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HomeMy WebLinkAboutAgenda Report - September 1, 2021 C-12AGENDA ITEM C--.12 CTTY OF LODI F C OUNC i L COMMUNICATION AGENDA TITLE: Adopt A Resolution of the Lodi City Council Approving the City of Lodi Capital Asset Policy MEETING DATE: September 1, 2021 PREPARED BY: Accounting Manager RECOMMENDED ACTION: Adopt a resolution of the City Council approving the City of Lodi Capital Asset Policy. BACKGROUND INFORMATION: During the previous two fiscal year audits, capital assets were an area of concern for our auditors relating to the internal controls over financial reporting related to capital asset accounting. They recommended that the City conduct a valuation of the Electric Utility assets, a reconciliation of capital outlay accounts for all operating departments, and establish organization wide capital asset accounting policies and procedures. Accounting principles generally accepted (GAAP), as per the Governmental Accounting Standards Board, require entities to track and record the original cost of capital assets and to calculate depreciation on certain of those capital assets and expense the costs over their useful life from the date placed in service. Staff had begun working internally on correcting the issues over capital asset accounting. On February 17, 2021, Council adopted Resolution No. 2021-36, authorizing a Professional Services Agreement with Bell Bumett & Associates for capital asset accounting consulting services. In April, staff worked with Bell Burnett & Associates to develop and implement policies and procedures to address the audit findings. It was recommended for Capital Asset Accounting of Multi -Year Projects that the City establish procedures to periodically reconcile the capital outlay accounts to the asset additions report and project expenditure reports to ensure that all capital outlay is captured as an addition in the current year, if it meets the City's capitalization threshold, or expensed. The Capital Asset Accounting and Valuation of the Electric Utility Lines received the recommendation from Bell Burnett & Associates for the City to modify their work order system to show the nature of each addition to or retirement of electric plant, the total cost thereof, the source or sources of costs, and the electric plant account or accounts to which charged or credited, which best represents the utility's operations. Work orders for jobs of short duration may be cleared quarterly. Records for major utilities shall be maintained in which, for each plant account, the amounts of the annual additions and retirements are classified to show the number and cost of the various record units or retirement units. This information should be maintained by the department and reconciled with the Finance Department for use in the capital asset accounting_ APPROVED:.::-.:twi: nrcr:Aur ZC, 20.211.' 271 ADT, Stephen Schwabauer, City Manager Bell Burnett & Associates worked with each of the operating departments to go over the individual procedures which was used to establish the new policy for Council adoption and operating procedures for the departments. FISCAL IMPACT: None. FUNDING AVAILABLE: Not applicable_ Melissa Munoz, Accounting Manager O, x,qbj Andrew Keys, Deputy City Manager REPORT ON CAPITAL ASSET ACCOUNTING CALIFORNIA JULY 27, 2021 Prepared by: DD D � aRR lBuirlmott INTRODUCTION Page. 2 BACKGROUND Page. 2 APPROACH AND METHODOLOGY Page. 2 EXECUTIVE SUMMARY Page. 3 ELECTRIC UTILITY VALUATION Page. 5 CAPITAL ASSET ACCOUNTING Page. 7 RECONCILIATION OF CAPITAL OUTLAY Page. 8 OTHER CONSIDERATIONS Page. 9 CONCLUSION AND NEXT STEPS Page. 10 APPENDIX EXHIBIT I — CAPITALIZATION POLICY Page. 12 EXHIBIT II —CAPITALIZATION PROCEDURES Page. 15 EXHIBIT III —ASSET DISPOSITION PROCEDURES Page. 20 CAPITAL ASSET ACCOUNTING - CITY OF LODI 1 At the request of the City of Lodi (the "City"), Bell Burnett & Associates ("BB&A") has prepared this Report (the "Report") for the City's exclusive use and consideration. The purpose of this Report is to provide the City with policies, procedures and recommendations with regard to the City's capital asset accounting practices. BB&A is a management and strategic consulting firm serving the public and private organizations. We offer an independent development, review and assessment of strategic plans, policies and initiatives by our clients in the private and public sectors. Our team brings an inter -disciplinary approach from capital improvements to operations to finance. We draw on our principals' past experience working at the highest levels in the utility, banking and consulting industries. In recent City Audits performed by The Pun Group, there were management letter comments related to internal controls over financial reporting related to capital asset accounting and valuation of assets, among other things. Several of these capital issues resulted in significant adjustments to year-end financial statements. In the 2019 audit, a reconciliation of capital assets was necessary that resulted in an adjustment of approximately $15.6 million. The City has worked internally on many of these items, making notable progress, but as it relates to various enterprises of the City, including the Electric Utility ("LEU"), the Public Works Department (Water, Wastewater, and Streets), and the Transit Department, it was desirable to have an independent firm assist the City to help ensure that industry best practices are employed in capital asset accounting. The objective of the Report is to develop and implement policies and procedures to address proactively these challenges and create a template whereby any comments in regard to capital asset accounting will hopefully no longer be raised in future audits. PPROACH AND METHODOLOGY BB&A's approach was to systematically assess each step in the capital accounting process to document the steps necessary to remedy the auditor's findings. We started by reviewing recent audits and management letters and then spoke