Financial and Accounting Analysis of San Diego County - Research Paper Example

? Finance and Accounting Research Paper on San Diego County Introduction San Diego County was incorporated in 1850 and is situated in the United s (U.S.), state of California. In the 48 adjacent U.S. states, it is the most southwestern county. As on January 1, 2011, it was estimated that the population of the city was 1,311,882, thus making San Diego County the second most heavily populated county in California. The city, with roughly 10,050 employees in 2011, offers variety of governmental services including sanitation and health services, recreational activities and cultural events, police and fire protection, the construction and safeguarding of infrastructure and streets, and the maintenance and function of the water and sewer utilities. The city functions under and is administrated by the State of California’s laws and its own Charter, as periodically modified since its acceptance by the electorate in 1931 (CAFR 24). The weather of San Diego County is portrayed by mild winters with most of the annual rainfall between November to March and warm and dry summers. It is known for its natural deep water harbor, long relationship with the U.S. navy, mild year-round climate, extensive beaches, and latest emergence as a biotechnology and healthcare development center. Most people who visit the county head to the wild animal park, San Diego zoo, sea world or Lego land. The national, regional and international economic condition has badly affected San Diego County’s City services and revenue. It has also exaggerated the health of the business community. In this tough economic environment, the City of San Diego has effectively balanced its annual budget and also implemented them on time i.e. by June 30 each year. This paper will provide an analysis of the Comprehensive Annual Financial Report (CAFR) of San Diego County and the city also meet the Governmental Accounting Standard Board (GASB) 34 requirements because the Comprehensive Annual Financial Report has been prepared in conformance with the standards and principles for reporting as set forth by GASB 34. Governmental Accounting Standard Board (GASB) With the implementation of the GASB 34, the financial reporting model for local and state governments has been changed. The financial statements under GASB 34 must include: Management Discussion and Analysis (MD&A); Government wide Statements involving Statement of Activities; Statement of Net Assets; Fund Statements; Notes to Financial Statements and Required Supplementary Information which includes the budgetary comparison. The CAFR of San Diego County meets the GASB 34 requirements as it is prepared in conformance with the standards and principles for reporting as required in GASB 34. The CAFR of the City also contains MD&A, Statement of Net Assets; Statement of Activities; Fund Statements; Notes to Financial Statements and Required Supplementary Information which includes the budgetary comparison of General Funds. The objective of the City’s CAFR is to provide with the financial statement which is of material misstatement. It maintains the accuracy of data; and fairness and completeness of the presentation. In addition, the City is keeping on to progress a complete internal control over the framework of financial reporting to ascertain satisfactory management of taxpayer funds (CAFR 22). According to GASB 34 and 51, in the government wide statements; all major assets are capitalized by the City of San Diego. Capital assets of both proprietary and governmental funds are utilized at the government wide level and proprietary assets are accounted at the fund level (CAFR 41). 2011 2010 With the execution of GASB 54, there was a considerable reclassification between Unrestricted and Restricted Net Assets. Restricted Net Assets resulted in an increase of $949,227 i.e. by $376,845 and Unrestricted Net Assets goes down by $394,573 (CAFR 36). The statistical section provides information as required by GASB 44. In addition to the financial statements, and the notes to the financial statements, the statistical data facilitates to access the economic condition of the City and also the Ten –year trend data has been presented in the statistical section (CAFR 279). Analysis of the Comprehensive Annual Financial Report (CAFR) The CAFR in General The Comprehensive Annual Financial report incorporates the financial statement for the state or city, and the exposure essential to correctly present the financial condition of the state component units and all state funds for the previous fiscal year. CAFR is organized in accord with generally accepted accounting principles for governmental units. In general, the CAFR is separated into three sections i.e. first is introductory section; second is financial section which includes the basic financial statement and the auditor’s opinion and the third is statistical section which includes the financial and other data for previous and current years. In the financial section, the notes to financial statements include the necessary disclosure of matters and summary of major accounting policies relating to the financial position of the state. The CAFR must conform to the GASB financial and accounting reporting standards. CAFR of City The CAFR of the City is also divided into three parts i.e. introductory, financial and statistical section; including the Letter of Transmittal and the Management’s Discussion and Analysis (MD&A) section which include the forward-looking statements