Fiscal Year 2013-2015 Special Budget Meeting

CITY OF OAKLAND Required Communications and Recommendations Fiscal Year Ended June 30,2009 SCHEDULE OF RECOMMENDATIONS AND RESPONSES Comment No. 2009-1 -Material Weakness Internal Service Fond Deficits Governments aSen use intonai service fimds to centralize certain service and tiien allocate tiie costs of those services within tiie goveimnesit U.S. generally accepted accounting principles (GAAP) permit the use of internal service funds to report any activity that provides goods or services to tiie government <xi a cost- reimburaement basis. That is, the goal of an internal service fimd should be to measure tiie full cost (including cost of capitt^ assets) of providing goods or services for the purpose of fiilly recovering that cost tiurough fees or chargps. Accumulattiig significant deficits or excess net assets are indicative of the interim being op&absd on a ci»t-reimbursement basis. Under such circumstances, ii may no long^ be a^^iropriate to report the acthdty hi an mtemal service fimd under GAAP. The City has not set user fees to recover die fiill cost of services. Due to the deficiency m charges for services, the htemal service fimds have essentially b(HTOwed monies fi'om tiie General Fimd m order to maintain operations. While the City made an improvement m tiie Equipment Fund, reducing its deficit by more tiian half; ^deficit increased in ibe Facilities fsadC«^^ oveiaUiict assets defied of mtmiaV service funds grew by $3.1 million and the overall borrowings fixan the Geneial Fund grew by $1.7 miUion. The City has acknowledged tiiis matter as significant and has made an effort to take conective measures. The City prepared a *Vebalancing plan" for its internal service fimds, which was first adopted for the fiscal year 2005-07 polity budget, whldi attempted to cure tiie internal service fond deficit by fiiscal year 2014-15. However, tiie rebalancing plans put in place in fiscal years 2006 and2007 were not followed correctly due to tiie lade of general fimd resources to make the required annual p^anents. As such, the City restructured its rebalancing plan as part of the recently adopted fiscal year 2009-11 budget This newly restructured rebalancfaig plan has beoi modified to cure foe net assets deficit of internal servk» fiinds by fiscal year 2018-19. In addition, tiie City adopted a financial poUcy that requires one-half of any one-time revenues reived to be used specifically to reduce the net assets deficit of internal service fonds. The need for thiB City to restructure its initial rebalancing plan, and in light of current economic pressures affecting tiie City, brings into question its ability to manage its internal service fiinds on a cost-r^bursement basis, as its accumulated borrowings have reached $50.8 million as of June 30,2009. We recommend tiiat foe City monitor Ih^ progress of its restructured rebalancing plan very closely to ensure its feasibility. If it is determined that tiw plan is not feasible and that foe City does not intend to or cannot recover the foil cost of providing goods or services witiiin a reasonable period of time, tiiai the use of internal service funds is no longer apptoptieSs under GAAP ai^ should not be used fca finaiwial rqx»ting purposes. Management Response: During foe 2009-11 budget, the City revised foe repayment plan for foe mtemal service funds to eliminate foe fimds net as^et deficit by 2018-19. In addition, foe City adopted a financial policy during foe 2009-11 budget that requh^ half of one-time revenues received to be used specifically to reduce the net assets deficits of internal service funds. Receipt of such one-time assets - and foeir subsequent deposit into foe internal ser^ce fimds, as required by the financial policies and barring any fiscal emergencies - will, in essence, eicpedite tiie **repayment" of foe osgatWe internal service balances. It is management's intent to take every step possible to ensure such an expedited repayment in advance of FY 2018-19. Currently, the City is reviewing all of its surplus real estate assets to determme foe feasibility of sale in foe next one to three years.