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HomeMy WebLinkAbout- - Prev Rose Report Attachment 3 - 10/18/2011September 21, 2004 CALIFORNIA 92628-1200 P.O. BOX 1200 FROM THE OFFICE OF THE MAYOR Costa Mesa Department Directors and Division Managers: On or about August 30, 2004, Tony Yannizzi, Costa Mesa Police Association President, and Jeff Janzen, Costa Mesa Firefighters Association President, presented you with a one page letter and a report prepared by the Harvey M. Rose Accountancy Corporation (Rose Report). On September 10, 2004, Finance Director Marc Puckett prepared a response to the Rose Report to be presented to the Costa Mesa City Council. On September 14, 2004, the response was presented to, and discussed by, the City Council. The City Council authorized release of the September 10, 2004 memorandum to those employees previously provided with the Rose Report. Sincerely, C' , 0 ry Ga Monahanr Mayor Enclosure C: Tony Yannizzi, CMPA President Jeff Janzen, CMFA President 77 FAIR DRIVE PHONE: (714) 7545285 • FAX: (714) 754-5330 • TDD: (714) 754-5244 • www.ci.costa-mesa.ca.us To: Costa Mesa Department Heads In recent fiscal years, budget mandates here in Costa Mesa have required each department within the city to either maintain a flat line budget or make significant cuts to accommodate "Declining economic conditions". As a result of these mandates, each department within the city has been forced to do without essential positions, programs or equipment. The cumulative effect of this fiscal practice is that normal upgrades that should have occurred through routine maintenance have become costly deferred projects. Ultimately, the citizens of Costa Mesa have suffered a reduced level of service from our various departments. The Costa Mesa Police Officers Association and the Costa Mesa Firefighters Association have contracted the accounting firm of Harvey M. Rose Accountancy Corporation to thoroughly evaluate the City's budgeting, accounting methods and the true financial condition of the City. The good news from the report is that there are excess funds in several accounts that the city council can decide to use immediately. The report identifies discretionary funds that the City Council may access for various purposes. This includes items -necessary to maintain properly equipped, compensated, and trained employees for all city departments. Our employee groups benefit from this information because the City is not in the dire financial condition that we all have been led to believe. We should be able to raise salaries and benefits to the level that our City Council resolution recommends. (Average of our contiguous cities wages and benefits). Each department benefits from this information because it may provide a source of funds to accomplish necessary equipment purchases or capital outlay items to keep us current and competitive as service providers to our community. We look forward to working with the city council and administrators to accomplish the competitive service edge we have taken pride in for many years while maintaining the conservative fiscal policies that make Costa Mesa an economically healthy municipality. If you have any questions about the Harvey M. Rose Accountancy Corporation or their credentials as experts in the field of municipal finance and accounting principles, feel free to contact Jeff Janzen (Costa Mesa Firefighters Association President) or Tony Yannizzi (Costa Mesa Police Association President). Thank you for your consideration. We hope you find this information useful. Tony Yannizzi r; 3958pager El As of June 30, 2003, the General Fund had a fund balance amounting to approximately $59.8 million, or 77.9% of the City's $76.8 million annual General Fund operating expenses. 0 Of the $59.8 million General Fund balance, $13,579,931 was not immediately available for spending as of June 30, 2003. However, the balance of $46,239,990 was unreserved and available for spending. L1 Of the $46.2 million in unreserved fund balance, we conservatively estimate that over $19.0 million had not been specifically designated, and could be considered surplus. Each year, the City conservatively estimates revenues and expenditures. On average, for the fiscal years 2001-02 and 2002-03, the City's actual revenues and expenditures resulted in a positive budget variance of 5.2%. El While the FY 2004-05 budget does not recognize approximately $2.2 million in additional lost income from the State over the next two fiscal years, this amount should be entirely recovered from the State's repayment of the FY 2003-04 VLF "backfill gap" in FY 2006-07. El As of June 30, 2004, the City's Capital Improvement Fund had a balance was $10,320,762, of which $9,981,212 was unreserved. At the same time, the Fund had cash amounting to $8,330,600. In FY 2003-04 and FY 2004-05, the City planned to spend only $3,283,220 from this fund. Assuming no other revenue transfers into this fund, there will be a likely fund balance exceeding $6.7 million as of June 30, 2005. El As of June 30, 2003, the Self Insurance Internal Service Fund had total estimated liability amounting to $11,019,330. To fund this liability, the City had total assets of $11302,727, including cash balances totaling $10,910,202. Of the $11,096,334 in total estimated liability, there was $10,936,311 in estimated claims payable. However, current liability claims paid in FY 2002-03 amounted to only $3,389,042, or $7,547,269 less than the total amount booked for claims as of June 30, 2003. Further, these paid claims were funded primarily from user fees charged to City departments, which amounted to $2,923,557 in FY 2003-04. El As a result, approximately $10.5 million represents reserves that have been established to fund the City's future liabilities. A portion of these reserves could be made available by policy of the City Council. Equipment Replacement Internal Service Fund El The Equipment Replacement Internal Service Fund had unreserved retained earnings on June 30, 2003 of $6,372,234, of which 98.5% was in the form of cash or cash equivalent ($6,278,920 in cash). The cash portion of the retained earnings amounted to approximately 3.83 times the annual net operating expenditures of $1,639,176 in FY 2002-03 (total operating expenditures of $2,162,524, less depreciation of $523,348). ® The cash retained earnings may exceed the cash reserve requirements that are necessary to fund ongoing annual fixed asset replacement needs, which averaged $824,080 annually over the past two fiscal years. 1111 ! 