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Welcome to the Finance Department’s questions and answers page. Using the form at this link, you can submit a question to the Finance Department regarding topics such as the City’s outstanding debt, budget, and investments. Following review and research by Finance Department staff, detailed answers to your questions will be sent to you via email and posted to the page below. Answers will also be presented to the City Council’s Finance Committee quarterly. Inquiries regarding the questions and answers process can be directed to Scott Catlett, Assistant Finance Director, at 951-826-5609 or scatlett@riversideca.gov.

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City Investment and Cash Accounting Inquiries

On August 21, 2014, we received two similar inquiries regarding the City’s accounting practices associated with its pooled investment portfolio and cash.  The questions can be summarized as follows:

  1. When cash is withdrawn from the city’s pooled investment portfolio, how are the expenditures accounted for?
  2. How does the City track the allocation of cash held in the pooled investment portfolio to the City’s various funds (General Fund, Electric Fund, Sewer Fund, etc.)?
  3. When cash enters or leaves the pooled investment portfolio, where did it come from and where does it go?
  4. When revenues are collected that belong to a specific fund (Electric Fund, Parking Fund, etc.), are they all received by the General Fund, and if not, how does the receipt of funds work?

First, it makes sense to discuss the basic concept of a pooled investment portfolio.  The City typically has over $400 million of cash on hand.  This cash belongs to a variety of funds, primarily the City’s enterprise funds (Electric, Water, and Sewer, among others) and the General Fund.  Managing cash in this way is a common practice for large organizations, which allows all of the cash to be combined and invested as a “pool” of funds to increase earnings and enhance flexibility.  The City never needs all $400 million of cash at any one time.  Therefore, the cash is invested in various types of investments as authorized by the City’s investment policy.  The primary investments are in government agency securities, US Treasury notes and bonds, medium term corporate bonds, the State’s Local Agency Investment Fund (LAIF), and money market accounts.  The longer term investments represent cash that is not likely to be needed during the next 12-month period, while the funds held in LAIF and money market accounts are intentionally kept liquid to be available for any immediate cash needs.  The decision as to how much cash to invest in the various investments changes over time as interest rates change.  Due to the current low interest rate environment, the City has a larger percentage of its cash held in shorter term investments than is usually the case.  It is also important to mention that the City is advised by a professional external investment advisor who makes recommendations for optimizing earnings in the portfolio on a regular basis.  The City consistently outperforms market benchmarks for comparable portfolios, though the difference is small, as appropriate, given the low-risk, low-yield nature of the investments permitted by the City’s investment policy.

The City has a single banking relationship with Bank of America to address its depository and disbursement requirements – it pays all payroll and accounts payable disbursements through its bank accounts with the bank.  The City’s Treasury Office manages the amount of cash needed for these payments daily as well as processes all cash receipts, which includes recording each receipt to the appropriate revenue account (Electric, Sewer, Water, Business License, etc.).  In this way, the amount of funds not immediately needed is identified and can be invested to earn a higher rate of return.  The City undertakes extensive cash flow analysis to anticipate its need for cash and is therefore able to maximize its investment earnings by not sitting on too much cash at the bank, or by investing too much in longer term securities and possibly having to sell an investment before maturity losing out on a portion of interest it would otherwise have earned.

From an accounting perspective, without getting into too much detail, each fund of the City keeps track of its share of the large cash pool in the City’s accounting system.  Revenues come in and payments go out, and each of these changes causes an increase or a decrease in the related fund’s cash.  Cash is reconciled daily to ensure that all transactions recorded in the accounting records are accurately reflected in the bank’s record of cash activity.  Contrary to the assumption made in one of the inquiries, cash is not “first received” into the General Fund before being recorded into its correct City fund; rather, it is immediately recorded in the appropriate fund based on the accounting provided by the Treasury office at the point of deposit.  It is important to understand that the movement of cash between various investment options does not increase or decrease cash balances in total.  Also, accounting transactions (payments and receipts) do not immediately impact the City’s portfolio of investments/securities – only the cash balance at the bank is affected.  Over time, decrease or increases in the balance of cash at the bank will affect the investment portfolio, as surplus cash will be pulled from the bank and higher yielding securities purchased, or if cash declines, as existing securities mature, that cash may be required to secure the bank balance at that time.  The daily reconciliation and monitoring processes ensure that the two are in sync.