with the City's Auditors, The Pun Group, to hear directly the circumstances and considerations that resulted in their findings and questioned costs. We then obtained City supporting schedules and spreadsheets and spoke to the City Accounting Division to obtain their thoughts and observations regarding these matters. Building CAPITAL ASSET ACCOUNTING — CITY OF LODI 2 on the information that we obtained, we reviewed pertinent financial schedules and spreadsheets and spoke to management and staff in the LEU, Public Works, and Transit Departments ("Operating Departments") to obtain their perspective. As often is the case with the work that we perform, we find that some of the best ideas for improvements are often latent within the organization; however, each of the parties view the issues through their own lens which provided us with better insight into why these challenges exist and how they have evolved over time. Although some of the symptoms are similar, the causes and implications of these issues do differ by Operating Department. A potential solution in one Operating Department may not apply equally to other Operating Departments. All City staff that we interacted with were helpful, engaged, and willing to entertain ideas as to how their own processes might be improved. This Report focuses first on recording and valuation issues as these flow through both policies and procedures and reconciliation. Revisions to general asset accounting policies and procedures are described next, followed by recommendation for the reconciliation process, and lastly other considerations. BB&A has proactively worked with the City Accounting Division and the Operating Departments to improve not only documentation, but also to hopefully make the capital accounting process more efficient, timely and accurate. Based on our review and subject to any circumstances or events that are unknown by BB&A as of drafting the Report, in BB&A's opinion, the successful implementation of the recommendations in the Report should be sufficient to address the findings by the auditor. Given the depth of our interviews we also surface issues which are beyond the scope of our work, but in our opinion should be addressed by the City in order to either improve efficiency and accuracy of work product, and/or assist the Operating Departments with their other reporting obligations outside of the City's financial statements. These observations and recommendations appear in Other Considerations. The recent challenges in capital asset accounting identified by the City's auditors provide an opportunity to review policies and procedures surrounding these activities. It also provides an opportunity to clear up potential communication, reporting, and data issues between various City Operating Departments. In summary, BB&A makes the following recommendations, with which we believe that there is consensus among the applicable Operating Departments: CAPITAL ASSET ACCOUNTING — CITY OF LODI 3 • More frequent and prescribed reviews of project closing for those Operating Departments with substantial assets (LEU and Public Works); • Agreement as to the form of reports to be used to verify project information to Munis information, and • Increased and more frequent communications between Operating Departments and City Accounting to ensure that there is less opportunity for misunderstanding in the future and greater understanding between City Accounting and the Operating Departments in regard to any reporting, classification, valuation and timing considerations that may be beneficial to the Operating Departments. In making these recommendations, BB&A has worked with each Operating Department to address some of their historic questions and concerns in order to facilitate more efficient capital asset accounting. It is further intended that this process will provide added benefits to the City by enhancing forecasting and regulatory compliance. BB&A has worked with LEU to establish new categories for asset classification based upon industry best practices, utilizing uniform reporting systems promulgated by the Federal Energy Regulatory Commission (FERC). We also have discussed with LEU and City Accounting staff the data available and acceptable methodologies for categorizing current assets into these categories as best as possible to establish a sound starting point for future asset classification. Once this is complete, it is recommended a review with the City's auditor be conducted to ensure they are agreeable to the starting point for LEU's assets. These new classifications should also be quite valuable to the utility for future operations, maintenance, and ratemaking purposes. We have also reviewed and concur with the procedures that they have put in place to address questions related to work order closure and materials management at the Warehouse. BB&A has worked with Public Works to resolve project closure and reconciliation reporting. Given the large volume of capital projects in this Department we recommend quarterly review and reconciliation of capital projects. BB&A has worked with the Transit Department to resolve project closure and reconciliation reporting. Since there are not as many capital projects as with Public Works and LEU, it is acceptable in BB&A's opinion to review and reconcile Transit projects on an annual basis. Several of our observations regarding reporting of grant revenues, interest income and regulatory reporting pertain to the Transit Department. These observations and recommendations are contained in the Other Considerations and Conclusion and Next Steps sections of this Report. By taking an incrementally larger view as to policies and procedures regarding capital asset accounting, BB&A has attempted to identify and relieve Operating Department issues as part of this process to help ensure city-wide consensus and increase reporting accuracy. To that end, there are several "Other Considerations" beyond the scope of our work that we bring to the City's attention and