1 1t 1 ® As of June 30, 2003, the Proposition 172 Special Revenue Fund had an accumulated balance of $1,938,343, all of which was unreserved and undesignated. In that year, the City had received $801,618 in Proposition 172 Sales Tax revenue, but had only expended $591,858, resulting in a one year operating surplus of $209,760. El Assuming the actual fund balance as of June 30, 2003, estimated FY 2003-04 and FY 2004- 05 collections equal to FY 2002-03 actual amounts, and budgeted appropriations for each of the past two fiscal years, we conclude that $500,000 or more currently remains in the fund balance. These funds could be made available for any legal General Fund purpose. El As of June 30, 2003, the Supplemental Law Enforcement Special Revenue Fund had an ending fund balance of $173,943, which was all in cash. ® Costa Mesa had a General Fund Balance equal to 77.9% of its annual expenditures, compared with an average of 71.0% for jurisdictions with a similar population. I 1- ' 1 II 1113WITIX 1) General Fund $ 46,239,990 2) Capital Improvement Fund 9,981,212 3) Self Insurance ISF 7,984,984 4) Equipment and Services ISF 5,454,840 5) Proposition 172 Fund 1,938,343 6) Supplemental Law Enforcement Services Fund 233,773 L $71,833,142 2 F The City Council should: 1. Direct the City Manager to report on the estimated General Fund Balance, and the estimated amounts and justification for all General Fund balance designations as of June 30, 2004. 2. Direct the City Manager to develop strategies for improving budget projection accuracy in future years, in an attempt to minimize significant budget variances. 3. Direct the City Manager to report on the estimated Capital Improvement Fund balance and unreserved portion as of June 30, 2004. 4. Consider a modification to Capital Improvement Program spending priorities and transfer any unreserved Capital Improvement Fund balance back to the General Fund. 5. Direct the City Manager to develop a multi-year cash flow model for City self-insurance program needs, to provide a clearer picture of future requirements while accounting for interest earnings and future contributions to the fund. 6. Consider a change in self-insurance reserve policies, which would allow a portion of $7,984,984 in reserves for outstanding claims to be returned to the funds contributing such monies in prior years. 7. Direct the City Manager to consult with the State Controller to determine how the City should return accumulated excess self-insurance reserves to contributing departments. 8. Direct the City Manager to determine projected future annual fixed asset replacement requirements and retain a cash balance sufficient to meet the capital requirements as well as to fund its working capital needs. 9. Direct the City Manager to return surplus Equipment Replacement reserve monies to the funds contributing such monies in prior years. 10. Direct the City Manager to provide an estimated June 30, 2004 Proposition 172 fund balance and cash balance, and transfer any available surplus monies into the General Fund. 11. Direct the City Manager to eliminate the Proposition 172 Fund to avoid any future accumulation of surplus fund balance. 12. Direct the City Manager to provide an estimated June 30. 2004 Supplemental Law Enforcement Services fund balance and cash balance, and transfer any available surplus monies into the General Fund. 13. Direct the City Manager to eliminate the Supplemental Law Enforcement Services Fund to avoid any future accumulation of surplus fund balance. 14. Direct the City Manager to analyze the activities performed for each of these funds by General Fund departments and agencies to determine whether costs can be reimbursed. ave ®se &ccountamcycorporation 1390 Market Street, Suite 1025, San Francisco, CA 94102 (415) 552-9292 - FAX (415) 252-0461 North Hollywood, CA (818) 503-7191 June 23, 2004 Jeff Janzen, President Costa Mesa Firefighters' Association Anthony Yannizzi, President Costa Mesa Police Officers' Association 846 Dune Street Anaheim, CA 92806 Dear Messrs. Janzen and Yannizzi: We have completed our review of the FY 2003-04 and FY 2004-05 Budgets and the 2002 and 2003 Comprehensive Annual Financial Reports (CAFR) for the City of Costa Mesa. Based on our review of these documents, as of June 30, 2003 the financial condition of the City of Costa Mesa was very good to excellent. As of June 30, 2003, the General Fund had a fund balance amounting to approximately $59.8 million, or 77.9% of the City's $76.8 million annual General Fund operating expenses. Further, the City's capital projects funds, internal service funds and special revenue funds have substantial resources in the form of retained earnings and cash balances that are in excess of requirements. The City should examine these funds to identify opportunities for the potential transfer of excess balances to the General Fund and to other funds from which prior year income was received. Although each of these funds was created for a specific purpose, the revenues that flow into them, in most cases, would otherwise be General Fund resources except for specific actions of the City Council. Such actions may have been taken many years ago by an entirely different Council. In many cases, the current Council has the power to modify the ordinances that www.harvevrose.com Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 determine the amount of monies that go into these funds and the type of expenditures that can be made from these funds. These funds and their pertinent financial data are shown in Attachment 1 and discussed in the following sections of this report. General Fund Balance The General Fund balance as of June 30, 2003 amounted to $59,819,921, which is a decrease of $3,925,833 from the $63,745,754 General Fund balance reported for FY 2001-02. The $59,819,921 June 30, 2003 General Fund balance included $13,018,886 of monies that were not immediately available because they were owed to the General Fund by the Redevelopment Debt Service Fund. A review of the June 30, 2003 CAFR indicated that neither the Redevelopment Debt Service Fund nor the Redevelopment Projects Fund have sufficient assets to immediately repay the debt. The General Fund also had miscellaneous reserves amounting to $561,045° Therefore, $13,579,931 of the $59,819,921 was not immediately available for spending as of June 30, 2003. However, the balance of $46,239,990 was unreserved and available for spending. While unreserved fund balance may be designated for specific purposes by action of the City Council or management, as stated in the June 30, 2003 CAFR, designations of fund balance "represent management plans that are subject to change." Therefore, there is no legal reason that these funds could not be expended. In prior years, jurisdictions were required to show detailed information on the amount of unreserved fund balance that had been designated by management. However, beginning in 2003 the City no longer reported designations as permitted by new financial reporting rules. Accordingly, designations were excluded from Costa Mesa's financial statements as of June 30, 2003. 