MINUTES REGULAR MEETING OF THE PALM DESERT AUDIT, INVESTMENT & FINANCE COMMITTEE Tuesday, January 23, 2018

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1 MINUTES REGULAR MEETING OF THE PALM DESERT AUDIT, INVESTMENT & FINANCE COMMITTEE Tuesday, January 23, 2018 I. CALL TO ORDER Chairman Leo called the meeting to order at 10:00 a.m. II. ROLL CALL Present: Lauri Aylaian, City Manager Russell Campbell, Community Member Robert Hargreaves, City Attorney Brian Holcombe, Community Member Sabby Jonathan, Mayor Janet Moore, Finance Director Stanley Sperling, Committee Member Susan Marie Weber, Mayor Pro-Tempore Robert Leo, Chair Absent: Also Present: Jose Luis Espinoza, Assistant Finance Director Anthony Hernandez, Senior Financial Analyst Niamh Ortega, Recording Secretary Richard K. Kikuchi, Lance, Soll & Lunghard, LLP Ryan Stendell, Director of Community Development Derek White, Desert Willow Golf Resort III. ORAL COMMUNICATIONS None. IV. APPROVAL OF MINUTES A. MINUTES OF THE MEETING OF NOVEMBER 28, 2017 MOTION was made by Member Campbell to approve as presented the Minutes of the regular meeting of the Palm Desert Audit, Investment and Finance Committee held on November 28, Motion was seconded by Member Sperling and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE.

2 V. NEW BUSINESS A. CITY OF PALM DESERT AUDITED FINANCIAL REPORTS FOR THE FISCAL YEAR ENDED JUNE 30, 2017 Mr. Espinoza informed the Committee that there were three sets of audit statements prepared and they would be discussed at this meeting. He introduced Mr. Richard K. Kikuchi, a partner with the auditing firm Lance, Soll & Lunghard, LLP (LSL). Mr. Kikuchi furthered that his firm was engaged to produce the financials for the City, the Successor Agency to the Palm Desert Redevelopment Agency, the Housing Authority and the Palm Desert Recreational Facilities Corporation. Since June 2017, the firm has expended hours and dedicated up to five staff members to complete the work. The auditors were onsite in September for two weeks, and since that time have worked with Mr. Espinoza and other City staff to finalize the report. Mr. Kikuchi highlighted several areas of the financial report, pointing out that Page v shows the award of excellence in financial reporting that the City has received for the last 20 years. Page 1 begins the independent auditor s report, which is a three-page summary of the results of the audit. He stated that the firm issued an unmodified opinion, which is the highest level opinion a financial auditor can issue. Management Discussion and Analysis begins on Page 5, and provides a description of current city activities and future plans. The financial section begins on Page 17, and provides information on the general fund, special revenue funds, and business-type activities like enterprise funds, ie Desert Willow and Parkview. Responding to question by Mayor Jonathan, Mr. Kikuchi stated that the general fund reserve is broken down on Page 22, and the unfunded liability, also known as net pension liability, is on Page 17. Restricted general fund reserve is shown on pages 69 to 71, and is reported in a manner consistent with GASB requirements. Upon further question, Member Moore responded that as of June 30, 2017, the general fund reserve is accurately reported as approximately $74 million. Mr. Kikuchi continued that his firm performed tenant income testing here in Palm Desert as well as the financial records with RPM at the Lodi office as part of Housing Authority review. Mayor Jonathan pointed out that the Parkview fund shows $4.4 million, and Member Moore informed the Committee that the funds were to be used for a potential capital project as well as landscaping costs. Member Aylaian furthered that she planned to address the potential project at an upcoming budget study session. 2