provide potential additional recommendations that may merit further consideration. Most of these issues are not necessarily large in scope but do present meaningful reporting, compliance and record keeping challenges within the Operating Departments that CAPITAL ASSET ACCOUNTING — CITY OF LODI 4 should be resolved or otherwise addressed through increased communication and training as necessary. There are two major considerations with regard to capital asset valuation within LEU. The first is to identify the appropriate categories that electric distribution system assets should be characterized moving forward. Historically LEU distribution assets have simply been classified as being either Overhead or Underground. This limitation leaves out other major capital categories, such as substations and transformers, amongst others, that are commonly reported as a best practice within the electric industry. Such information is also substantially useful for other purposes, including engineering, operations and maintenance planning, efficiency analysis, and cost of service information used in the calculation of electric rates. Second, it is likely a worthwhile exercise to attempt to allocate existing assets that are currently categorized as Overhead or Underground to the new recommended asset classes. As long as these allocations are based on LEU's best estimates given system experience and records and the dollars allocated equal the current book value of currently recorded assets, this should be sufficient for moving forward with LEU's valuation. Classification of Assets BB&A has reviewed the Federal Energy Regulatory Commission ("FERC") Uniform System of Accounts' to provide the City of Lodi Electric Utility ("LEU") with information to consider as it plans to enhance its tracking of distribution plant assets in the future. The FERC Uniform System of Accounts provides for the following distribution plant account categories. 360 Land and land rights 361 Structures and improvements 362 Station equipment 363 Storage battery equipment 364 Poles, towers and fixtures 365 Overhead conductors and devices 366 Underground conduit 367 Underground conductors and devices 368 Line transformers 369 Services 1 Office of the Federal Register, National Archives and Records Administration. Code of Federal Regulations, Title 18 Part 101 Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to The Provisions of The Federal Power Act. Superintendent of Documents, U.S. Government Printing Office. CAPITAL ASSET ACCOUNTING — CITY OF LODI -0 370 Meters 371 Installation on customers' premises 372 Leased property on customers' premises 373 Street lighting and signal systems 374 Asset retirement costs for distribution plant Most similarly sized municipal utilities in California utilize some form of these accounts within their accounting structure. Few of those with which we are familiar utilize all of accounts listed in the table above other than the largest utilities. Based upon our knowledge of LEU's system, and the value of use of this information, BB&A recommends that LEU consider utilizing the following categories of distribution system assets: • Land and land rights • Structures and improvements • Poles, towers and fixtures • Overhead conductors and devices • Underground conduit conductors and devices • Line transformers • Street lighting and signal systems Most similarly sized municipal utilities combine the two underground categories into one for simplicity's sake. We see no need for LEU to use both underground categories. It is our understanding that LEU currently expenses meters. Although most municipal utilities have historically capitalized meters, we are increasingly seeing municipal utilities expense their meters upon purchase, as LEU presently does. The main reason for this is that the useful life and replacement cycles for meters are much shorter now due to new metering technologies that are being deployed. For this reason, we believe that LEU should be able to choose whether or not to retain the current practice of expensing meters as opposed to capitalizing them. Some municipal utilities do not have street lighting and traffic signals in their asset base if they are owned by the city. Those that do have such assets include them in their distribution system assets. Our understanding is the LEU owns city streetlights but does not own the traffic signals. Therefore, we recommend that LEU utilize the streetlighting category to capitalize these items in the future. Valuation of Assets BB&A has reviewed current LEU asset valuations as recently adjusted by the City's Auditors. Our recommendation for the recording of assets moving forward is a two-step process. First, we are satisfied that the book value currently recorded is an adequate representation of plant in service for purposes of moving forward. However, given the new asset categories recommended above, it would be appropriate to attempt to classify existing assets into these categories as reasonably as possible given engineering data and estimates available to LEU. As long as LEU CAPITAL ASSET ACCOUNTING — CITY OF LODI 6 breaks out existing assets going forward, all additions should be categorized in one of the FERC accounts identified above. Other In addition to the classification and valuation of assets, BB&A was requested to review LEU's documentation of its Work Order Closing Process and Material Transaction Procedure. The Work Order Closing Process was developed internally after the 2019 audit in order to document the processes leading up to the closing of work orders. The Work Order Closing Process, along with the recommendations above, should reduce the likelihood of projects not being closed on a timely basis and result in a more accurate accounting of capital assets. The Material Transaction Procedure, supplemented with the Warehouse Materials Management workflow process was developed by LEU in 2020 as a result of an audit finding that material charges were sometimes duplicated on LEU