2 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 However, a review of the June 30, 2002 CAFR, the FY 2003-04 Final Budget and the FY 2004-05 Recommended Budget suggests that the single largest designation of General Fund balance is the City's Operating Reserve. Costa Mesa Municipal Code Section 2-205, et seq., states that the Operating Reserve is designated "by resolution of the City Council" and can only be used (a) "to provide emergency funding as a result of a declared emergency," or (b) "to provide required funding for an unanticipated but urgent event threatening the public health, safety and welfare of the City of Costa Mesa." The FY 2004-05 Recommended Budget states that "The City will strive to maintain a designated General Fund Reserve for Working Capital equal to 20% of its operating budget." At this level, the City would have been required to set aside $15,363,345 in FY 2003-04 to be consistent with the Council's policy. However, according to the budget only $14,125,000 was designated for this purpose. In FY 2004-05, the policy and the amount of the designation have remained unchanged. The notes to the June 30, 2002 financial statements provide additional insight into the amounts the City has historically designated from its unreserved General Fund balance. The table on the next page summarizes the June 30, 2002 designations, showing the $14,125,000 Operating Reserve (Working Capital) and an additional $12,797,787 in other designations. As shown, as of June 30, 2002, the City had designated significant General Fund money for General Liability Claims and Workers' Compensation Claims, amounting to over $9.5 million. The rationale for these designations is unclear. As will be discussed more fully later in this report, the City had fully ftinded its insurance liability reserves in a separate Self Insurance Internal Service Fund, and was holding $11.1 in cash for claims liability at the time these General Fund designations were established. Further, the City had designated over $2.0 million for capital projects, while holding an unreserved fund balance of $6.3 million in the Capital Improvements Fund, which was available entirely in cash. According to the CAFR, the Capital Improvement Fund has been established "to account for the construction of facilities financed by the City's General Fund." 3 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 I In 11 r City of Costa Mesa General Fund Designations as of June 30, 2002 June 30, 2002 1.Working Capital 14,125,000 2. General Liability Claims 5,839,622 3. Workers' Compensation'Claims 3,700,000 4. Capital Outlay 1,255,276 5. Cable TV Program 1,015,452 . 6.-1 Capital Improvement Projects 759,622 7. Special Projects 227,815 Total Designations 1 26,922,787 It is clear from the above analysis of General Fund balance, that the City of Costa Mesa has significant funds available which could be appropriated by the City Council. Even if one assumes that current year designations approximate the same amounts as reported as of June 30, 2002, the City would still have over $19.3 million in unreserved and undesignated fund balance. However, as stated above, we continue to question the decision by the City to designate significant General Fund dollars for General Liability and Workers' Compensation claims, and for Capital Projects, as reported for June 30, 2002. Therefore, we believe that undesignated amounts could be substantially greater than they were in that year. Accordingly, we recommend that the City report on the estimated General Fund Balance, and the estimated amounts and justification for all General Fund balance designations as of June 30, 2004. •" Ir-d'Vtli It is also interesting to note that the FY 2004-05 Recommended Budget states that $4,738,521 in General Fund balance will be used to finance operations because of a projected gap between income and expenses for the year. The City Manager argues, "This is the third consecutive year that the City is utilizing General Fund balance to the tune of $4 million each year ... 0 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 The City cannot continue along this path without expecting to increase taxes and fees, implement new taxes or approve new development ... or, consider program or service cuts." Yet, there is no discussion of the significant accumulated fund balance or the historical ability of the City to add to that balance each year. As reported in the City's financial statements, the General Fund has had positive budget variances averaging 5.2 percent for the period FY 2001-02 through FY 2002-03. These positive variances resulted in an average annual budget surplus of $2.7 million over this two year period as the result of receiving unanticipated revenues and realizing unanticipated expenditure savings. The table on the next page displays this recent history. Although we did not analyze previous financial statements, it is probable that the positive variances were even more pronounced in prior fiscal years. As shown in the table, on average for the two fiscal years, the Final Budget anticipated an operating deficit of $1,152,735, which was proposed to be made up from General Fund balance. In fact, average annual surplus of $2,706,561 was generated over that two year period, based on actual revenues and expenditures. Therefore, the actual results of operations resulted in an average positive variance of $3,959,296 from the Final Budget, which was 5.2% better than what had been projected by the City Manager. Clearly, if this pattern continues, it is unlikely that the City will need to substantially supplement its operating income with fund balance in FY 2004-05. The City should strive to improve its projection accuracy to minimize significant budget variances in future years. FY 2004-05 Budget Projections There is no question that the current fiscal year is full of economic uncertainty as the State grapples with its financial problems. While at the time of this report, the immediate impacts from State budget reductions could be reasonably estimated, final resolution of FY 2004-05 State budget as well as the potential for future year impacts on local government were not certain. 5 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 History of Budgeted to Actual Revenues and Expenditures City of Costa Mesa FY 2000-01 through FY 2002-03 BudgetActual Variance Variance Y 2001-02 73,901,755 76,685,771 2,784,016 3.8% Y 2002-03 76,526,847 77,190,008 663,161 0.9% �YearAvg 75,214,301 76,937,890 1,723.589 2.30A Budget Actual Variance Variance Y 2001-02 72,975,875 1 71,645,931 1 1,329,944 1.80/4 Y 2002-03 79,758,197 76,816,726 2,941,471 3.7% Year Avg76,367,036 74,231,329 2,135,708 2.8% Budget Actual Variance Act Exp FY 2001-02 925,880 5,039,840 4,113,960 5.7% FY 2002-03 (3,231,350) 373,282 3,604,632 4.7°10 2 -Year An (1,152,735) 2,706,561 3,859,296 5.2% In his budget analysis, the City Manager has estimated that the City will realize a $1,946,707 loss in income from State budget reductions in each of the next two fiscal years. This amount is reasonably consistent with estimates made for Costa Mesa by the League of California Cities. However, the City Manager indicates that the "City's proposed budget, as submitted, includes an anticipated revenue loss of (only) $855,000 due to ERAF II" and that an additional $1.1 million in reductions may be necessary, depending on the final State budget outcome. used on the information available for this report, we believe this assessment is reasonable. Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 However, it is important to recognize the context of the anticipated State cutbacks over the course of the next several years: ® The $1.9 million loss in revenue has been recommended by the Governor for only two years. According to the Governor's proposal and discussions by the Legislature, in FY 2006-07 this funding will be fully restored. Therefore, the $1.9 million annual revenue reduction can be viewed as a temporary loss of income during fiscal years 2004-05 and 2005-06. The City's budget has already recognized $855,000 of this reduction, resulting in an annual additional impact of approximately $1.1 million per year. Over the two year period, the total revenue loss will amount to slightly less than $2.2 million. ® In FY 2006-07, the State will pay the City approximately $2.0 million as repayment of the Vehicle License Fee (VLF) "backfill gap" that occurred in FY 2003-04. As a result, over the next two fiscal years the net loss in income for the City will amount to less than $200,000. Because of the dynamics of the proposed State budget solution, it will be Costa Mesa's cash position that will mostly be affected over the course of the next two fiscal years. Accordingly, because of the strong Costa Mesa General Fund financial position and cash balance (which amounted to $44.5 million on June 30, 2003) the impacts on the City should be minimal. Capital Improvement Fund As stated previously, Costa Mesa has established a Capital Improvement Fund "to account for the construction of facilities financed by the City's General Fund." As of June 30, 2002, the Capital Improvements Fund balance was $10,320,762, of which $9,981,212 was unreserved. At the same time, the Fund had cash amounting to $8,330,600. In FY 2003-04 and FY 2004-05, the City appropriated $2,119,090 and $1,164,130 from this fund, respectively, for total planned expenditures of $3,283,220. Assuming no other revenue transfers were made into the Capital Improvement Fund by the General Fund and that all budgeted amounts will be fully expended, the Capital Improvement Fund will continue to have V7 JeffJansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 significant unreserved balances of approximately $7.9 million at the end of FY 2003-04 and $6.7 million at the end of FY 2004-05. The City Council should report on the estimated Capital Improvement Fund balance and unreserved portion as of June 30, 2004. This report should be comprehensive, and should include a listing of all pending projects by year of initial appropriation and project status, reconciled to the estimated fund balance as of June 30, 2004. Because the General Fund is the source of these monies, the City Council may choose to modify its spending priorities and transfer any unreserved fund balance back to the General Fund. The City operates two internal service funds, including the Self Insurance and Equipment Replacement Internal Service Funds. In total, as of June 30, 2003, these two funds had retained earnings balances amounting to $6,655,631. This amount equates to assets in excess of liabilities, which generally is surplus. The cumulative cash balance of the two internal service funds as of June 30, 2003 amounted to $17,189,122. The total liabilities of the internal service funds amounted to $11,096,334. If the City were to return surplus cash to the funds from which it was obtained, the General Fund would receive the majority of such refunds. As of June 30, 2003, the total surplus cash in the internal service funds conservatively exceeded $6,090,000. Self Insurance Internal Service Fund The Self Insurance Internal Service Fund accounts "for the receipt and disbursement of funds used to pay workers' compensation, general liability and unemployment claims filed against the City." As of June 30, 2003, the total estimated liability amounted to $11,019,330. To fund this liability, the City had total assets of $111)302,727, including cash balances totaling $10,910,202. Of the $11,096,334 in total estimated liability, there was $10,936,311 in estimated claims payable. 8 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 However, current liability claims paid in FY 2002-03 amounted to only $3,389,042, or $7,547,269 less than the total amount booked for claims as of June 30, 2003. Further, these paid claims were funded primarily from user fees charged to City departments, which amounted to $2,923557 in FY 2003-04. In addition, the City also received interest income amounting to $468,563. As a result, the total fund realized a positive change in net assets amounting to $3,078. Further, as of June 30, 2003, the City had fully funded current and future year claims, and accumulated excess net assets of $2831397. These surplus net assets should immediately be refunded to the funds from which they were collected. In fact, the accumulation of net assets which exceed expected or "allowable' costs is prohibited for programs to which the federal or State governments contribute money. Federal ONM Circular A-87 (Cost Principles for State, Local, and Indian Tribal Governments), states in Attachment C, Section GA "Billing rates used to charge Federal awards shall be based on the estimated costs of providing services, including an estimate of the allocable central service costs. A comparison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the actual allowable costs of the service shall be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs." Under this requirement, central service internal service funds are therefore prohibited from charging the federal government an amount which exceeds the actual cost of business (i.e., the federal government will not pay for fund profits). In addition, funding for the full amount of future liability is not necessary, and some jurisdictions fund only the current portion due each year while maintaining smaller reserves for future year estimated liability. The development of a multi-year cash flow model for City self-insurance program needs could provide a clearer picture of future requirements while accounting for interest earnings and future contributions to the fund. The benefits from this change in policy would include the release of some of the existing reserves for current year purposes. E Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 