3 Mr. Kikuchi reviewed the PDRFC and noted that it is a discretely presented component unit, which means it is separate but a part of the CAFR with its own report. Page 119 shows a description of the special revenue funds that make up the special revenue fund type. Mr. Espinoza clarified that the total pension liability is $115 million, of which approximately $77 million is considered funded. The $37 million number is the unfunded portion of the liability. Mayor Jonathan stated that he saw a sales tax trend analysis was performed, and asked if a TOT trend analysis was also done. Mr. Kikuchi responded that it was not required for this audit. Mr. Kikuchi reviewed the SAS 115 internal control letter. If, during the course of the audit, the firm uncovered any situations that needed to be addressed with the governing board, they would be reported here. He reported that there were no internal control issues. Mayor Jonathan pointed out that the internal control audit was a limited review, and not as involved as a fraud audit. He asked if it made sense for the City to periodically conduct a fraud audit and cited examples of other cities that experienced issues with fraud. Mr. Kikuchi indicated that some cities have opted for audits with a wider scope and the accompanying testwork. It is one way to provide a higher level of comfort surrounding various transactions. Financial auditors typically do the test work strictly related to the financial reporting. If they notice that there are no controls in place, then that would be reported. Based on Mayor Jonathan s comments, Member Moore suggested that perhaps Mr. Kikuchi s firm could submit a proposal for the Committee s review and potential recommendation to Council. Mr. Kikuchi concluded with the standards for communication and the governing board, reminding the Committee that this meeting is one of the methods used to satisfy the communication requirement. Additionally, the firm keeps staff aware of current and upcoming requirements so that the City remains in compliance and is prepared for any changes necessary in future audits. He thanked staff for a successful first year working with the City to perform the audit as contracted. Member Weber thanked Mr. Kikuchi for his diligence, and Mayor Jonathan added his thanks to staff. MOTION was made by Member Sperling to recommend that the City Council receive and file the City of Palm Desert audited financial reports for the fiscal year ended June 30, Motion was seconded by Member Campbell and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. 3

4 B. PALM DESERT RECREATIONAL FACILITIES CORPORATION AUDITED FINANCIAL REPORTS FOR THE FISCAL YEAR ENDED JUNE 30, 2017 Member Moore distributed the report, and discussion was concurrent with Item V, A. MOTION was made by Member Campbell to recommend that the City Council receive and file the Palm Desert Recreational Facilities Corporation audited financial reports for the fiscal year ended June 30, Motion was seconded by Member Holcombe and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. C. INDEPENDENT ACCOUNTANTS REPORT ON AGREED-UPON PROCEDURES PERFORMED ON THE MEASURE A TRANSPORTATION FUND FOR THE FISCAL YEAR ENDED JUNE 30, 2017 Mr. Espinoza highlighted that this agreed-upon procedure was performed by Conrad LLC. MOTION was made by Member Campbell to recommend that the City Council receive and file the Independent Accountant s Report on Agreed-upon Procedures performed on the Measure A Transportation Fund for the fiscal year ended June 30, Motion was seconded by Member Holcombe and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. D. REPORT ON CITY INVESTMENT SCHEDULE AND SUMMARY OF CASH FOR NOVEMBER AND DECEMBER 2017 Member Moore noted that Mr. Metz was absent and she would be happy to address any questions. MOTION was made by Member Campbell to recommend that the City Council receive and file the City Investment Schedule and Summary of Cash Report for the months of November and December Motion was seconded by Member Sperling and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. E. STATEMENTS FOR LOCAL AGENCY INVESTMENT POOL ACCOUNT THROUGH DECEMBER 2017 Member Moore provided an overview of the reports. MOTION was made by Member Holcombe to receive and file the reports for Local Agency Investment Fund (LAIF), California Asset Management Program 4

5 (CAMP), and Riverside County Investment Pool through December Motion was seconded by Member Campbell and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. F. FINANCIAL REPORT FOR CITY OF PALM DESERT THROUGH DECEMBER 2017 Member Moore distributed a spreadsheet depicting the transfers out from last year and highlighted a $2.8 million transfer to the equipment replacement fund to assist with updating technology. Council also adopted an emergency medical services cost recovery plan, which will help reduce transfers to the Fire Fund, and the revenues will bring in approximately $2 million by billing insurance companies and Medicare. Member Moore added that during the analysis staff found that a large amount of calls were for emergency medical rather than fire. Member Moore also reported that sales tax is down slightly over last year, as anticipated. The busy months are still ahead so it is difficult to predict how much this may change. Internet sales are affecting the overall sales tax collected; however, Palm Desert is in a better position than most cities due to its larger retail base. TOT has increased, primarily due to the increase from 9% to 11%. Hotel Paseo was delayed from its anticipated opening in the fall, and is now expected to open by the end of February Embassy Suites had a fire over the weekend and it may impact TOT revenues for the current month as the hotel was evacuated. Business license revenues are behind by a month. Staff has been working on transferring to a new system over the last six months and as a result processing is lagging about a month. Staff expects to be up to date next month. Member Campbell asked how much revenue is anticipated from marijuana sales. Member Moore responded that it is from a distribution of the state s excise tax. The City hopes to also place a measure on the ballot to collect tax on those sales. Mr. Stendell, Director of Community Development, added that there probably would not be any stores open until summer due to necessary background checks. Staff knows how many retailers will be in the city but does not have an idea of sales yet. Mayor Jonathan also added that the City does not have a cannabis tax so it is difficult to determine how it will play out at this early stage. MOTION was made by Member Campbell to receive and file the financial report for the City of Palm Desert through December Motion was seconded 5