projects. The processes that LEU has implemented for work crews and Warehouse personnel should be sufficient to eliminate the problem of duplication of materials. BB&A has developed Capital Asset Policies and Procedures for the City's consideration. We have drafted a recommended Capitalization Policy for City Council review and approval, and a recommended Asset Disposition Procedure for City Accounting consideration. In addition, we have worked with the City Accounting Division and Operating Departments to develop associated Procedures as described herein. The value of having fixed Policies and living Procedures is that with Policy direction from the City Council, Operating Departments have the latitude to adjust Procedures as systems and circumstances occur in the future without the need to change the overlying Policy as long as the procedures remain consistent with the direction of the Policy. City Capitalization Policy In BB&A's experience, best practices by similarly sized cities are to establish summary policies at a city-wide level that provide direction to Operating Departments consistent with the policy direction of elected officials. It is a good practice for the elected officials to review periodically these policies to affirm that they continue to reflect community interests. Various Operating Departments, in conjunction with the Accounting Division, would then have the latitude to develop and periodically modify internal accounting and control procedures to implement the policies. CAPITAL ASSET ACCOUNTING — CITY OF LODI 7 BB&A has prepared a recommended City policy for capitalization for the City's consideration. The policy has been vetted with the City Accounting Division and applicable Operating Departments. Exhibit I contains the Capitalization Policy as recommended by BB&A. BB&A worked directly with the LEU, Public Works, Transit, and the City Accounting Division to develop procedures associated with these policies. Exhibit II contains the individual Department Procedures that were developed with the applicable Operating Departments and the City Accounting Division. The procedures differ incrementally by Department as their individual operations and needs are somewhat different from one another. Exhibit III contains the Asset Disposition Procedure that was prepared with the assistance of the City Accounting Division. The reconciliation of capital outlay accounts has been troublesome for both City Accounting and the Operating Departments that maintain substantial assets - LEU, Public Works, and Transit. BB&A reviewed the requirements and individual reports with representatives of the Operating Departments to derive the observations and consequent recommendations contained in this Report. The difficulties are not all the same by Department, but they are substantial, nonetheless. In the opinion of BB&A, there may be an incremental disconnect between the City Accounting group who are focused on big picture financial reporting through the City's Munis system and the Operating Departments who are focused on internal operations and external reporting to regulatory and fund providers. This disconnect is manifested in the systems, databases and spreadsheets that the Operating Departments employ that are not tied to the Munis System. It is important to note that this is not intended as a unilateral indictment of the Munis System. The Operating Departments may not have a sufficient understanding of how to use the Munis System which makes them rely on the City Accounting Division to run reports and provide answers to their queries, which at best appears to be an inefficient process or use of resources. Likewise, the City Accounting Division may need to review the Operating Department reporting requirements and whether these reports are, or can be, provided by Munis already, including the reporting requirements to various external funding sources and regulatory compliance agencies. The solution to this disconnect may be greater training or awareness of what the Munis System can provide to the Operating Departments and/or identifying what changes to the Munis System, if any, may be warranted given the needs of the Operating Departments. The reconciliation between the General Ledger (Munis Reports) and the Operating Departments Project Ledger presently occurs once a year at year-end. This is not an uncommon industry CAPITAL ASSET ACCOUNTING — CITY OF LODI 8 practice, but it can present complications, particularly for Departments with a large number of projects and assets. Often Project Managers and Engineers are managing multiple projects. For those projects completed in the early months of a fiscal year they may have difficulty remembering specific project information given their attention to more recent projects. For this reason, as well as to better manage workload throughout the year BB&A recommends that capital projects in these high volume Operating Departments (LEU and Public Works) be reconciled and closed on a quarterly basis. This recommendation has been included in the proposed Department Capital Asset Procedures included in Exhibit II. Since the Transit Department does not have the volume of projects of the other two Departments annual reconciliation and project closure should be acceptable. For items such as Equipment (77030) and Vehicles (77040) annual reconciliation and closing should be sufficient for all Operating Departments. It also appears that there is an added level of difficulty tracking projects that extend over multiple fiscal years. We believe that there may be a relatively easy fix to make sure that items such as these do not slip through the cracks. We recommend that the City Accounting Division create a Project Ledger query or report that has the ability to list the open projects from previous fiscal years, so the Operating Departments know to go back and check them for activity in the current year. While the Report has focused on capital assets and reconciliation, our interviews with Operating