City's Transportation Development Act Article 3, 4 and 6.5 Program (TDA Program) for the year ended
June 30, 2020.
Management's Responsibility
Compliance with the requirements referred to above is the responsibility of the City's management.
Auditors' Responsibility
Our responsibility is to express an opinion on the City's compliance based on our audit.
We conducted our audit of compliance in accordance with auditing standards generally accepted in the
United States; the standards applicable to financial audits contained in Government Audit Standards issued
by the Comptroller General of the United States; Section 6666 and 6667 of the Rules and Regulations of the
California Administrative Code in the Transportation Development Act Statutes and Administrative Code for 1987
(the Act) and the allocation instructions and resolutions of the San Luis Obispo Council of Governments.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
noncompliance with the compliance requirements referred to above that could have a material effect on the
TDA Program occurred. An audit also includes examining, on a test basis, evidence about the City's
compliance with those requirements and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does
not provide a legal determination of the City's compliance with those requirements.
Basis for Qualified Opinion on Compliance Requirements in PUC Section 99268.3
As described in the accompanying schedule of findings and responses, the City did not comply with
requirements regarding PUC Section 99268.3 as described in finding number 2020-001 for fare box recovery
revenue ratio. Compliance with such requirements is necessary, in our opinion, for the City to comply with
the requirements applicable to that program.
Address: 2855 Telegraph Avenue, Suite 312 Berkeley fA 94705 - Phone: 510.768.8251 • Fax: 1; n WA R7da
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Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
Qualified Opinion on Compliance Requirements in PUC Section 99268.3
In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, the
City complied, in all material respects, with the types of compliance requirements referred to above that
could have a direct and material effect on TDA Program for the year ended June 30, 2020.
Internal Control Over Compliance
Management of the City is responsible for establishing and maintaining effective internal control over
compliance with the compliance requirements referred to above. In planning and performing our audit, we
considered the City's internal control over compliance to determine the auditing procedures for the purpose
of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the
effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the
effectiveness of the City's internal control over compliance.
A deficiency in internal control over compliance 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, noncompliance on a timely basis. A material weakness in internal control over compliance is a
deficiency, or combination of deficiencies in internal control over compliance, such that there is a reasonable
possibility that material noncompliance with a compliance requirement will not be prevented, or detected
and corrected, on a timely basis.
Our consideration of internal control over compliance was for the limited purpose described in the first
paragraph of this section and was not designed to identify all deficiencies in internal control that might be
deficiencies, significant deficiencies, or material weaknesses in internal control over compliance. We did not
identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as
defined above.
The purpose of this report on internal control over compliance is solely to describe the scope of our testing
of internal control over compliance and the results of that testing based on Section 6666 and 6667 of the
Rules and Regulations of the California Administrative Code in the Transportation Development Act Statutes and
Administrative Code for 1987 (the Act), and the allocation instructions and resolutions of the San Luis Obispo
Council of Governments, this report is not suitable for any other purpose.
Badawi & Associates
Certified Public Accountants
Berkeley, California
February 15, 2021
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Item #11
SCHEDULE OF FINDINGS AND RESPONSES
Finding 2020-01
Noncompliance Material to the Financial Statements —Fare box recovery ratio below minimum
Criteria: Per PUC Section 99268.3 in Article 4 of the Transportation Development Act, urbanized transit
providers are required to maintain, for the fiscal year, a ratio of fare revenues to operating cost at least equal to
one -fifth (20%).
Condition: For the year ended June 30, 2020, City of San Luis Obispo Transit maintained a ratio of revenues to
operating cost of 18%.
Effect or Potential Effect: There is no effect on TDA-related allocations in the first year of non-compliance, as this
year is considered a grace year. If there is a subsequent second year in which the ratio is out of compliance, the
allocations of Local Transportation Funds and State Transit Assistance monies are to be reduced for the year
following the second year of non-compliance by the amount of the difference between the actual fare revenues
and the required fare revenues for the second year. In addition, the California legislature passed AB 90, which
would prohibit the imposition of a penalty on an operator that does not maintain the required ratio of fare
revenues to operating cost during the 2019-20 or 2020-21 fiscal year.
Cause: Revenues decreased due to loss of ridership at the beginning of the COVID-19 pandemic.
Recommendation: The management of City of San Luis Obispo Transit should work with the San Luis Obispo
Council of Government to achieve compliance.
Views of Responsible Official(s) and Planned Corrective Actions:
The COVID-19 pandemic impacted ridership during the final quarter of the 2019-20 fiscal year, which in turn
reduced fare box revenues. The City will work with the San Luis Obispo Council of Governments and any other
relevant entities to achieve fare box revenue compliance in future years.