concerning the City’s financial condition, business, outcome of operation and prospects. The main purpose of the CAFR is to explain what really was spent and the position of assets and liabilities at the end of the financial year. The City meets the GASB requirement. Introductory Section The introductory section incorporates the economic development activities, fiscal fundamentals, governmental funds, business type activities, budgetary process and the five year financial outlook. The economy of San Diego County has been affected by the economic recession which has slowed the commercial and residential development within the region. Source: Comprehensive Annual Financial Report (CAFR) 2011. Unemployment has almost doubled in the past four years, increased from 4.8% in November 2007 to 9.2% in November 2011 (CAFR 13). Source: Comprehensive Annual Financial Report (CAFR) 2011. The property tax revenue of the City declined from $584.3 million in 2010 to $569.0 million in 2011 i.e. by $15.3 million. This declining trend is due to the higher collection rate. Property taxes contribute almost 33% to total Governmental Funds Revenue. Enhanced consumer spending had a positive consequence on sales tax revenue in fiscal year 2011. It has increased from $185 million to $223 million approximately i.e. by 20.5%. The budgeted total sales tax revenue for 2012 is $251.2 million. It was expected that the sales tax revenue will surpass the budgeted amount, therefore result in improving consumer spending trend (CAFR 15). Source: Comprehensive Annual Financial Report (CAFR) 2011. The General Fund reserve was budgeted at 8% but the result of financial year 2011 reveals that it has crossed the budget and resulted a higher general fund reserve of 11% in 2011 i.e. total reserve balance of $115 million (CAFR 19). The strategic goals over the next five years includes: meet contractual requirements and fund mandated programs, maintain other reserves and General Fund according to the City’s Reserve Policy, attain full cost recovery for services and programs that are proposed to be entirely cost recoverable and extend plans to finance deferred capital infrastructure (CAFR 21). Financial Section The financial section is organized in accord with governmental accounting standards. It involves the independent auditor’s report, MD&A, and basic financial statements. The basic financial statements contains: fund financial statements; government-wide financial statements and notes to financial statements. The total net assets of Total Primary Government for the year 2010 is $8,086,434 which has increased to $8,206,203 in 2011 i.e. resulted an increase of around 1%. It signifies the growth prospects because net assets are a valuable indicator of financial position of government. Total revenue of Governmental Activities has decreased from $1,724,421 to 1,698,054 in 2011 of Business-type Activities has also decreased from $944,421 to $907,739 in 2011. The total debt outstanding at the end of fiscal year 2011 is $3,529,622 which has decreased compared to previous year. Statistical Section It provides information as required by GASB Statement No. 44. In addition to the financial statements, and the notes to the financial statements, the statistical data facilitates to access the economic condition of the City and also the Ten –year trend data has been presented in the statistical section. The Total Net Assets from Governmental Activities in 2002 was $3,473,666 which has increased to $4,369,403 in 2011 i.e. increased by 25%. Total revenues in 2002 were $1,293,248 which has increased to $1,712,451 in 2011 i.e. increased by approx 32%. It represents the good economic condition of the City. Total General Fund has also increased from $70,003 in 2002 to $245,748 in 2011. Data Evaluation The Government Wide Financial Statements shows the financial position and the operating results of the government. The decrease or increase in net assets may serve as a helpful indicator to know that whether the financial position of City of San Diego is weakening or improving. The net assets for the fiscal year 2010 resulting from Governmental Activities are $4,355,045 and for the fiscal year 2011 are $4,369,403 and from Business-Type Activities for the year 2010 are $3,731,389 and for the year 2011 are $3,836,800. Therefore total net assets for the financial year 2010 are $8,086,434 and for the year 2011 are $8,206,203 which is more than fiscal year 2010 i.e. increased by approximately 1%. It indicates that the financial position of the City is on the improving track. 84% of net assets signify the investment of San Diego City in capital assets, 12% of net assets signify the assets that are subject to external restrictions and the remaining 4% is accessible to fund ongoing services (CAFR 50-52). The Governmental Fund Financial Statements put stress on the near term outflows and inflows of spendable resources, along with the balances of spendable resources which are presented at the end of the financial year. The total assets resulting from Total Governmental Funds are $2,051,677 and Total Fund Equity is $1,708,239 for the financial year 2011. Revenues resulting from the Total Governmental Funds are $1,712,451 and expenses are $1,763,691 which means that it has resulted in a deficit of $51,240 which is not a good sign for the City. However the fund balances at the end of the year has increased from $1,639,340 to $1,708,239 in 2011 (CAFR 54-56). The Proprietary Fund Financial Statements gives separate information for the Water and Sewer