Departments surfaced other issues that were either tangentially related to or beyond the scope of work of the Report. These issues may warrant further study and resolution by the City. As touched upon, year-end Munis information is used for grant and regulatory reporting, predominantly by the Transportation Department due to the breadth of their funding sources, and to a lesser extent the Public Works Department. There appear to be legitimate accounting adjustments made after the Operating Departments have completed their reconciliation that result in changes to the General Ledger. An example would be the allocation of overhead related to labor back into the capital accounts. The Operating Departments do not appear to understand when and why these changes take place, and therefore have provided reports to funding and regulatory bodies that in some cases do not include these adjustments. BB&A recommends that Munis training be offered to the Operating Departments so that they have a better understanding of the reason for these changes. It would also be helpful for City Accounting to be more familiar with the needs of the Operating Departments to have "final numbers" for these reporting purposes in order to build greater consensus in regard to any timing considerations facing the Operating Departments. CAPITAL ASSET ACCOUNTING — CITY OF LODI 9 Tangentially, we received Operating Department observations that grant revenues are sometimes misapplied to the wrong accounts. It is good practice to have the Operating Department confirm the revenue account with City Revenue Department when grant funding is received. Also, certain grants require that interest earnings on grant funds be spent on the projects that were funded by the respective grant. Operating Departments report some confusion surrounding the timing and accreditation of these earnings, which later creates potential subsequent appropriations requirements from City Council. BB&A has discussed this situation with the City Accounting Division, and there appears to be an existing City Council Resolution to help satisfy the appropriations requirements. We have communicated such to the Operating Departments which should hopefully eliminate any questions in the future, whereby Operating Departments know that the earnings on a grant are being credited for that grant and these earnings are available for the expenditures authorized under the respective grant. In our estimation, one benefit of the Report is that communications between the City Accounting Division and the Operating Departments have appeared to improve, helping to resolve some misunderstandings, and will likely be even better once the Munis training is implemented. Extended closing periods and audit adjustments also seem to have adversely impacted the grant and regulatory reporting. Hopefully, with the recommendations contained herein along with the other efforts that the City is taking these problems will be alleviated in the future. CAPITAL ASSET ACCOUNTING — CITY OF LODI 10 BB&A appreciates the opportunity to assist the City and its Operating Departments with the development of Policies and Procedures related to capital asset accounting and reconciliation. In summary and conclusion, BB&A recommends the following steps be taken within the scope of our work: • City Council consider and adopt Capitalization and Asset Disposition Policies • Operating Departments confirm that the recommended Procedures are acceptable and apply them to future closings • LEU and City Accounting set up new Asset Classification Accounts • LEU and City Accounting establish allocation of existing assets to new Asset Classification Accounts • LEU and Public Works capital projects be reviewed and closed as appropriate on a quarterly basis • Transit capital projects be reviewed and closed as appropriate on an annual basis • Equipment and Vehicle closing to remain on an annual basis • Determine if feasible to create Project Ledger report that shows "open projects" based on year of initiation Other recommendations beyond the scope of our work are offered as follows: • Consider offering Munis training to Operating Department staff working with capital asset reporting and reconciliation, and regulatory reporting • Regular quarterly meetings between City Accounting and Operating Department financial staff be established to identify and correct any problems that may exist, including any changes that may be merited to procedures and any reporting within the Munis System • Operating Department confirm assignment of grant and project revenue to proper accounts when received CAPITAL ASSET ACCOUNTING — CITY OF LODI 11 CITY OF LODI CAPITALIZATION POLICY September 1, 2021 The City of Lodi (the "City") has developed the following Capitalization Policy (the "Policy"), which, subject to any future amendments, shall be in effect as of July 1, 2021. The objective of the Policy is to specify the types of costs that will be capitalized by the City and how to properly account for capital assets. It is intended that the Policy will comply with the requirements of Government Accounting Standard Board (GASB) Statement Number 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. 1. Definitions Capital Asset — The Government Finance Officers Association (GFOA) defines capital assets as "assets that are used in operations and that have initial lives extending beyond a single reporting period". Capital assets may be intangible (capacity rights) or tangible (buildings, equipment). 