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Item #11
City of San Luis
San Luis Obispo, California
Single Audit Reports
For the year ended June 30, 2020
BADAWI&ASSOCIATES
i.'tFt t li itJ ���Ls� ALL(]UE11 AfV
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Item #11
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Item #11
City of San Luis Obispo
Single Audit Reports
For the year ended June 30, 2020
Table of Contents
Page
Report on Internal Control over Financial Reporting and on
Compliance and Other Matters Based on an Audit of Financial Statements
Performed in Accordance with Government Auditing Standards.................................................................... 1
Report on Compliance for Each Major Federal Program and on
Internal Control over Compliance in Accordance with the Uniform Guidance
And on the Schedule of Expenditures of Federal Awards............................................................................... 3
Schedule of Expenditures of Federal Awards..................................................................................................... 7
Notes to the Schedule of Expenditures of Federal Awards.............................................................................. 8
Schedule of Findings and Questioned Costs....................................................................................................... 9
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Item #11
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Item #11
BADAWI&ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND
OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS
INDEPENDENT AUDITOR'S REPORT
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards issued
by the Comptroller General of the United States, the financial statements of the governmental activities, the
business -type activities, each major fund, and the aggregate remaining fund information of the City of San
Luis Obispo, California (City), as of and for the year ended June 30, 2019, and the related notes to the
financial statements, which collectively comprise the City's basic financial statements and have issued our
report thereon dated February 15, 2021.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City's internal control
over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in
the circumstances for the purpose of expressing our opinions on the financial statements, but not for the
purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not
express an opinion on the effectiveness of the City's internal control.
Our consideration of internal control over financial reporting was for the limited purpose described in the
preceding paragraph and was not designed to identify all deficiencies in internal control that might be
material weaknesses or significant deficiencies and therefore, material weaknesses or significant
deficiencies may exist that have not been identified. However, as described in the accompanying schedule
of findings and responses, we did identify certain deficiencies in internal control that we consider to be
material weaknesses and significant deficiencies.
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 entity's
financial statements will not be prevented, or detected and corrected on a timely basis. We consider the
deficiencies described in the accompanying schedule of findings and questioned costs as items 2020-001,
2020-002 and 2020-003 to be material weaknesses.
Address: 2855 Telegraph Avenue, Suite 312 Berkeley, CA 94705 -Phone: 510.768.8251 • Fax: 510.768.8249
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Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
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. We
consider the deficiencies described in the accompany schedule of findings and questioned costs as items
2020-004, 2020-005, 2020-006 to be significant deficiencies.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City's financial statements are free from
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, noncompliance with which could have a direct and material effect on the
financial statements. However, providing an opinion on compliance with those provisions was not an
objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed
no instances of noncompliance or other matters that are required to be reported under Government
Auditing Standards.
City of San Luis Obispo's Response to Findings
City's response to the findings identified in our audit is described in the accompanying schedule of findings
and questioned costs. City's response was not subjected to the auditing procedures applied in the audit of
the financial statements and, accordingly, we express no opinion on it.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance
and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal
control or on compliance. This report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this
communication is not suitable for any other purpose.
Badawi & Associates
Certified Public Accountants
Berkeley, California
February 15, 2021
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Item #11
BADAWI&ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON
INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH THE UNIFORM
GUIDANCE AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
INDEPENDENT AUDITOR'S REPORT
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Report on Compliance for Each Major Federal Program
We have audited the City of San Luis Obispo, California's (City) compliance with the types of compliance
requirements described in the OMB Compliance Supplement that could have a direct and material effect on
each of the City's major federal programs for the year ended June 30, 2020. The City's major federal
programs are identified in the summary of auditor's results section of the accompanying schedule of
findings and questioned costs.
Management's Responsibility
Management is responsible for compliance with federal statutes, regulations, and the terms and conditions
of its federal awards applicable to its federal programs.
Auditor's Responsibility
Our responsibility is to express an opinion on compliance for each of the City's major federal programs
based on our audit of the types of compliance requirements referred to above. We conducted our audit of
compliance in accordance with auditing standards generally accepted in the United States of America; the
standards applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States; and the audit requirements of Title 2 U.S. code of Federal
Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal
Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform
the audit to obtain reasonable assurance about whether noncompliance with the types of compliance
requirements referred to above that could have a direct and material effect on a major federal program
occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those
requirements and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal
program. However, our audit does not provide a legal determination of the City's compliance.
Address: 2855 Telegraph Avenue, Suite 312 Berkeley, CA 94705 -Phone: 510.768.8251 • Fax: S10.768.8249
Packet Page273
Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
Opinion on Each Major Federal Program
In our opinion, the City, complied, in all material respects, with the types of compliance requirements
referred to above that could have a direct and material effect on each of its major federal programs for the
year ended June 30, 2020.
Report on Internal Control over Compliance
Management of the City is responsible for establishing and maintaining effective internal control over
compliance with the types of compliance requirements referred to above. In planning and performing our
audit of compliance, we considered the City's internal control over compliance with the types of
requirements that could have a direct and material effect on each major federal program to determine the
auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on
compliance for each major federal program and to test and report on internal control over compliance in
accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the
effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the
effectiveness of the City's internal control over compliance.
A deficiency in internal control over compliance exists when the design or operation of a control over
compliance does not allow management or employees, in the normal course of performing their assigned
functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a
federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or
combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility
that material noncompliance with a type of compliance requirement of a federal program will not be
prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over
compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type
of compliance requirement of a federal program that is less severe than a material weakness in internal
control over compliance, yet important enough to merit attention by those charged with governance.