Therefore, the City Council could consider a change in policy, which would allow a portion of the $7,984,984 in reserves for outstanding claims to be returned to the funds contributing such monies in prior years. The General Fund would probably receive most of any monies refunded, which would include the full amount of $283,397 in surplus assets and any portion of the $7,984,984 in reserves for future liability that are determined to be available. These returned funds could be used for any legal General Fund purpose. In addition, the City Finance Director should consult with the State Controller to determine how the City should return the accumulated excess reserve. Eguipment Replacement Internal Service Fund The Equipment Replacement Internal Service Fund accounts "for all motorized equipment used by City departments." This fund had unreserved retained earnings on June 30, 2003 of $6,372,234, of which 98.5% was in the form of cash or cash equivalent ($6,278,920 in cash). The cash portion of the retained earnings amounted to approximately 3.83 times the annual net operating expenditures of $1,639,176 in FY 2002-03 (total operating expenditures of $2,162,524, less depreciation of $523,348). These cash retained earnings may exceed the cash reserve requirements that are necessary to fund ongoing annual fixed asset replacement needs, which averaged $824,080 annually over the past two fiscal years. The City should determine its projected future annual fixed asset replacement requirements and retain a cash balance sufficient to meet these capital requirements as well as to fund its working capital needs. Any surplus ironies should be returned to the funds contributing such monies in prior years. The General Fund would probably receive most of any monies refunded, which would be available for any legal General Fund purpose. The current excess cash balance could amount to as much as $5,454,840. OMB Circular A-87 prohibits the assessment of fees and charges by equipment and vehicle internal service funds for purposes of accumulating capital to fund the inflationary cost component of new equipment or replacement. 10 JeffJansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 RUKIMA Li WA 019 DI 9L1191 The City has 15 special revenue funds. Combined, all 15 of the Special Revenue Funds had ending fund balances of $24,055,526, of which $2,738,847 was unreserved and undesignated. These funds also held cash and cash equivalents of $23,559,726, which represented 97.9 percent of their combined fund balances. Because these funds are designated for specific purposes, they cannot be used for general government purposes unless the activities support the purpose for which the Special Revenue designation is intended. Therefore, the City should ensure that all General Fund financed activities that could be financed with special revenues are identified, so that Special Revenue Fund services are not directly or indirectly financed by the General Fund. Two of these Special Revenue funds fall into this category and should receive particular scrutiny by the City: (1) the Proposition 172 Fund, and (2) the Supplemental Law Enforcement Services Fund. As of June 30, 20039 these two funds had balances that could have been made available to the General Fund to finance certain public safety functions supported by general tax revenues. Each of these funds is discussed more fully, below. Proposition 172 Fund The City established the Proposition 172 Fund "to account for the receipt and disbursement of a voter -approved one-half cent permanent increase in the State sales tax in November 1993. These revenues must be expended for public safety purposes." As of June 30, 2003, this fund had an accumulated balance of $1,938,343, all of which was unreserved and undesignated. In that year, the City had received $801,618 in Proposition 172 Sales Tax revenue, but had only expended $591,858, resulting in a one year operating surplus of $209,760. It is not clear why the City (a) has chosen to account for these revenues in a special revenue fund, or (b) has not been expending the full amount of the revenue in each fiscal year. Most jurisdictions with which we are familiar, commingle Proposition 172 funds with General Fund sources and fully 11 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 expend revenues in the year that they are received. The underlying justification for this approach stems from the fact that most jurisdictions contribute much more General Fund discretionary funding to public safety services than is required by the Proposition 172 Sales Tax law. As an example, in FY 2003-04 and FY 2004-05, the City of Costa Mesa financed the Police Department using $29.9 million and $30.5 million of General Fund discretionary income, respectively. The City Manager seems to have recognized this fact in FY 2003-04 and FY 2004-05, when he budgeted $1,063,795 and $1,128,432 in Proposition 172 Sales Tax for police and fire services for each year, respectively,. These were significant increases from prior year levels. For example, in FY 2002- 03, the City expended only $591,858 from this source. In the prior year, only $374,488 was expended. Without additional information, we can not determine the amount of Proposition 172 Fund balance that might be currently available for appropriation. In addition to the amounts for Police and Fire, the FY 2004- 05 Recommended Budget includes an appropriation of $827,030 in the Non - Departmental budget unit. The increased annual Police and Fire appropriations over the last two fiscal years and the additional appropriation to the Non -Departmental budget unit has likely depleted a portion of the fund balance. Nonetheless, assuming the actual fund balance as of June 30, 2003, estimated FY 2003-04 and FY 2004-05 collections equal to FY 2002- 03 actual amounts, and budgeted appropriations for each of the past two fiscal years,' we conclude that $500,000 or more currently remains in the fund balance. Because the City substantially supports the Police and Fire departments with General Fund discretionary income, the Proposition 172 funds could be immediately transferred to the General Fund and used for any legal purpose. The City should provide an estimated June 30, 2004 Proposition 172 fund balance and cash balance, and transfer any available surplus monies into the General Fund. The Proposition 172 Fund should be eliminated to avoid any future accumulation of surplus ftind balance. 