2. Capital Asset Threshold In order to be capitalized, a Capital Asset must cost at least $10,000 and have a useful life of at least five years ("Capitalization Threshold"). The City shall maintain a schedule for individual Capital Assets that meet the Capitalization Threshold within its financial reporting system. Items with an original value of less than $10,000, or with an estimated useful life of less than five years, shall be recorded as an operating expense. For Equipment (77030), and Vehicles (77040), this policy is applicable to all Operating Departments. For Capital Projects (77020), for all Major Improvement Projects and New Construction Projects, this policy is applicable to all Operating Departments. CAPITAL ASSET ACCOUNTING — CITY OF LODI 12 For Infrastructure Capital Assets, the Public Works Engineer will provide a quarterly Infrastructure Report (Attachment 2) including Storm Drainpipe, Water Pipe and New Street information, and the City Accounting Division will record the Capital Assets at year-end. 3. Capital Assets Are Reported at Historical Value The City will report purchased or constructed capital assets at their historical cost for financial reporting in audited financial statements. The total cost of each capital asset is the cash outlay (or its equivalent) required to purchase or construct the asset and put it in service. Repairs and Maintenance Are Classified as Operating Expenses Any outlay that only returns a capital asset to its existing condition before the repair or maintenance, regardless of amount, will be classified as an operating expense. 4. Sale or Disposal of Assets The Deputy City Manager is responsible for the sale of City surplus personal property having a value of $50,000 or less. No equipment, material or property will be sold to or given to a City employee except through public auction or sealed bids open to the general public. No City employee shall be permitted to bid or knowingly come into ownership of any property in which the employee participates in the disposition process. Prior to the disposition of any equipment which might reasonably be subject to product liability claims through its subsequent use, the Deputy City Manager shall obtain a written disclaimer holding the City harmless against any such claims. Any known defect, not readily apparent through visual inspection, shall be identified in writing by the Department owning the property and made known to any potential buyer. No property involved in an accident or claim against the City shall be disposed of without the prior approval of the Risk Manager and the City Attorney. Should the Deputy City Manager be unable to obtain any offer after solicitation of bids the Operating Department may then dispose of the property by whatever means is in the best interest of the City. The proceeds of a sale shall be credited to the applicable fund within which it resided. CAPITAL ASSET ACCOUNTING — CITY OF LODI 13 The Deputy City Manager shall maintain documentation of the disposal of all surplus and/or obsolete equipment and scrap material. Documentation shall include date and method of disposition, sale price and name and address of buyer. The sale of individual items with a market value in excess of $50,000 shall be subject to the approval of City Council. CAPITAL ASSET ACCOUNTING — CITY OF LODI 14 CITY OF LODI CAPITALIZATION PROCEDURES September 1, 2021 The City of Lodi ("the City") has developed the following Capitalization Procedures (the "Procedures"), which, subject to any future amendments, shall be in effect as of July 1, 2021, and which shall be used and implemented in connection with the Capitalization Policy ("Policy"). The objective of the Procedures is to specify how various Capital Assets will be periodically recorded in the City's basic financial statements by applicable Operating Departments with the assistance of the City Accounting Division. All Capital Assets exceeding the Capital Asset Threshold (as defined herein), except for Equipment and Vehicles, will be provided by applicable Operating Departments to the City Accounting Division on a quarterly basis. Equipment and Vehicles will be verified at year-end as described herein. All Capital Assets will be recorded by the City Accounting Division at fiscal year-end within one of the following Funds and Object Codes. FUND OBJECT CODE 431 - Descriptor 77020 — Capital Project 434 - Descriptor 77030 - Equipment 435 - Descriptor 77040 - Vehicle 500 - Lodi Electric 530 - Wastewater 560 - Water 600 - Transit 641— Equipment Replacement 642 — IT Replacement 643 — Police Vehicle Replacement 644 — Fire Vehicle Replacement 645 — Public Works Vehicle Replacement 646 — CDD Vehicle Replacement 647 — PRCS Vehicle Replacement 650 - Fleet CAPITAL ASSET ACCOUNTING — CITY OF LODI 15 For Equipment (77030), and Vehicles (77040), the City Accounting Division will export to all Operating Departments Equipment (77030) and Vehicle (77040) a General Ledger Account Detail Report at fiscal year-end to identify which transactions can be capitalized at year-end. For Capital Projects (77020), all Operating Departments with the exception of Lodi Electric will report projects that should be capitalized at year-end to the City Accounting Division quarterly. The Public Works Management Analyst and Parks, Recreation and Cultural Services Analyst will primarily be responsible for providing project information and status. For Lodi Electric Capital Projects, the Accounting Division will provide a quarterly Project/Work Order Detail Report (Attachment 1) so that Lodi Electric can populate the information into appropriate Asset Categories. Lodi Electric will report Capital Projects that are placed into service quarterly, and the City Accounting Division will record the Capital Assets at year-end. For Infrastructure Capital Assets, the Public Works Engineer will provide a quarterly Infrastructure Report (Attachment 2) including Storm Drainpipe, Water Pipe and New Street information, and the City Accounting Division will record the Capital Assets at year-end. CAPITAL ASSET ACCOUNTING — CITY OF LODI 16 CITY OF LODI LODI ELECTRIC UTILITY CAPITALIZATION PROCEDURES September 1, 2021 The City of Lodi Electric Utility ("LEU") has developed the following Capitalization Procedures (the "Procedures"), which, subject to any future amendments, shall be in effect as of July 1, 2021, and which shall be used and implemented in connection with the City of Lodi Capitalization Policy and Procedures ("City Policy and Procedures"). The