Once one understands these pieces of the puzzle, the natural next question is “What happens to the interest earned on investments and how is it allocated amongst the various City funds?”  Good question!  The City employs a monthly process by which interest is allocated to each of the City’s funds based on the fund’s  average cash balance for the month.  For example, if the General Fund held $10 and the Electric Fund held $20 in average balances over the month, and if $3 of interest was earned, $1 would go to the General Fund and $2 would go to the Electric Fund.

Complicating the matter are instances where funds have a “negative cash” balance recorded in the City’s accounting system.  Grant funds are like this – monies are expended up front for a grant-funded project and the City is made whole on a reimbursement basis at a later date.  In these situations, the cash pool “fronts” the money to cover the required project payments and is reimbursed when the grant revenue is received.  The cash pool is made whole because during the period of negative cash the interest allocation process charges interest to the funds with a deficit cash balance rather than paying them interest.  In the previous example, the General Fund had $10 and the Electric Fund had $20.  If instead the General Fund had $50 and the Electric Fund had negative $20, then the Electric Fund would pay interest to the General Fund to compensate for the fact that the pool really only held $30 ($50 – $20).  If the interest earnings should have been $5, then the General Fund would still receive the $5 due, but $3 would come from investment earnings and $2 would come from the Electric Fund.  The fund with a negative cash balance would record interest expense for the amount “borrowed’ from the cash pool temporarily and the other funds in the pool would record additional interest income.  In this way, all funds are made whole each month whether they have positive or negative cash.  This is a common practice in agencies with pooled investment portfolios.  Both cash activity and the monthly interest allocation process are areas of focus by the City’s independent external auditors each year to ensure that all cash balances and interest income are properly recorded in the City’s financial statements.  The City’s annual financial statements specifically call out any of these negative cash conditions that exist as of June 30 each year as described in Note 12 to the financial statements.  At June 30, 2013, these transactions (referred to as “Due To” or “Due From” transactions) amounted to approximately $22 million due to the General Fund, primarily related to pending grant receipts, and a small amount due to the Electric and Water Funds related to Central Stores inventory.

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Keep Riverside Clean and Beautiful and Shopping Cart Retrieval

On August 21, 2014, we received the following inquiry:

“Why are the keep riverside clean and beautiful and the shopping cart program in the cost of service for refuse collection?”

The City has partnered with the Greater Riverside Chambers of Commerce since 1995 through its Keep Riverside Clean and Beautiful (KRCB) program to provide litter prevention, waste reduction, beautification, and community improvement services.  In 2007, the City entered into a professional services agreement with KRCB to formalize and enhance their efforts on behalf of the City.  These efforts are directly related to the City’s Refuse Fund activities and represent tasks that would otherwise fall to City staff at what would likely be a higher cost.  The funds paid to KRCB cover the staff salaries of employees working on KRCB activities and related office expenses and in no way subsidize other activities of the Greater Riverside Chambers of Commerce.  Additionally, thousands of volunteer hours per year are coordinated through KRCB, which according to the Point of Light Institute have an estimated value of $22.14 per hour.  These volunteer hours resulted in a value to the City of approximately $660,000 during fiscal year 2013/14.

Fiscal   Year Number of Volunteers Volunteer Hours
2013-14 15,196 29,913
2012-13 26,446 34,430
2011-12 11,880 40,975
2010-11 14,235 33,538
2009-10 13,565 23,091
2008-09 11,139 24,002
2007-08 4,873 11,453
2006-07 3,691 9,972

 

The cost of the City’s shopping cart retrieval program is almost entirely offset by revenue received from the owners of shopping carts collected by the contractor.  The small deficit created by the program is funded by the General Fund and the contract is budgeted in the General Fund’s non-departmental cost center.

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Water Fountain at Victoria and Mary

On August 27, 2014, we received the following inquiry:

“What was the cost of the water fountain, since stolen, that was put at the corner of Victoria and Mary? Was it donated or was it paid by taxpayer money?   It was obvious from those of us who walk Victoria that it was going to be stolen by someone who wanted the metal. And it was, within weeks of installation.   Considering stolen metal was a subject at a recent council meeting regarding guards in the parks, who decided that it would be safe there, that it was a prudent decision to spend money on such a beautiful fountain that would inevitably have a short life on that corner?”

The fountain in question was installed by Stater Brothers Markets as a result of the adjacent project to expand the shopping center containing one of their grocery stores.  That project resulted in the need to reconfigure the footprint of the park to allow the shopping center to expand, and additional land was added to another area of the park by Stater Brothers to compensate for the loss.  The privately-funded project also added new features to the park, including the water fountain.  The entire fountain was not stolen; rather one of the three bowls of the fountain was stolen and the City’s park maintenance staff then removed the remainder of the damaged fountain.  The City has several other fountains of this type in other parks elsewhere in the City.  The decision was made to utilize the removed fountain for parts to maintain the other fountains and to replace the damaged fountain with a different model given the high visibility location.  The replacement fountain, which is less desirable to thieves but unfortunately also less attractive, will be installed at a cost of $4,135 to be funded from the City’s General Fund park maintenance budget.