12 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 Supplemental Law Enforcement Services Fund Similar circumstances exist with the Supplemental Law Enforcement Services Fund that has been established by the City. This fund was established "to account for the receipt and disbursement of funds received under the State Citizen's Option for Public Safety (COPS) Program ... and can only be spent for "front line municipal police services" in accordance with Government Code § 30061© (2). As of June 30, 2003, this fund had an ending fund balance of $173,943, which was all in cash. The City should provide an estimated June 30, 2004 Supplemental Law Enforcement Services fund balance and cash balance, and transfer any available surplus monies into the General Fund. As with the Proposition 172 Fund, the Supplemental Law Enforcement Services Fund should be eliminated to avoid any future accumulation of surplus fund balance. Other Special Revenue Funds It is likely that financial, legal and other services are provided by the General Fund to support the activities funded by other special revenue funds, and that some reimbursement for the cost of these support services is received. Because of the substantial fund balances of these other special revenue funds of nearly $22 million as of June 30, 2003, the City should analyze the activities performed for each of these funds by General Fund departments and agencies to determine whether additional costs can be reimbursed. As part of this study, we compared financial information obtained for the City of Costa Mesa with certain information obtained from other California cities. The cities chosen for this comparison have similar populations and scopes of services that are provided to their citizens. 13 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 As shown in Table 3 on the next page, the City of Costa Mesa had General Fund balance per capita of $529, compared with an average for the surveyed jurisdictions of $443. When compared with Vallejo and West Covina, which are the closest in population to Costa Mesa, the fund balance per capita was $529 compared to $65 and $456 for the other jurisdictions, respectively. When compared with Concord, which had total expenditures approximating Costa Mesa's in FY 2002-03, the per capita fund balance comparison continues to show a significant difference of $529 to $289. In the last comparison with San Buonaventura, which had annual per capita expenditures approximating Costa Mesa's, the differences are still apparent. Costa Mesa's per capita fund balance equaled $529, while San Buonaventura's per capita fund balances was $477. Costa Mesa had fund balance equal to 77.9% of its annual expenditures compared with an average of 71.0%. It is important to note that the average for the other jurisdictions was skewed upward by Thousand Oaks, West Covina and Burbank, which each reported fund balances that were in excess of 100% of their annual expenditures. Comparison of General Fund Balances In California Cities with Comparable Populations Ran City Aaenal Expenditures Ceaeral Faad Eadiaa Bataeee Paramtof Aaaaal ExpendituremWx • F-9bmed Eapeadhara Per Ca to Fuad asteaftFtoaatial Per Capita&ataaea1 Dale of 1. FULLERTON 57,785,967 21,662,367 37.5% 134,200 431 161 6/30/03 2. THOUSAND OAKS 51,579,339 67,814,797 131.5% 1266100 409 538 6/30/03 3. CONCORD 67,345,596 36,120,133 53.6eA 124,900 539 289 6/30/03 4. VALLEIO 66,357,528 7,846,315 11.8Ye 121,100 548 65 6/30/03 5. WEST COVINA 40,176,731 50,841,306 126.5'/e 111,400 361 456 6/30/03 6. SAN►ACLARA 114,913,737 104,133,788 90.61/e 107,200 1,072 971 6/30/03 7. BURBANK 107,384,000 119,342,000 111.1% 105,400 1,019 1,132 6/30/03 8. SAN BUENAVENTURA 64,944,113 50,060,368 77.0% 105,000 619 477 6/30!03 9. BERKELEY 96,255,746 25,359,412 26.30/ 104,300 923 243 6/30/03 t0. FAIRFIEL.D 46,482,019 23,586,222 50.7% 103,600 449 229 6/30/03 AVERAGE EXCLUDING COSTA MESA 71,327,478 1 50,676,671 1 71.0% 114 320 6241 443 1 N/A COSTA MESA 76,816,726 1 59,819,921 1 77.9% 113,000 1 680 529 6!30/03 ° State of Cali fornia Department of Finance, Demographic Research Unit, estimated population as of January 1, 2004 14 Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 Comparing Costa Mesa's annual expenditures for public safety functions shows that they are well funded compared with other jurisdictions. Based on information contained in Costa Mesa's CAFR, approximately 48% of Costa Mesa's governmental fund expenditures are spent on public safety activities. For the comparison cities, an average of 30% of governmental fund expenditures are spent on public safety. Only Fullerton, at 46%, spent a similar proportion of its governmental funds on public safety activities. This data is displayed in Table 4 below. Analysis of Governmental Fund Expenditures By Function We should note that full examinations of the financial statements for the surveyed jurisdictions were not conducted for this study. However, it is clear from is limited review that (a) Costa Mesa has substantial General Fund balance which exceeds per capita levels many of the jurisdictions surveyed as part of this study; and, (b) Costa Mesa's costs for public safety services, measured as a percentage of governmental fund expenditures, are above the levels found in many jurisdictions with similar populations. 15 General PulNfa I Put4k Culture and Pluming/ DdA S w Transp 8 C Government I safety aloft Reereau" Com Devel CapitalOther Total COSTA MESA 21,219,016 47,622,369 0 6.826.793 18,206,712 5,292,562 O 99,166,422 % 21% 48% 0% 7% 18% 6% 0% 100'X. FULLERTON4,459,000 35,790,000 10,707,000 8,002,000 4,840,000 6,745,000 7,635,000 78,178,0D0 % 6% 46% 14% 10% 6% 9% 10% 100% THOUSAND OAKS 13,208,695 16,931,218 9,827,731 8,957,013 19,803,419 8,053,848 15,336,249 90,118,171 % 15% 19% 11% 10% 22% 7% 17% 100% CONCORD 10,935,855 28,889,785 14,917,505 12,196,418 18,418,242 12,111,169 - 97,468,974 % 11% 30% 15% 13% 19% 12% 0% 100% VALLEJO 40,018,119 50,848,005 28,716,950 - 23,015,880 14,177,864 - 154,776,818 % 26% 33% 17% 0% 15% 9% 0% 100% WEST COVINA 3,531,297 29,767,232 13.504,313 11,655,366 9,826,955 13,181,503 - 81.246.ggg 'IB 4% 37% 17% 14% 12% 18% 0% 10096 SANTA LARA 33,829,000 64,683,000 14,762,000 16,662,000 - 73,085,000 - 203,021,000 % 17% 32% 7% 8% 0% 36% 0% 100% BURBANK 25,412,000 51,787,000 17,944,000 21,355,000 29,375,000 18,427,ODO - 164,300,000 °J6 15% 32% 11% 13% 18% 1191 0% 100% SAN BUENAVENTURA 10,498,535 34,611,974 12,638,440 5,195,320 2,942,485 40,840,360 - 106,725,094 `16 10% 32% 12% 5% 3%38% O% 10096 BERKELEY 19,572,000 60,260,000 50,455,000 28,071,000 25,318,000 7,888,000 42,316,000 233,860,000 % 8% 28% 22% 12% 11% 3% 18% 100% FAIRFIELD 10,166,295 25,057,547 13,438,529 - 14,807,608 45,780,967 109,250,944 % 9% 23% 12% 0% 14% 42% 0% 100% AVG EXCL COSTA MESA 17,163,080 39,882,576 18,4W,947 11,208,412 14810.757 23,825,071 6,628,726 131,894,667 % 13% 30% 14% 8% 11% 18% 5% 100% We should note that full examinations of the financial statements for the surveyed jurisdictions were not conducted for this study. However, it is clear from is limited review that (a) Costa Mesa has substantial General Fund balance which exceeds per capita levels many of the jurisdictions surveyed as part of this study; and, (b) Costa Mesa's costs for public safety services, measured as a percentage of governmental fund expenditures, are above the levels found in many jurisdictions with similar populations. 