objective of the LEU Procedures is to specify how various Capital Assets will be periodically recorded in the City's basic financial statements with the assistance of the City Accounting Division. All Capital Assets exceeding the Capital Asset Threshold (as defined herein), except for Equipment and Vehicles, will be provided by LEU to the City Accounting Division on a quarterly basis. Equipment and Vehicles will be verified at year-end as described herein. For Equipment (77030), and Vehicles (77040), the City Accounting Division will export to LEU a General Ledger Account Detail Report at fiscal year-end to identify which transactions can be capitalized at year-end. For Capital Projects (77020), LEU will report projects that should be capitalized at year-end to the City Accounting Division on a quarterly basis. For LEU Capital Projects, the Accounting Division will provide a quarterly Project/Work Order Detail Report (Attachment 1) so that Lodi Electric can populate the information into appropriate Asset Categories. Lodi Electric will report Capital Projects that are placed into service quarterly, and the City Accounting Division will record the Capital Assets at year-end. CAPITAL ASSET ACCOUNTING — CITY OF LODI 17 CITY OF LODI PUBLIC WORKS CAPITALIZATION PROCEDURES September 1, 2021 The City of Lodi Public Works Department ("Public Works") has developed the following Capitalization Procedures (the "Procedures"), which, subject to any future amendments, shall be in effect as of July 1, 2021, and which shall be used and implemented in connection with the City of Lodi Capitalization Policy and Procedures ("City Policy and Procedures"). The objective of the Public Works Procedures is to specify how various Capital Assets will be periodically recorded in the City's basic financial statements with the assistance of the City Accounting Division. All Capital Assets exceeding the Capital Asset Threshold (as defined herein), except for Equipment and Vehicles, will be provided by Public Works to the City Accounting Division on a quarterly basis. Equipment and Vehicles will be verified at year-end as described herein. For Equipment (77030), and Vehicles (77040), the City Accounting Division will export to Public Works a General Ledger Account Detail Report at fiscal year-end to identify which transactions can be capitalized at year-end. For Capital Projects (77020), Public Works will report projects that should be capitalized at year-end to the City Accounting Division on a quarterly basis. For Public Works Capital Projects, the Accounting Division will provide a quarterly Project/Work Order Detail Report (Attachment 1) so that Public Works can populate the information into appropriate Asset Categories. Public Works will report Capital Projects that are placed into service quarterly, and the City Accounting Division will record the Capital Assets at year-end. CAPITAL ASSET ACCOUNTING — CITY OF LODI 18 CITY OF LODI TRANSIT DEPARTMENT CAPITALIZATION PROCEDURES September 1, 2021 The City of Lodi Transit Department ("Transit") has developed the following Capitalization Procedures (the "Procedures"), which, subject to any future amendments, shall be in effect as of July 1, 2021, and which shall be used and implemented in connection with the City of Lodi Capitalization Policy and Procedures ("City Policy and Procedures"). The objective of the Transit Procedures is to specify how various Capital Assets will be periodically recorded in the City's basic financial statements with the assistance of the City Accounting Division. All Capital Assets exceeding the Capital Asset Threshold (as defined herein), including Equipment and Vehicles, will be provided by Transit to the City Accounting Division on annual basis. Equipment and Vehicles will be verified at year-end as described herein. For Equipment (77030), and Vehicles (77040), the City Accounting Division will export to Transit a General Ledger Account Detail Report at fiscal year-end to identify which transactions can be capitalized at year-end. For Capital Projects (77020), Transit will report projects that should be capitalized at year- end to the City Accounting Division. For Transit Capital Projects, the Accounting Division will provide an annual Project/Work Order Detail Report (Attachment 1) so that Transit can populate the information into appropriate Asset Categories. Transit will report Capital Projects that are placed into service annually, and the City Accounting Division will record the Capital Assets at year-end. CAPITAL ASSET ACCOUNTING — CITY OF LODI 19 The City of Lodi ("the City") has developed the following Asset Disposition Procedures (the "Procedures"), which, subject to any future amendments, shall be in effect as of the adoption and implementation of Capitalization Policies and Procedures, and which shall be used and implemented in connection with the Capitalization Policy ("Policy"). The objective of the Procedures is to specify how various Capital Assets will periodically be disposed of by applicable Operating Departments with the assistance of the City Budget Division. Definitions: Surplus and/or Obsolete - equipment, material or property which has functional value but is no longer required by the using organization. For the purpose of the procedure described below, the words equipment, material and property are used interchangeably and have the same meaning. Scrap - equipment, material or property that is no longer capable of performing its intended function without extensive repair, and/or material that is of no value except for reclamation purpose. Disposition Process - the sequence of events involved with the disposal of items initiating with the original recommendation to dispose of an item through the physical removal from City property and transfer of title. Surplus and/or Obsolete Equipment Material: The applicable Department Head, or their designee will notify the Deputy City Manager in writing of the existence of surplus and/or obsolete equipment and