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Posting of Interfund Loan Receivable Movement Journal Entries

On August 7, 2014, we received a question regarding the journal entries attached to a previous post that showed movements of interfund loan receivables between funds.  In this post we will illustrate the accounting entries that occur when these loans are moved in an attempt to assist interested members of the public with reading the previously provided accounting records.  These entries do not include any principal and/or interest payments made as of the same date, which are booked in separate journal entries.  These entries, therefore, are limited to the actual movement of the loan receivable.

The movement of an interfund loan receivable for an enterprise fund would look like the following example, which shows a loan made to the Parking Fund moving from the Electric Fund to the Workers Compensation Trust Fund.  This transfer was made as of June 30, 2009, and is reflected in the report attached to our original loan post on page 10 as JE00039832.  You can find that document here.

Description Debit Credit
Electric Claim on Cash $3,000,000
Workers Comp Claim on Cash $3,000,000
Increase and decrease in cash to reflect the transfer of the loan
Workers Comp Advances to Parking Fund 570 $3,000,000
Electric Advances to Parking Fund 570 $3,000,000
Increase and decrease in loan receivable due from Parking Fund
Parking Advances from Electric Fund 510 $3,000,000
Parking Advances from Workers Comp Fund 610 $3,000,000
Decrease and increase in loan payable from Parking Fund

 

Two things are important to note in this transaction.  First, the cash transfer is making the original lending fund whole because it has now exchanged liquid cash for a receivable, both of which are assets.  The future loan payments, including the principal, will now be paid to the new lending fund and the original lending fund is completely out of the picture.   Second, in accounting, debits and credits can have the opposite effect on account balances depending on the type of account.  For example, a debit to an account such as loans (advances) receivable is an increase while a debit to a liability account such as loans (advances) payable is a decrease.  While there are $9,000,000 of debits and $9,000,000 of credits in the above example, the transaction only results in a $3,000,000 transfer of cash.  The other entries are simply correctly recording the payable and the receivable in the three funds involved in the transaction.

The movement of an interfund loan receivable for a governmental fund would look like the following example, which shows a loan made to the former Redevelopment Agency moving from the Electric Fund to the Sewer Fund.  This transfer was made as of June 30, 2009, and is reflected in the report attached to our original loan post and linked above on page 5 as JE00039827.

Description Debit Credit
Electric Claim on Cash $4,018,391.21
Sewer Claim on Cash $4,018,391.21
Increase and decrease in cash to reflect the transfer of the loan
Sewer Advances to RDA Fund 478 $4,018,391.21
Electric Advances to RDA Fund 478 $4,018,391.21
Increase and decrease in loan receivable due from RDA
RDA Advances from Electric Fund 510 $4,018,391.21
RDA Advances from Sewer Fund 550 $4,018,391.21
Decrease and increase in loan payable from RDA (shown twice)

 

You will note if you look at the actual journal entry in the report that the only difference between this entry and the one above is that the last set of entries recording the movement of the payable are reflected twice, once in Fund 910 and once in Fund 978.  Fund 910 is a “memo fund” used to record certain obligations of the City’s governmental funds and Fund 978 is a similar “memo fund” used to record certain obligations of the former Redevelopment Agency.  Here, as was the case in the entry above, though there are approximately $16 million of debits and $16 million of credits, the transaction only has a cash impact of approximately $4 million.  The other entries are simply properly recording the transaction as receivable and payable in the various funds involved in the transaction.

While the City’s accounting systems are complex, the accounting above is quite straight forward to those familiar with government accounting.  These are routine entries made in government agencies throughout the United States, whose format is dictated by accounting guidance.  We hope that this post, though complicated, will serve to better educate those with an interest about the City’s recording of interfund loans.

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Structure of Public Utilities

On August 13, 2014, we received the following question regarding the City’s sewer enterprise:

“In many cities, [the] wastewater enterprise is part of the water enterprise/public utilities department. Why is wastewater in Riverside a function under public works?”