Utility funds, which are regarded as the main funds of the City. The Total Net Assets from Sewer Utility Funds accounts for $2,143,926 and from Water Utility funds are $1,515,636 which is less that the Sewer Utility Funds and from Other Enterprise Funds is $177,645 which is less than the Sewer Utility Funds but more than the Water Utility funds. Therefore, total net assets of Sewer Utility Funds are doing the major contribution in Total Funds which accounts for $3,837,207. Total operating revenues from Proprietary Funds including the Sewer, Water and Other Enterprise Funds resulted in $842,291 and Total Operating Expenses resulted in $704,683. Therefore the surplus from Proprietary Funds is $137,608 which indicates the improving financial position of the City (CAFR 58-60). Proprietary Fund and General Fund The City of San Diego maintains two types of proprietary funds i.e. internal service funds and the enterprise funds. Enterprise funds are applied to account for different business type activities like Water and Sewer Utilities and Internal Service Funds are utilized to account for such activities that offer central supplies or services to the City (CAFR 35). The total net assets resulting from Enterprise funds accounts for $181,844 for the fiscal year 2010 and $177,645 for the fiscal year 2011. The net assets have decreased in comparison to previous year. The total operating revenues are $113,045 and total operating expenses are $116,707 which means that it has accounted a deficit of $3,662. The total operating revenues resulting from Internal Service Funds are $203,870 and total operating expenses are $217,347 so, it has resulted in a deficit of $13,477. The total net assets are $29,279 for the financial year 2010 and $23,187 for the year 2011 which has also decreased by approx 20%. The General Fund is regarded as the City’s major operating fund. The revenues of General Fund are derived from taxes; fines and penalties; licenses and permits; aid from other Governmental Agencies; and other revenue. The total revenues from General Fund was budgeted as $1,022,037 but the actual total revenue accounted for $1,010,383 which is less than the budget and therefore the variance occurs at $11,654. The expenditure budgeted was $1,069,924 but the actual expenditure resulted in $1,057,134 which was more than the budget i.e. excess by $12,790. The Total Fund Balance at the end of the fiscal year 2011 was budgeted as $115,280 but the actual total fund balance resulted in $112,601 which is again less than the budgeted figure i.e. less by $2659. The revenue and the total fund balance should be more than the budgeted figure and the expenditure should be less but the opposite took place which does not depict the good position of the City and also signify that the current revenue scheme is not so healthy (CAFR 168). CAFR Notes Evaluation Risk Management: The City of San Diego is exposed to a variety of risks of loss including destruction and theft of assets, injuries to employees, errors and omission, and natural disasters. In order to manage undue risks, the City has established different self-insurance programs and also keeps contracts with different insurance companies. It also upholds a surplus liability insurance policy. The self insurance retention amount of the City is $4,000. The County provides a cafeteria-style flexible benefits plan. It offers health and insurance plan and also provides the option of acquiring vision and dental insurance for the employees. The City is subject to liability for the omissions or negligent acts of its employees and officers acting within the scope of their duty (CAFR 148-149). Pension Plans: San Diego City Employees’ Retirement System (SDCERS) is a public employee retirement system which provides disability, retirement, survivor and death benefits to the City. The Deferred Retirement Option Plan (DROP) provides alternate method of ensuing extra retirement benefits from the Plan (CAFR 133-134). Reserves: According to the City Charter Section 91, it is needed that the City Council should maintain a General Reserve Fund enough to meet all legal demands against the City Treasury earlier to the collection of taxes. The General Fund Reserve includes the appropriate reserve, Emergency Reserve and the General Fund unassigned fund balance. It was required to maintain 8% of annual General Fund Reserve which was attained in 2010 and maintained through 2011 (CAFR 76). Conclusion The national, regional and international economic condition has badly affected San Diego County’s City services and revenue. The property tax revenue has decreased by $15.3 million; revenues resulting from the Total Governmental Funds are also less than the expenditures; the total operating revenues resulting from Internal Service Funds are also less than the expenditures; and the actual total revenues from General Fund is also less than the budgeted one, which indicates that the City is facing challenges in meeting the requirements. However, total operating revenues from Proprietary Funds are more than the expenditures; and the actual General Fund Reserve has also crossed the budgeted figure resulting in 11% of General Fund Reserve. The City has also set strategic goals over the next five years which would be achieved with continuous fiscal discipline and better government efficiency. Work Cited Whitfield, Kenton. (2011). City of San Diego: Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2011. Retrieved from: http://www.sandiego.gov/investorinformation/pdf/cafr_2011.pdf. Read More