Our consideration of internal control over compliance was for the limited purpose described in the first
paragraph of this section and was not designed to identify all deficiencies in internal control over
compliance that might be material weaknesses or significant deficiencies. We did not identify any
deficiencies in internal control over compliance that we consider to be material weaknesses. However,
material weaknesses may exist that have not been identified.
Packet Page274
4
Item #11
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 3
Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance
We have audited the financial statements of the governmental activities, the business -type activities, each
major fund, and the aggregate remaining fund information of the City, as of and for the year ended June 30,
2020, and the related notes to the financial statements, which collectively comprise the City's basic financial
statements. We issued our report thereon dated December 31, 2020, which contained unmodified opinions
on those financial statements. Our audit was conducted for the purpose of forming opinions on the
financial statements that collectively comprise the basic financial statements. The accompanying schedule of
expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform
Guidance and is not a required part of the basic financial statements. Such information is the responsibility
of management and was derived from and relates directly to the underlying accounting and other records
used to prepare the basic financial statements. The information has been subjected to the auditing
procedures applied in the audit of the financial statements and certain additional procedures, including
comparing and reconciling such information directly to the underlying accounting and other records used
to prepare the basic financial statements or to the basic financial statements themselves, and other
additional procedures in accordance with auditing standards generally accepted in the United States of
America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material
respects in relation to the basic financial statements as a whole.
The purpose of this report on internal control over compliance is solely to describe the scope of our testing
of internal control over compliance and the results of that testing based on the requirements of the Uniform
Guidance. Accordingly, this report is not suitable for any other purpose.
Badawi & Associates
Certified Public Accountants
Berkeley, California
February 15, 2021, except for the schedule of expenditures
of federal awards, which is as of December 31, 2020
5
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Item #11
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Packet Page276
Item #11
City of San Luis Obispo
Schedule of Expenditures of Federal Awards
For the year ended June 30, 2020
Grantor Agency and Grant Title
U.S. Department of Transportation
Highway Planning and Construction Cluster
Passed Through the State of California Department of Transportation
Federal State
Catalog Pass -through Program Subrecipient
Number Number Expenditures Payments
Highway Planning and Construction 20.205 BRLS-5016(050) $ 1,828,107 $
Highway Planning and Construction 20.205 HSIPL-5016(053) 30,937
Subtotal Highway Planning and Construction Cluster 1,859,044
Federal Transit Cluster
Direct Program:
Federal Transit Formula Grants
Total U.S. Department of Transportation
U.S. Department of Justice
Direct Programs
Coronavirus Emergency Supplemental Funding
Bulletproof Vest Partnership Program
Edward Bryne Memorial Justice Assistance Grant Program
Total U.S. Department of Justice
U.S. Environmental Protection Agency
Passed through the California State Water Resource Control Board
Capitalization Grants for State Revolving Funds
Total U.S. Environmental Protection Agency
Total Expenditures of Federal Awards
See accompanying Notes to Schedule of Expenditures of Federal Awards.
20.507 2,307,593
Subtotal Federal Transit Cluster 2,307,593
4,166,637
16.034 41,431
16.607 7,583
16.738 12,871
61,885
66.458 C-06-8029-110 4,000,000
4,000,000
$ 8,228,522 $ -
IN
Packet Page277
Item #11
City of San Luis Obispo
Notes to the Schedule of Expenditures of Federal Awards
For the year ended June 30, 2020
A. Reporting Entity
The City is a California charter city. It was incorporated on February 19, 1856 and chartered on May 1,
1876. It is organized in accordance with the Council -Mayor -City Manager form of government. With a
population of approximately 46,802, the City provides a broad range of municipal services, including
police and fire protection, parks and recreation, water and sewer utilities, street maintenance, public
transportation, parking, planning, and building and safety.
B. Basis of Accounting
Funds received under the various grant programs have been recorded within the special revenue funds
of the City. The City utilizes the modified accrual method of accounting for the special revenue funds.
Modified accrual accounting recognizes revenues when they become available and measurable and,
with a few exceptions, recognizes expenditures when liabilities are incurred. The accompanying
Schedule of Expenditures of Federal Awards (Schedule) has been prepared on the modified accrual
basis of accounting.
C. Relationship of Schedule of Expenditures of Federal Awards to Financial Statements
The accompanying Schedule presents the activity of all federal financial assistance programs of the City.
Federal financial assistance received directly from federal agencies as well as federal financial assistance
passed through the State of California is included in the Schedule.
The Schedule was prepared only from the accounts of various grant programs and, therefore, does not
present the financial position or results of operations of the City.
D. Pass -Through Entities' Identifying Number
When federal awards were received from a pass -through entity, the Schedule shows, if available, the
identifying number assigned by the pass -through entity. When no identifying number is shown, the
City determined that no identifying number is assigned for the program or the City was unable to
obtain an identifying number from the pass -through entity.
E. Indirect Costs
The City did not elect to use the 10% de minimis indirect cost rate.