Riverside’s structure has been as it is now for the entire history of the City, though department names have changed and some functions have been consolidated over the years.  To answer this question, we solicited input from the Public Works Department as well as Riverside Public Utilities.  The question can be asked of many cities, and each has differing reasons for how their management structure is organized.   Within California, some cities such as Corona combine water and wastewater into a single department, while other cities such as Anaheim, Pasadena, Burbank, Glendale, Los Angeles, and others do not, instead housing the wastewater enterprise under Public Works.  In Riverside, the Public Utilities Department was created by Article XII of the City Charter and includes the water and electrical supplies and other utilities as deemed appropriate by the City Council.

The water and wastewater functions are complex and intrinsically different.  For example, Public Utilities sells commodities of water and electricity to their customers while wastewater is more closely aligned with the street maintenance function of the City as it is a service to the general public and not consumer based.  The current separation of these functions in Riverside is therefore based on a natural demarcation between commodities and services.  However, it is very important that the operators of these systems communicate and coordinate their operations, as they do in Riverside.

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Follow Up: Structure of the City’s Finance Department

In response to our post on August 4, 2014, regarding the structure of the City’s Finance Department, the gentleman asking the original question sent a response indicating that the City’s arrangement with the Treasurer function housed in the Finance Department was unlike the majority of California cities of a similar size.  While we appreciate the comment, it is unfortunately incorrect.  We based our original post on our knowledge of our peers, who we deal with on a regular basis.  However, to be thorough, we conducted a survey of all cities in California with a population over 150,000 to generate an exact list for this post.  Here are the results:

There are 12 cities in California with a population over 300,000, including Riverside, and excluding San Francisco due to its consolidated city/county government structure.  Of those 12 cities, 9 (75%) have the exact same structure as Riverside with the Treasurer reporting to or consolidated with the CFO position (San Diego, San Jose, Fresno, Long Beach, Oakland, Bakersfield, Santa Ana, Riverside, and Stockton), 2 (17%) have appointed treasurers (Sacramento and Anaheim) operating in stand-alone departments, and 1 (8%) has a unique structure with an elected Controller administering a portion of the City’s financial management and an appointed department head administering the remainder including the treasury function (Los Angeles).  Expanding the survey to include the 35 California cities with a population over 150,000, which is less than one half the size of Riverside, the results indicate that 21 (60%) have the same structure as Riverside, 8 (23%) have an elected Treasurer, 4 (11%) have an appointed Treasurer, and 2 (6%) have a unique structure, including Los Angeles, as described above, and Garden Grove, where the head of another department serves as Treasurer and the Finance Director serves as Deputy Treasurer.

As our original post indicated, the structure found in Riverside is by far the typical structure found in large municipal finance departments in California and elsewhere.

 

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Sales Tax Associated With Purchasing Vehicles

On August 6, 2014, we received the following question:

“If a Riverside auto dealer sells a car to a buyer from Los Angeles, I understand the sales tax is computed at LA’s rate.  Does the City of Riverside still get its % of the tax revenue for that sale back from the State Board of Equalization?”

It is a correct statement that sales tax for vehicle purchases is computed at the sales tax rate for the jurisdiction where the purchaser lives, regardless of the location where the vehicle is purchased.  For vehicles purchased in Riverside, the City of Riverside receives the same 1% share of the sales tax regardless of the home address of the person purchasing the vehicle.  However, if their home address is not in Riverside, then any additional add-on components of the sales tax (such as Riverside County’s Measure A tax for transportation infrastructure) are assessed based on the home address of the person purchasing the vehicle.  This both ensures that the City receives the tax revenue from auto dealers located within its boundaries and that shoppers do not purchase vehicles in certain jurisdictions for the purpose of avoiding higher sales tax rates elsewhere.

 

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Posting of Journal Entries

On August 3, 2014, we received the following inquiry:

“For a non-financial person, it is difficult to understand how cash is being moved around.  Using the journal entries, could you please construct a schematic of cash flows, using posted dates, on a specific day?  I suggest 6/30/2009.”

Unfortunately, the City’s automated accounting systems, and accounting in general, are not that simple.  Thousands of entries are posted daily, most of which impact cash, either positively or negatively.  It is not possible to put together a “simple schematic” that shows the impact on cash balances for a single day, as is being requested. A report which reflects all the cash activity for a single day can be generated from the accounting system, but it will simply show all the “ins and outs” for all the funds for all types of business activity on that day.  It will not be helpful by itself to determine whether cash is accurately stated at day’s end without examining “the other side” of all the transactions generating or using cash.

The nature of the question suggests a concern that cash is moving between funds or accounts in a haphazard or inappropriate way, presumably related to the accounting for interfund loans.    The special audit of the Sewer Fund directed by the City Council will specifically trace the “flow of funds” related to the various interfund loans and confirm the accounting entries  related to the cash portion of these transactions (or identify problems, if any).