15 JeffJansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association June 23, 2004 In summary, as of June 30, 2003, the City of Costa Mesa had significant fund balances in the General Fund and other funds that include General Fund monies. Some or all of these fund balances are available for General Fund purposes and should be examined closely by the City. These June 30, 2003 fund balances, and/or surplus cash balances, are as follows: 1) General Fund $ 46,239,990 2) Capital Improvement Fund 9,981,212 3) Self Insurance ISF 7,984,984 4) Equipment and Services ISF 5,454,840 5) Proposition 172 Fund 1,938,343 6) Supplemental Law Enforcement Services Fund 233,773 Total $71,8333142 Included in the internal service fund (ISF) monies listed above would be some amounts that would appropriately be returned to funds other than the General Fund. However, most of these amounts would be General Fund monies. If you have any questions on this report, please call me at our main office at (415) 552-9292, or on my cell phone at (510) 757-7991. Sincerely, In City of • Analysis ofFund Balances Use of Fund Surpluses/Balances Flf001 2-02 FY 200203 .................... . . yy Beginning Fund Balance _ 64,200,101_ 63,745,754 - Reserve for Encumbrances - —_-402,9171 p Advances to Redevelopment Agency Funds _ 13,073,043T-13,018,886 Future Advances to Other Funds _ _ 0 ' 0 __ _ _ Other Reserved and Designated _ _ 737,661 561,045 Unreserved But Designated _ 126,922,787 - _.0 . Undesignated _ _ _ _- — i 22,609,346_ 46,239,990 Ending g Fund Balance -- 63,745,754 59,819,921 Cash and Investments 45,926,944 44,480,615 Annual Operating Expenses _ I _ 71,645,931 r 76-816,726 Fund Balance as a% of Annual Operating Ex nses ----T 89-- 77.9% City of • Analysis ofFund Balances Use of Fund Surpluses/Balances FY 2001-02 FY 2002-03 CAPITAL PROJECTS FUNDS - •i:ti 1. •yt Beginning Fund Balance -7,495,942 1 7,918,932 Reserve for Encumbrances _ 1,412,672 1 0 _ Prepaid Items247,550 Land Held for Resale 1 339,550 - 0 Unreserved Ending Fund Balance— _ _ _ 6Y ,258,710 9,981,212 7,918,932 10,320,762 Cash and Investments 7,857, 8-1 8,330,600 .. ..::: w-:::::.: �: may.■. `:: .�• . .1AE• i�.. .�. ..•': .. 4.:•x:5:.... ...n ..................... dam.®r�� .....�:MJ.Q•: Ji•:::: %i.: -.i! �_ I —_ —.__ Beginning Fund Balance 2,272,5501 2,166,380 Reserve for Encumbrances 0 ! 0 -Prepaid Items _Land Held for Resale _ Unreserved _ -- _ _ 1,697,665 _ 1,697,665 468,715 107,789 Ending Fund Balance _ _ _ _ 2,166,380 1,805,454 Cash and Investments ! 479,4651 155,752 _ City of • Analysis ofFund Balances Use of Fund Surpluses/Balances FY 2001-02 FY 2002-03 INTERNAL SERVICE FUNDS nom::-....;..n}...y :::{::i;:-vi:}•::.t-: B innin9 Fund E ui — Retained Earnings - Unreserved _ ---2484 ► v , ?80,319 280,3191 283,397 City of Costa Analysis of Fund Balances Use of Fund SurpluseslBalances - - - --- FY 2001-02 FY 200203 SPECIAL REVENUE FUNDS , - T --- - ----- ..- -- inning Fund Balance _ .L._._-. 1 - i-- --------- j 1 . , . 310,313 1,728,583 Reserve for En_c_ u_ mbrances 0 ; 0 Loan Deposit _ - v _ _ - _- - 0 ; 0 Advances to Other Funds Unreserved -- But Designated 0-- Undesi Hated_ _ 1,728,583 T 1,938,343 —_ _ Ending Fund Balance1,938,343 Cash and Investments 1,601,062 1,814,559 Total Revenue 792,758 fi 801,618 Total Expenses 374,488, 591,858 `sE3 1 E''l -- - 382,049 ( 426,236 Reserve for Encumbrances --_ -_ -- ®i Loan Deposit - Advances to Other Funds Unreserved But Designated __ _ Undesignated__ _ -i- --._ �_-____.-- 0 ____ 0 t _ 0 00 0 _ 426,236 173,943 Endin Fund Balance 426,236 173,943 Cash and Investments - - ----- - ` - -- --- - 426,736 175,108 Total Revenue,023 246233,773 Total Expenses 192,202 167,519 Harvey M. Se Accountancy Corporation 1390 Market Street, Suite 1021, San Francisco, CA 94102 (415) 552-9292 ® FAX (415) 252-0461 August 25, 2004 Jeff Janzen, President Costa Mesa Firefighters' Association Anthony Yannizzi, President Costa Mesa Police Officers' Association 846 Dune Street Anaheim, CA 92806 Dear Messrs. Janzen and Yannizzi: Per your request, we have completed an additional comparison of the finances of the City of Costa Mesa with those of four cities selected by your associations and the County of Orange. As we discussed on the telephone, some comparisons between the City of Costa Mesa and the County of Orange may not be entirely relevant because of the significant differences between services that are mandated for counties and those that are mandated for cities. As shown in Table 3 on the next page, the City of Costa Mesa had per capita General Fund Balance of $529, compared with an average for the surveyed jurisdictions of $117. When the County of Orange is removed from the analysis, the average per capita General Fund Balance for the surveyed jurisdictions increases to $163. A simple comparison with Fountain Valley shows a per capita General Fund Balance of $529 for Costa Mesa compared to $671 for Fountain Valley. However, a further analysis of the Fountain Valley CAFR indicates that a significant portion of the $37.9 million General Fund Balance, reported for that city in Table 1, had been designated for equipment, insurance, employee benefit and capital project reserves. Such reserves are included in separate internal service funds and a capital improvement fund in the City of Costa Mesa financial statements. Therefore, the per capita General Fund Balance comparison between Costa Mesa and Fountain Valley must be adjusted to be valid. Jeff Jansen Costa Mesa Firefighters' Association Anthonv Yannizzi Costa Mesa Police Officers' Association August 25. 2004 Page 2 of 5 If Fountain Valley's per capita General Fund Balance is adjusted for these factors, it declines to $237, or 44.7% of the Costa Mesa per capita General Fund Balance. Averaging Fountain Valley's adjusted per capita General'Fund Balance with those computed for the surveyed cities, the average for all four cities declines from $163 to $127. Therefore, Costa Mesa's per capita General Fund Balance is nearly 4.2 times greater than the four cities that were surveyed. When compared with Newport Beach, which had total expenditures that were slightly greater than Costa Mesa's in FY 2002-03, the per capita fund balance comparigon continues to show a significant difference of $450 to $529, respectively. The cities of Huntington Beach and Santa Ana had per capita General Fund balances that were lower, at $75 and $65, respectively. These findings provide a significant indicator of the relatively good financial health of the City of Costa Mesa, as of June 30, 2003. As you recall from our previous comparison of Costa Mesa to ten municipalities with similar populations, Costa Mesa had a greater per capita fund balance than all but