6 by Member Sperling and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. G. FINANCIAL REPORT FOR PARKVIEW PROFESSIONAL OFFICE BUILDINGS FINANCIAL REPORT THROUGH DECEMBER 2017 The report was reviewed. Mayor Jonathan stated that CVAG was happy with their new chairs. MOTION was made by Member Campbell to receive and file the City financial report through December 2017 as presented. Motion was seconded by Member Hargreaves and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. H. FINANCIAL REPORT ON DESERT WILLOW GOLF RESORT THROUGH DECEMBER 2017 Mr. White reported that November and December were excellent months, and that overall they are ahead of prior year and budget with net operating expenses. Responding to question, Mr. White attributed the excellent months to phenomenal weather, a favorable Canadian exchange, and a strong stock market. Member Weber asked several questions about the food and beverage line item. Mr. White responded that food and beverage is not broken down on this particular report, and very few marketing dollars are dedicated to it. Member Weber noted that there was not much profit in food and beverage at this point, and Mr. White agreed, stating that the first six months of the year typically operate at a loss. He expects to see improvement in February. MOTION was made by Member Campbell to receive and file the Palm Desert Golf Course Facilities Corporation financial reports through December 2017 as presented. Motion was seconded by Member Holcombe and carried by a 9-0 vote, with Aylaian, Campbell, Hargreaves, Holcombe, Jonathan, Moore, Sperling, Weber and Leo voting AYE. VI. CONTINUED BUSINESS None. VII. OLD BUSINESS None. 6

7 VIII. INFORMATIONAL ITEMS A. UPDATE RELATIVE TO PALM DESERT AQUATIC CENTER (Ryan Stendell, Director of Community Development) Member Moore introduced Mr. Ryan Stendell, Director of Community Development to the Committee. He presented an overview of the Aquatic Center, as requested by the Committee at the last meeting. He reviewed the amenities of the pool and informed the Committee that the center offers both water- and land-based fitness programs, and it has been used for private and corporate events as well as swimming competitions and birthday parties. Mr. Stendell shared that the original cost recovery goal was 60%, and the General Fund makes up any operations shortfall. After 5 years, the center was at 59.6% cost recovery. Staff wants to make the facility better every year so a lot of effort and funds are spent maintenance. The overall budget is $1.2 million, with increased expenses in Year 5 for pumps, lighting, upgrades, and equipment replacement. YMCA operations is the most significant cost in expenses, and will continue to be with rising min wage. Mr. Stendell stated entry fees for daily use have not increased since the pool opened, and it may now be time to analyze those fees as this is a large portion of revenues. He mentioned that a 60% cost recovery goal is hard on the facility as it requires staff to max out the use of equipment. The depreciation schedule is on file with the Finance department. Mr. Stendell gave a brief summary of the goals realized to date. 345,000 non-residents have attended the facility, and entry rates have remained consistent. The space has been rented by over 64 unique user groups. Looking ahead to 2018, safety remains the first priority. Other goals include increasing swim lesson enrollment by 5%, and focusing on long-term asset preservation. The aquatic center will be included in the reserve study. The contract with the YMCA is coming to an end, and staff is currently conducting a Request for Proposals to determine if there are other interested operators. An indemnification clause is included in the operator s contract for the City s protection. YMCA staff have prepared a five-year plan demonstrating the effect of minimum wage increases on their contracts and employees. Mayor Jonathan noted that Desert Willow is also affected by minimum wage to an even greater extent and Desert Willow has also put together a five-year forecast to examine the effects. Council is pleased that the City is looking ahead and taking a proactive approach. 7

8 Member Weber indicated that her impression was that very few employees other than servers were receiving minimum wage. Mr. White responded that almost all Desert Willow employees are minimum wage earners. The other aspect is additional wage compression, which cannot continue with each minimum wage increase. Mr. Stendell added that most lifeguards work for minimum wage, and Member Moore furthered that landscape and service contractors are typically utilizing minimum wage employees, so the cost of contract increase with each minimum wage adjustment. B. COMMITTEE MEMBER COMMENTS Mayor Jonathan reminded committee members that applications are being accepted for various committees and commissions. If members know of anyone who may be interested, please direct them to Rachelle Klassen, City Clerk. C. REQUEST TO ADD POTENTIAL ITEMS TO UPCOMING AGENDA Chairman Leo asked that an educational item on Short-term Rentals and TOT be added to the next meeting agenda. IX. ADJOURNMENT By Minute Motion, duly made, seconded and approved, Chairman Leo adjourned to the next regular meeting of March 27, Respectfully submitted, Niamh Ortega, Recording Secretary 8