Our hope is that a satisfactory outcome from the auditors’ work will adequately address any concerns related to the handling of cash associated with the interfund loans.

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Structure of the City’s Finance Department

On July 30, 2014, the Finance Department received a question asking why the City’s accounting and treasury functions are housed in the same department.  This is a common practice in modern finance departments, both in government organizations and in private sector companies.  These functions, as is the case in Riverside, typically operate as distinct sections within a larger Finance Department, with the ultimate managerial responsibility resting with the organization’s Chief Financial Officer.  While many cities still have elected treasurers to this day, Riverside has not had such a position since 1953.  A robust program of internal controls and separation of duties ensures that these functions coexist effectively in a single department, supplemented by an audit annually by an independent accounting firm and regular review by the City’s Internal Audit Division, which is not a part of the Finance Department.  Below we’ve provided some history of the evolution of the City’s Finance Department over the past 60 years.

Originally, the City had elected City Auditor and City Treasurer positions serving as the financial officers of the City.  These appear to have initially been part-time positions, which were later supported by full-time staff as the City grew.  On April 21, 1953, a new City Charter became effective, which provided for the appointment of a City Controller and a City Treasurer in lieu of the former elected positions.  Former elected City Auditor Herbert W. Pierson was appointed as the City’s first Controller on August 18, 1953, and former elected City Treasurer Fred D. Smith was appointed as the City’s first appointed Treasurer on the same day.   On March 11, 1958, the City Council adopted Ordinance No. 2612 establishing a revised administrative organizational structure of the City.  The former structure established the Office of the Controller and Office of the Treasurer as distinct departments, while the new structure formed the Finance Department and created the position of Finance Director as its head.  The newly created Finance Department included an Accounting Division and a Collection, License, & Treasury Division, among others.  On September 1, 1958, the City Council approved the appointment of William A. Berndt as the City’s first Finance Director.  From this time forward, the Finance Director has been the Chief Financial Officer of the City, though the position was titled as an Assistant City Manager for approximately seven years until 2010.  The City Charter was amended in 2012 to remove the titles of City Treasurer and City Controller from the Charter as appointed officers subject to confirmation of the City Council, which had remained unchanged since 1953.  In practice, the appointed City Treasurer had long been the Finance Director and the appointed City Controller had long been the Finance Director, the Assistant Finance Director, or more recently the division manager in charge of the Accounting Division, which is now formally titled as the Accounting Manager/Controller.  The 2012 Charter amendment consolidated the duties of the two officers into a single officer – the Chief Financial Officer – to more accurately reflect the structure that has existed for decades and more appropriately subject only the appointment of the City’s Finance Director/Treasurer to confirmation by the City Council.

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Was the Jurupa Avenue Extension Project an Appropriate Use of Sewer Fund Resources?

At the Finance Committee meeting on July 29, 2014, a question was raised regarding why the City’s Sewer Fund paid for the extension of Jurupa Avenue from Van Buren Boulevard to Rutland Avenue.  The street extension was funded by the Sewer Fund pursuant to an Exchange, Disposition, and Development Agreement, as amended, entered into on May 28, 2003.  This agreement was between the City, Friends of Riverside Airport, LLC, Van Buren Golf Center, LLC, and Riverside Gateway Plaza, LLC and outlined plans to exchange the 59.53 site of the City’s former sewer treatment plant (also known as the Agricultural Park after a one-time effort to develop the property for agriculture-related park purposes) with a 61.80 acre site owned by Friends of Riverside Airport located nearby.  Under the terms of the agreement, Friends of Riverside Airport agreed to remediate the site of the former sewer treatment plant in exchange for the City agreeing to extend Jurupa Avenue.  The exchanged property, which exceeded the acreage of the former City parcel, was dedicated for park purposes.

Use of the Sewer Fund to construct the street extension was in lieu of the Sewer Fund paying the costs of the remediation directly.  While this is a complex transaction, the costs of remediation were an obligation of the Sewer Fund and therefore the costs of implementation of the Agreement were likewise a cost of the Sewer Fund.   The transaction was actually a positive benefit to the Sewer Fund, as the remediation costs were higher than the cost of the street extension project.

It was also suggested that there was an interfund loan or advance made that related to the Jurupa Avenue Extension project.  This is incorrect.  There are not, nor have there ever been, any interfund loans/advances that relate to this project.  The project was funded by a variety of funding sources including the Sewer Fund, storm drain funds, and Measure A funds.

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