Packet Page278
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section I - Summary of Auditor's Results
Financial Statements
Types of auditor's report issued: Unmodified
Internal control over financial reporting:
• Material weakness(es) identified? Yes
• Significant deficiency(ies) identified? Yes
Any noncompliance material to the financial statements noted? No
Federal Awards
Internal control over major programs:
• Material weakness(es) identified? No
• Significant deficiency(ies) identified? None noted
Type of auditor's report issued on compliance for major programs Unmodified
Any audit findings disclosed that are required to be reported in
Accordance with section 200.516(a) No
Identification of major programs:
CFDA Number(s) Name of Federal Program or Cluster Expenditures
66.458 Capitalization Grants for State Revolving Funds $ 4,000,000
Total Expenditures of All Major Federal Programs $ 4,000,000
Total Expenditures of Federal Awards $ 8,228,522
Percentage of Total Expenditures of Federal Awards 48.6%
Dollar threshold used to distinguish between type A and type B program
Auditee qualified as low -risk auditee under
section 200.520?
$750,000
No
9
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Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings
A. Financial Statement Audit Finding
2020-001 Year -End Close and Balance Sheet Account Reconciliations (Material Weakness)
Criteria: The City is responsible for fair presentation of the financial statements in conformity with
accounting principles generally accepted in the United States of America. In addition, an effective internal
control system over financial closing and reporting provides reasonable assurance for the safeguarding of
assets, the reliability of financial information, and compliance with laws and regulations.
Condition: During the performance of the audit, we noted that the City had to record a large number of
adjusting entries after the closing process was complete to record transactions not previously recorded or to
correct transactions or balances previously recorded in error. Those adjusting entries should have been
part of the closing process and the timing of recording those adjusting entries have caused some delays and
added complexity in the audit.
Cause: The City's closing process was not comprehensive enough to identify timely all the journal entries
and adjustments needed to ensure the accuracy of the various account balances. Additionally, the City
implemented a new financial software, however formally written accounting policies and procedures
related to the system were not developed.
Effect. The City's accounting records needed significant adjustments after the closing of the books and the
start of the audit which caused delays in the audit and added more complexity in dealing with the large
volume of adjustments.
Recommendation: We recommend that the City update its closing process to ensure all transactions and
adjustments are accounted for timely before the audit starts.
The City should furthermore develop formal written policies over significant accounts that include the
timely reconciling of accounts to activity reported in related subsidiary ledgers. Also, the City should
develop a checklist for year-end closing procedures.
Management's response:
This is the second year-end close utilizing the new Oracle Cloud financial system. There were significantly
fewer post -closing adjustments than the prior fiscal year and significantly fewer delays in finalizing the
audit. Management continues to refine processes and procedures in the ERP system, including improving
the year-end close process. A year-end close checklist is under development and will be utilized next year.
In addition, City staff are performing monthly closing procedures, which will improve the timeliness of
year-end closing. Integrated into the month -end procedures will be the review of and reconciliation of the
City's balance sheet accounts. This will help to identify issues prior to the start of the audit.
Packet Page280
10
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2020-002 Journal Entries Posting and Numbering (Material Weakness)
Criteria: Journal entries should be independently prepared, reviewed, and posted to the general ledger
with unique identification number. In addition, journal entries should be adequately documented to
support its accuracy and purpose.
Condition: During the performance of the audit, we noted the following regarding the City's journal entry
process:
• The City was unable to provide us with documentation or documentation was insufficient for
journal entries selected for review.
• The City uses various numbering schemes (a date and time format, a subsidiary ledger -month
format, other) that makes it difficult to determine the number of journal entries recorded and the
sequence of entries.
• The City does not maintain a log of manual journal entries to document the accountability of all
journal entries, the preparer, the approver, and the purpose of why the entry was recorded.
• Journal entries can be prepared and posted without system restriction, and no controls in place to
ensure the journal entries are approved before posted.
The City implemented review procedures towards the end of the fiscal year, so significant number of
journal entries we tested before the implementation have the conditions above.
Cause: The City didn t fully implement the review procedures across the fiscal year.
Effect: Journal entries recorded in the City's accounting system may be inaccurate, unapproved or
unsupported.
Recommendation: We recommend that the City implement formal written procedures and policies over
journal entries to ensure only accurately prepared and supported journal entries are recorded to the general
ledger.
11
Packet Page281
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2020-002 Journal Entries Posting and Numbering (Material Weakness), continued
Management's Response:
Management is developing written policies over journal entries to ensure that all journal entries have
adequate and complete documentation when they are posted to the general ledger. In addition,
management is exploring the Oracle system's approval functionality, which should provide assurance that
all journals are approved before posting. As a work around, the current process is to have a separate
person prepare the journal entry and then have another person post the journal entry. This process can be
audited by running a report to show the "prepared by' and "posted by' fields for each journal entry
transaction. Journal entries are recorded with a system generated unique identification number; however, it
is not a sequential number, which makes it difficult to identify the sequence of entries. Management has
identified changes in the configuration of the Oracle system that could assist with this issue and will work
to implement those during the year. In addition, the City is now utilizing Oracle's capability of
electronically saving documentation with each entry posting.
Packet Page282
12
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2020-003 Bank Reconciliation (Material Weakness)
Criteria: An effective internal control system over cash and investments includes frequent and timely
reconciling of account balances to information provided by the bank and custodians.