material and request disposition instructions. The above notification will list each item, acquisition, date or estimated age, condition, acquisition price if known, and any known defect not readily apparent through visual inspection. If the equipment is of a specialized nature, a brief description of its function shall be included. It shall be the Department Head's responsibility to provide, with the request, a release from the Risk Manager and the City Attorney if the equipment was involved in an accident or is the subject of a claim. CAPITAL ASSET ACCOUNTING — CITY OF LODI 20 Should any surplus item be of immediate use to another Department within the City, the Budget Division may transfer the equipment to the program they believe can best use the equipment. The Deputy City Manager may dispose of the equipment by public auction, sealed bids, negotiations, or trade-in allowance on the purchase of other City property. Scrap Material: The applicable Program Manager will notify the Deputy City Manager in writing of the existence and location of scrap material. The notification will include material composition (i.e., metallic, paper, plastic or chemical content), Department liaison, Department Head certification that the material is scrap. The Deputy City Manager will dispose of such material by public auction, sealed bid or negotiation. LEU has an Agreement for Professional Services for recycling services with California Electronic Asset Recovery Corporation ("CEAR") executed on May 11, 2021, that provides for the disposal and recycling of certain electronic items including meters, computers & peripherals, and other consumer electronic and office products. Items included in this agreement or similar future agreements shall not be subject to this Policy. LEU has an Agreement for Professional Services for hazardous waste disposal services with Transformer Technologies, LLC, entered on September 22, 2020. The Agreement provides for the disposal of hazardous waste including various types of transformers, capacitors, switches, and breakers among other things. Items included in this agreement or similar future agreements shall not be subject to this Policy. Future agreements for the proper disposal of utility poles and utility wire/cable shall not be subject to this Policy. Disposal of these items will be set forth in applicable agreements. CAPITAL ASSET ACCOUNTING — CITY OF LODI 21 This Report ("Report") has been sponsored by the City of Lodi (the "City") and prepared for the exclusive use of the City. The Report is distributed for general information purposes only. While the information and opinions contained in the Report have been prepared in good faith, the information has been provided to Bell Burnett & Associates by the City, and the information in the Report is not and does not purport to be comprehensive, all-inclusive or to have been independently verified. Neither Bell Burnett & Associates, nor any of their principals, employees, advisers or consultants accept any liability or responsibility for the accuracy, reasonableness or completeness of or for any errors, omissions or misstatements, negligent or otherwise, relating to or makes any representation or warranty, express or implied, with respect to the information contained in the Report or on which it is based or with respect to any written or oral information made, or to be made available to any of the recipients or their professional advisers and, so far as permitted by law and except in the case of fraudulent misrepresentation by the party concerned, any liability therefore is hereby expressly disclaimed. While considering the Report, each recipient/interested party should make its own independent assessment and seek its own professional, financial, legal and tax advice as to the information and findings of the Report. CAPITAL ASSET ACCOUNTING — CITY OF LODI 22 RESOLUTION NO. 2021-248 ADOPT A RESOLUTION OF THE LODI CITY COUNCIL APPROVING THE CITY OF LODI CAPITAL ASSET POLICY ------------------------------------------------------------------------ ------------------------------------------------------------------------ WHEREAS, during the previous two fiscal year audits, capital assets were an area of concern for our auditors relating to the internal controls over financial reporting related to capital asset accounting; and WHEREAS, generally accepted accounting principles (GAAP), as per the Governmental Accounting Standards Board, require entities to track and record the original cost of the capital assets and to calculate depreciation on certain of those capital assets and expense the costs over their useful life of the date placed in service; and WHEREAS, staff had begun working internally on these issues and on February 17, 2021, Council adopted Resolution No. 2021-36 executing a Professional Services Agreement with Bell Burnett & Associates for capital asset accounting services, in the amount of $50,000; and WHEREAS, Bell Burnett & Associates worked with the operating departments to go over the individual procedures, which was used to establish the new policy and operating procedures for the departments. NOW, THEREFORE, BE IT RESOLVED that the Lodi City Council does hereby approve and adopt the Policy as the Capital Asset Policy for the City of Lodi; and BE IT FURTHER RESOLVED, pursuant to Section 6.3q of the City Council Protocol Manual (adopted 11/6/19, Resolution No. 2019-223), the City Attorney is hereby authorized to make minor revisions to the above -referenced document(s) that do not alter the compensation or term, and to make clerical corrections as necessary. Dated: September 1, 2021 I hereby certify that Resolution No. 2021-248 was passed and adopted by the City Council of the City of Lodi in a regular meeting held September 1, 2021 by the following votes: AYES: COUNCIL MEMBERS — Chandler, Hothi, Khan, Kuehne, and Mayor Nakanishi NOES COUNCIL MEMBERS — None ABSENT: COUNCIL MEMBERS — None ABSTAIN: COUNCIL MEMBERS — None r/JENNIFE CUSMIR City Clerk 2021-248