seven jurisdictions in the sample. Therefore, whether measured against cities with similar populations or those jurisdictions with which your City is nonnally compared, Costa Mesa was among the cities with the highest June 30, 2003per capita General Fund Balance. Because the County of Orange funds many services that are not the responsibility of cities, we did not include it in the comparison of self-reported expenditures by sei-vice category. Therefore, this portion of the analysis only compares Costa Mesa with the cities of Huntington Beach, Newport Beach, Fountain Valley and Santa Ana and omits the County of Orange. As with our previous analysis, comparing Costa Mesa's annual expenditures for public safety functions shows that they are well funded compared with other jurisdictions. As you recall, based on information contained in Costa Mesa's CAFR, approximately 48% of Costa Mesa's governmental fund expenditures are spent on public safety activities. For the four comparison cities included in this analysis, an average of 40% of goverrunental fund expenditures are spent on public safety. This data is displayed in Table 2, below. Harvey A1. Rose Accountancy Corporation Jeff Jansen Costa Mesa Firefighters' Association Anthony Yannizzi Costa Mesa Police Officers' Association August 25, 2004 Page 3 of 5 As in the previous analysis, this average is skewed somewhat by the CAFR information obtained for Fountain Valley. As shown in Table 2, Fountain Valley data shows that approximately 55% of its expenditures are for Public Safety services. This may be due, in part, to the City's small size. As shown in the table, Fountain Valley's total governmental expenditures were only $28.0 million, compared with expenditures that ranged between $99.2 million and $298.0 million for Costa Mesa and the other three surveyed jurisdictions. This suggests that Fountain Valley, because of its small size, may not have as well developed administrative, general government and public service infrastructures as the larger jurisdictions. We hope this additional information is useful to you. In the event you require additional information or analysis, please don't hesitate to call. Sincerely, Stephen Foti Principal HO"VeyXI. Rose: AceountanevCorporalion 4. O CC co R N 0 V3 ?» ami 'n w O ca O m & uo�o, tiUQUQa, P - ,e � a zi n. NI C4 eaq`oqd `tl O h Q ti v� U U� 0.N u. �o°.o �>. N cc,,,�v CA y O h ca 4-i O C -�U¢U4a 01)N O R u C HMR - background The Harvey M. Rose Accountancy Corporation (HMR) specializes in managcmcnt scrviccs for the public sector. Established in 1979 and working primarily for local and state government jurisdictions, the firm is a leader in the areas of management and performance audits; budget, legislative, and fiscal analyses; operational and organizational reviews; project feasibility assessments; and related areas. Their work covers the spectrum of local and state government functions including administration and finance, health and social services, law and justice, culture and recreation, planning and public works, public transit utilities airports, capital projects, and redevelopment and housing. school districts, The firm's clients are most often elected officials and executives of cities, counties, special districts, school districts, and state agencies. Through its services, HMR has assisted many public agencies improve their operations and efficiency. Corporation staff has performed hundreds of such studies of public sector agencies, ranging from small departments to some of the largest and most complex local government service providers, with budgets exceeding $4.2 billion annually. HMR is distinguished by the independence and objectivity of its analyses regardless of the politics of a project, meeting clients' deadlines, and providing follow-up services whenever needed. The Harvey M. Rose Accountancy Corporation (HMR) was formed after the voters of San Francisco approved a charter amendment which allows the City and County of San Francisco to contract out for services to a private firm if it can provide the same services as civil service staff at less cost. At that time, San Francisco's Budget Bureau was a civil service office headed by Harvey Rose. However, by forming a private corporation to provide the same services, Harvey Rose and his staff have been able to produce annual savings in excess of $200,000 for the City and County of San Francisco, primarily by reducing mandatory civil service costs such as pension costs. HMR has expanded its staff in order to provide management consulting services to numerous other governing bodies, county administrators, civil grand juries, and city managers, while continuing to provide a consistent level of services to the San Francisco Board of Supervisors. Highlights of HMR's qualifications and representative clients include: Contract Budget Analyst for the Board of Supervisors of the City and County of San Francisco since 1979, responsible for fiscal impact analyses of all legislation considered by the Board of Supervisors, management audits of all City and County departments, and analyses of all department budget and supplemental appropriation requests. Management auditor for the Board of Supervisors of Santa Clara County, California, since 1981, conducting audits of all major departments and programs, conducting an annual review of the County Executive's proposed budget for the Board of Supervisors, and performing special cost and other analyses. ® Contract Auditor for the Los Angeles County Auditor-Controller through a Master Agreement pool since 1986. Competitively selected for numerous management audits and special studies through this Agreement. ® Management audits, fiscal analyses, and other projects for numerous California cities, including: Los Angeles; San Bernardino; San Jose; Oakland; Berkeley; Ontario, Chino, Vallejo, and Modesto. ® Management audits and related services for numerous counties, including: Los Angeles; Orange; San Diego; San Bernardino;. Ventura; Santa Barbara; Marin; San Mateo; and Sonoma in California; and Maricopa County in Arizona. ® Management audit services for numerous other public sector jurisdictions, including: the Judicial Council of the State of California, San Diego Unified School District; Santa Clara Valley Water District; and the Port of Oakland. HMR staff is very familiar with the operations of diverse government agencies at all levels because the firm's services are provided exclusively to government. Because of this, the staff has earned a reputation for its ability to quickly identify problem areas in an objective and independent manner, collect and analyze relevant information, and prepare effective recommendations within the government setting, all in a timely manner. For additional information, see their website at htt[2://www.harveyrose.com/inside/inside.litmi � t _ ___ iall.�lu�„jj�m1