Condition: During the performance of the audit, we noted that bank reconciliations were not performed
until the start of the engagement. Also, the June 2020 bank reconciliation was not balanced and had an
unreconciled variance of around $600,000, which was still under investigation by the City.
Cause: The City was not able to perform the bank reconciliations timely as there was not sufficient policy
and procedures in place to ensure completion of the process.
Effect: Errors and fraud can go undetected without frequent and timely bank reconciliation.
Recommendation: We recommend the City develop formal written policies over cash and investments that
include the timely reconciling of accounts and include cash and investment accounts reported in each fund.
Management's Response:
Management agrees that timely bank reconciliations are an important part of the effective internal controls
over cash and investments. The Oracle financial system has functionality that will assist with the
reconciliation of the City's books and the bank statement, however that functionality was not configured
during the implementation. Management is working with consultants and staff to configure and implement
this functionality as the current process is manual and very time consuming given the number of
transactions that occur on a daily basis.
In addition, management believes that the large discrepancy reported by the auditors is an unreversed
journal entry related to accrued payroll and is a result of the implementation and configuration of the
Oracle software and transition between systems. All employees have been paid and expenses have been
recorded appropriately, however the cash balance and accrued payroll liabilities were not reduced
accordingly and remain in the pass -through account.
Since April 2020, the bank reconciliations are being prepared monthly as part of the month end close.
Packet Page283
13
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2020-004 Capital Assets Reconciliation (Significant Deficiency)
Criteria: A good internal control reporting system over capital assets requires the maintenance of detail
records of all capital assets to be able to support amounts reported on the financial statements and to ensure
safeguarding of assets.
Condition: The City has established basic procedures to ensure that capital asset additions are properly
capitalized, capital asset disposals are properly recorded, and current year depreciation expense for capital
assets are recorded at the fund -financial statement level for proprietary funds and at the government -wide
financial statement level for governmental funds.
However, during the audit, we noted a $4.5 million construction -in -progress addition was not captured in
the general ledger. Additionally, we noted infrastructure assets were added to the capital assets module to
replace existing infrastructure without corresponding fully -depreciated infrastructure assets removed.
Finally, the City had also not performed a physical inventory of assets to determine whether all capital
assets reported were still in the City's possession at the end of the fiscal year.
Cause: The City doesn't have sufficient procedures in place to ensure the completeness and accuracy of
capital assets.
Effect. The capital assets balance can be misstated on the financial statements.
Recommendation: We recommend that the City implement procedures to ensure all capital assets additions
are captured properly and replaced capital assets are removed timely. We also recommend that the City
perform a physical inventory of all capital assets to ensure the completeness and accuracy of the subsidiary
ledgers and general ledger.
Management's Response:
The City continues to refine its processes and procedures for recording capital assets in the Oracle system.
Management has revised the approach to include additional cross checks to ensure all additions are
captured and fully depreciated infrastructure assets are appropriately removed. Accounting staff have also
been working with staff in the Geographic Information Services (GIS) department to cross reference assets
that the GIS system has mapped, which will assist in identifying annual additions and deletions. In
addition, it provides an order of magnitude double check on the book value of the assets recorded in the
capital assets system. The City is reviewing the Oracle system configuration to assist in the management of
capital asset additions throughout the year to reduce the manual work effort at year end. Efforts to conduct
a City-wide inventory are underway and the City plans to have this project completed by the end of the
fiscal year.
Packet Page284
14
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2020-005 Segregation of Duties in Cash Disbursement (Significant Deficiency)
Criteria: An effective internal control system over cash disbursement requires the segregation of
incompatible duties. An effective internal control system over cash disbursement provides reasonable
assurance for the safeguarding of assets.
Condition: During the performance of the audit, we noted Accounts Payable Analyst was granted edit
access to the vendor master file, who also has the access to check printing and invoices data entry.
Additionally, the financial system doesn't prevent unauthorized invoices to be processed and the
Accounting Manager doesn't review the check register against invoices when doing the review process.
Cause: The City does not have sufficient internal controls over cash disbursement processes.
Effect. Unauthorized payments or incorrect payment can occur undetected.
Recommendation: We recommend the City to implement internal controls to prevent unauthorized or
inaccurate cash disbursement, for example, to generate a change report of vendor master file and have
management reviewed regularly.
Management's Response:
Management agrees that appropriate segregation of duties is an important aspect of an internal control
system over cash disbursements. Improvements can be made to the accounts payable procedures to reduce
the risk of unauthorized payments. The vast majority of invoices are processed against approved Purchase
Orders, which Management believes reduces the chance of unauthorized payments occurring.
Management will also implement configuration changes in the Oracle system, as possible and appropriate,
that could further reduce this risk. A report of vendor master file changes is currently under development.
Management is reviewing a possible segregation of duties between the Purchasing and Accounts Payable
divisions to further protect against fraudulent activity.
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15
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2020-006 Payroll Module Implementation (Significant Deficiency)
Criteria: An effectively implemented payroll system should process the payroll accurately, and an effective
internal control system over payroll requires timely and accurate payroll processing.
Condition: During the performance of the audit, we noted that -
• The City has not implemented Goals and Performance module in Oracle for all employees,
evaluation tracking and reporting has transitioned to a completely manual process. During the
interview of payroll employees, we learned that a significant number of employee reviews were
performed late, causing manual retroactive payroll payments to be made.
• The Oracle payroll module has overtime configuration implemented incorrectly, and the City has to
manually track the payroll in a spreadsheet and correct the error as it occurs since the
implementation.
Cause: The Oracle payroll module has not been implemented correctly.
Effect: Errors and fraud can go undetected in payroll processing with a large volume of manual corrections
needed.
Recommendation: We recommend the City to work with third -party vendor to correct the implementation
of payroll module.
Management's Response:
Management is in full agreement with this finding and is currently working with third -party vendors to
correct payroll configurations, as recommended. During the fiscal year the payroll team performed an
internal audit of the payroll processing in order to identify and address issues with the system
configuration. As stated, the payroll team is manually tracking the overtime results of each payroll and
manually correcting any calculation errors that result.
Packet Page286
16
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section II - Current Year Findings, continued
S. Federal Award Program Audit Finding
No findings or questioned costs were noted in the current year.
Packet Page287
17
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings
A. Financial Statement Audit Finding
2019-001 Year -End Close and Balance Sheet Account Reconciliations (Material Weakness)
Criteria: The City is responsible for fair presentation of the financial statements in conformity with
accounting principles generally accepted in the United States of America. In addition, an effective internal
control system over financial closing and reporting provides reasonable assurance for the safeguarding of
assets, the reliability of financial information, and compliance with laws and regulations.
Condition: During the performance of the audit, we noted that the City's closing process have not
identified that several closing journal entries were not prepared and recorded which caused several account
balances to be misstated. Example of these closing entries are interest revenue allocation, interest payable
accrual, pool -cash fund cleanup and long-term debt activities.
In addition, the City had to record a large number of adjusting entries after the closing process was
complete to record transactions not previously recorded or to correct transactions or balances previously
recorded in error. Those adjusting entries should have been part of the closing process and the timing of
recording those adjusting entries have caused some delays and added complexity in the audit
Finally, we noted that the City did not perform reconciliations over capital assets and long-term debt
accounts causing large variances to not be identified between the subsidiary ledgers and the City's general
ledger prior to the start of the audit.
Effect. The City's accounting records needed significant adjustments after the closing of the books and the
start of the audit which caused delays in the audit and added more complexity in dealing with the large
volume of adjustments.
Cause: The City's closing process was not comprehensive enough to identify timely all the journal entries
and adjustments needed to ensure the accuracy of the various account balances. The closing process did
not include reconciliations of the subsidiary ledgers to the general ledgers to ensure that variances are
identified and timely addressed.
The City implemented a new financial software, however formally written accounting policies and
procedures related to the system were not developed.
Packet Page288
18
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings
A. Financial Statement Audit Finding, continued
2019-001 Year -End Close and Balance Sheet Account Reconciliations (Material Weakness), continued
Recommendation:
We recommend that the City update its closing process to ensure all transactions and adjustments are
accounted for. The City should provide cross training of finance staff to ensure continuity during the
financial reporting process and audit in case the City experience turnover in key finance positions.
The City should furthermore develop formal written policies over significant accounts that include the
timely reconciling of accounts to activity reported in related subsidiary ledgers. Also, the City should
develop a checklist for year-end closing procedures.
Status: See current year finding 2020-001
Packet Page289
19
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-002 Capital Assets Reconciliation (Material Weakness)
Criteria: A good internal control reporting system over capital assets requires the maintenance of detail
records of all capital assets to be able to support amounts reported on the financial statements and to ensure
safeguarding of assets.
Condition: The City has established basic procedures to ensure that capital asset additions are properly
capitalized, capital asset disposals are properly recorded, and current year depreciation expense for capital
assets are recorded at the fund -financial statement level for proprietary funds and at the government -wide
financial statement level for governmental funds.
However, reconciliations among the City's fixed asset module (sub -ledger), manually generated roll -
forward schedules and general ledger were not performed causing large variances to not be identified by
City staff prior to year-end audit procedures.
The City had also not performed a physical inventory of assets to determine whether they were still in the
City's possession at the end of the fiscal year.
Cause: Procedures are not in place to reconcile the general ledger capital asset balances to the City's capital
asset module as well as to reconcile the general ledger capital asset balances to the City's manually
generated roll -forward schedules.
Effect. While not resulting in any current adjustment in the capital assets, numerous capital assets were
misclassified in the sub -ledgers, which cannot be reconciled to the general ledgers by each category of
capital assets.
Recommendation: We recommend that the capital asset subsidiary ledgers to be maintained and reviewed
by management on a timely basis and any discrepancies between the subsidiary ledgers and the City's
general ledger are reconciled in order to accurately capture capital activity in the current period. In
addition, the City's manually generated capital asset roll -forward schedules should be reconciled to the
general ledger to verify accuracy in calculations and current year journal entries to record capital asset
activity. We also recommend that the City perform a physical inventory of all capital assets to ensure the
completeness and accuracy of the subsidiary ledgers and general ledger.
Status: See current year finding 2020-004
Packet Page290
20
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-003 Journal Entries Posting and Numbering (Material Weakness)
Criteria: Journal entries should be independently prepared, reviewed, and posted to the general ledger
with unique identification number. In addition, journal entries should be adequately documented to
support its accuracy and purpose.
Condition: During the performance of the audit, we noted the following regarding the City's journal entry
process:
• The City was unable to provide us with documentation or documentation was insufficient for
journal entries selected for review.
• The City uses various numbering schemes (a date and time format, a subsidiary ledger -month
format, other) that makes it difficult to determine the number of journal entries recorded and the
sequence of entries.
• The City does not maintain a log of manual journal entries to document the accountability of all
journal entries, the preparer, the approver, and the purpose of why the entry was recorded.
• Journal entries can be prepared and posted without system restriction, and no controls in place to
ensure the journal entries are approved before posted.
Cause: The City does not have formal written procedures for journal entries.
Effect. Journal entries recorded in the City's accounting system may be inaccurate, unapproved or
unsupported.
Recommendation: We recommend that the City implement formal written procedures and policies over
journal entries to ensure only accurately prepared and supported journal entries are recorded to the general
ledger.
Status: See current year finding 2020-002
Packet Page291
21
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-004 Subsidiary ledger Reconciliation (Material Weakness)
Criteria: An effective internal control system over financial reporting requires the maintenance of all
subsidiary ledgers to be reconciled to the general ledger and be able to support amounts reported on the
financial statements. An effective internal control system over financial reporting provides reasonable
assurance for the safeguarding of assets, the reliability of financial information, and compliance with laws
and regulations.
Condition: During the performance of the audit, we noted the following subsidiary ledgers are in different
systems than the general ledger, and the transactions were captured in the general ledger by posting
manual journal entries:
• Payroll
• Utility Billings
However, no reconciliation were performed between these subsidiary ledgers and general ledger to ensure
the journal entries posted correctly.
Cause: The City does not have formal written procedures for subsidiary ledgers reconciliation.
Effect: Considering the City doesn't have a regular bank reconciliation process in place, lack of
reconciliation between subsidiary ledgers and general ledger could potentially result in undetected errors
or unauthorized transactions.
Recommendation: We recommend the City perform regular reconciliation between the general ledger and
subsidiary ledgers.
Status: Implemented.
Packet Page292
22
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-005 Bank Reconciliation (Significant Deficiency)
Criteria: An effective internal control system over cash and investments includes frequent and timely
reconciling of account balances to information provided by the bank and custodians.
Condition: During the performance of the audit, we noted that bank reconciliations were not performed
until the start of the engagement. As a result, we noted that the total cash and investments represented in
the general ledger did not agree to the bank confirmations total by around $25,000.
Cause: During the fiscal year under audit, the City experienced turnover in positions with significant roles
in the City's financial reporting and closing process. The City was not able to perform the bank
reconciliations timely as there was not sufficient cross training in place to ensure continuity of the process.
Effect: Errors and fraud can go undetected without frequent and timely bank reconciliation.
Recommendation: We recommend the City develop formal written policies over cash and investments that
include the timely reconciling of accounts and include cash and investment accounts reported in each fund.
Status: See current year finding 2020-003
Packet Page293
23
Item #11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2020
Section III - Prior Year Findings, continued
B. Federal Award Audit Finding
No findings or questioned costs were noted in the prior year.
Packet Page294
24
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Recommendation
Review and accept the Transportation
Development Act and Single Audits for
Fiscal Year 2019-20.
Audit Requirements
Single Audit
■ organization -wide financial statement and federal awards' audit of a non-
federal entity
■ $750,000 or more in federal funds in one year.
■ To provide assurance to the Federal Government that a non-federal entity has
adequate internal controls in place
■ Generally, in compliance with program requirements.
Transportation Development Act
■ California Code of Regulations, Title 21, section 6662
■ Annual audit of accounts and records within 12 months of the end of the fiscal
year
Transportation Development Act
Funding for two specific purposes
Development and construction of local streets, roads, pedestrian facilities, and
`tat' bicycle facilities
0-7—
Transit
0
TDA Funds
Special Revenue $48,608
• TDA funds are legally restricted. The City has
a special revenue fund created for TDA
revenues.
• Revenues went unspent at the end of FY
2019-20 and will be utilized in a
transportation project delayed due to COVID-
19 in FY 2021.
Transit $779,666
• The Transit Fund is an enterprise fund to
account for revenues received pursuant to
the TDA, the Federal Transit Authority, and
revenues from transit operations.
Fare Box Recovery Revenue Ratio
The fare box recovery revenue ratio measures the profitability of a transit system.
User Fares
Operating Expenditures
• Per PUC Section 99268.3 in Article 4 of the TDA requires a ration of at least 20%
• For the year ended June 30, 2020, the City ended with 18%. Revenues decreased due to the
affects of COVID-19
• AB 90 - prohibits imposing a penalty on an operator that does not maintain the required ratio
during 2019-20 or 2020-21. (Note 7 of TDA report)
• Where are we now?
Single Audit FY 2019-20
• What is a Single Audit?
• An audit of both financial statements and federal awards.
• What information does a single audit provide?
• A report on the City's internal control for financial reporting.
• A schedule of expenditures funded by Federal Grants and the City's compliance with Federal regulations.
• A schedule of findings and questioned costs, if any. These findings are areas of improvement for the City
when it comes to internal controls.
Single Audit FY 2019-20
Grant Title City Project/Department Program Expenditures
Marsh Street Bridge
Highway Planning and Construction Replacement $ 1,828,107
Highway Planning and Construction Widen 50 Higuera 30,937
Federal Transit Formula Grants
Coronavirus Emergency Supplmental Funding
Bulletproof Vest Partnership Program
Edward Byrne Memorial Justice Assistance Grant
Capitalization Grants for State Revolving Funds
Total Expenditure of Federal Awards
Transit services
Police
Police
Police
Utilities - WRRF upgrade
2,307,593
41,431
7,583
12,871
4,000,000
$ 8,228,522
Addressing Auditor's Findings
Seven Findings
➢All internal control functions
❖ Year-end closing ❖ Segregation of Duty in AP
❖ Bank Reconciliation ❖ Payroll System Configuration
❖ Journal Entry numbering ❖ Late Performance Reviews
❖ Capital Assets
➢ No findings on revenue and expenditure accounting.
Addressing Auditor's Findings
Each of these findings represents an opportunity for continuous improvement
and City staff take each one seriously.
Any ERP system implementation requires processes and procedures to
change and adapt. Continuous improvement occurs frequently in the first few
years of a major ERP change.
Resolving these findings will require internal and external resources, at the
same time as day-to-day operations continue. But this is an investment that
will pay dividends.
Year-end Closing & Reconciliations
• Finding: The City recorded a large number of adjusting entries after the closing process was
complete to record transactions not previously recorded or to correct transactions
• Response: This is the second year of Oracle Cloud financial system. There were fewer
adjustments and delays than the prior year. Checklist for year-end close is under development.
Monthly closing has been implemented, which will further assist with review and reconciliation
prior to the start of the audit.
JE posting & numbering
• Finding: Journal entries should be independently prepared, reviewed, and posted to the general
ledger with unique identification number and include supporting documentation.
• Response: The City is exploring the Oracle system's approval functionality and workflow to
ensure that all journal entries receive appropriate level of review and approval before posting. In
addition, looking at possible configuration changes that would assist with generating sequential
numbering, rather than current unique ID numbers. Staff are utilizing the system's ability to upload
and save documentation with the journal entry.
Bank Reconciliation
• Finding: Bank reconciliations were not performed timely. June 2020 bank reconciliation had an
unreconciled variance of around $600,000
• Response: The City is working with Oracle Consulting Services to configure the Bank
Reconciliation functionality that is part of the system. The large discrepancy is an unreversed
journal entry related to accrued payroll and is a result of the implementation and configuration of
the Oracle software and transition between systems. All employees have been paid and
expenses have been recorded appropriately. However, the cash balance and accrued payroll
liabilities were not reduced accordingly and remain in the pass -through account.
Since April 2020, the bank reconciliations are being prepared
monthly as part of the month end close.
Capital Asset —Additions and Deletions
• Finding: Capital asset additions and deletions were not captured in the general ledger. A
completed project was still reflected as construction -in -progress. In addition, infrastructure assets
were added to replace fully depreciated items, however the fully depreciated assets were not
removed from the general ledger.
• Response: The City continues to refine the process and procedure of recording capital assets in
the Oracle system and has revised the approach to include additional cross checks. Accounting
and GIS are working to cross reference assets mapped in GIS. Additional configuration of the
Oracle system will assist in the management of capital asset additions throughout the fiscal year.
Efforts to conduct a City-wide inventory are underway.
Segregation of Duty in AP
• Finding: The Accounts Payable Accounting Assistant is able to edit the vendor master file, has
access to check printing and invoice data entry.
• Response: The City will improve the internal controls in the accounts payable function by
implementing configuration changes in the Oracle system, as possible and
appropriate. Development of a vendor master file changes report is underway. In addition, staff
are reviewing possible segregation of duties between Purchasing and Accounts Payable.
Payroll System Configuration
• Finding: The Oracle payroll module has overtime configuration implemented incorrectly, resulting
in manual tracking and correction of payroll.
• Response: The City is working with Oracle Consulting Services to correct the payroll
configurations. In the interim, the payroll team is manually tracking the overtime results of each
payroll and manually correcting any calculation errors that result.
Late Performance Reviews
• Finding: The City has not implemented the Goals and Performance module in Oracle for all
employees. Manual tracking and reporting of performance reviews results in delayed reviews,
which then requires manual retroactive payroll calculations.
• Response: The City is working with Oracle Consulting Services to correct the payroll
configurations for retroactive calculations. In the interim, manual calculations and payments are
being performed.
Current on -time performance review rate: 88%
Recommendation
Review and accept the Transportation
Development Act and Single Audits for
Fiscal Year 2019-20.