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May 31 .. 1990
HONORABLE CIT¥ COUNCIL
Palo Alto, California
Members of the Council:
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The City of Palo Alto$ along with ten other California cities. is
a member of a joint powers authority (JPA} for the provision of
-general liability and auto liability insurance. The JPA, Authority
for California Cities Excess Liabil ity or ACCEL, recently received
and made aVailable to its members a management letter from Price
'Waterbouse# issue-d in relation to the 1988-89 fiscal year. A copy
Gt the letter is att.ached. 'tIe are concerned by the comments and
recomrne~1ations cootained in the letter. and are following throu9~
-t,o'ith the Board of ACCEL to ensure that appropriate action is taken
to correct the problems identified. The City Auditor has also been
m~de aware of the letter and concurs with ~r concern. Staff vill
keep the Cou.ncil informed of progress in addressing these issues.
Respectfully submitted,
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ElIILY HARRISON
Directo~ of Fin~nce
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City ranager
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Price J fater/lOuse
februa:)' I, 1990
To the Board of Directon,
of Aull>ority for o.rifornia
Cities bcess Liability
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10 planning and performing our audit of !.be: financial staLefU('Dts ollhe Authority foe
CaIifomia Cities Excess liability for the yeat coded June 30, 1989, "",'e considered its
internal control suucture in order 10 del.emiine our a ucfitrng procedures foe the purpose
cl apressing OLiC opi.n'ioo on t1:Je finan rial statemeol.S and not 10 provide assurance: ()n the
intanal c-ontroi' structure. However, ,.·c [)Oled' c:er'tllin matterS in\'o1vi.'1g tbe interna!
centret structure and its -operatIon that we consider to be reportabte conditions under
staDd~& cstablisfled by the Americac. Iru;.1ilute of Certified PubLic AccountanlS.
Reportabk ~Ondi!KlrtS in\'Olve matt~r.!i coming k) our atlent:ioo rdating ao significant
dcficiencles in toe design or opcrat"ion of the lnlcrnaJ conuel slruL"ture that. iu our
jud£:mcnl .. could adversely affect the org:miz~fioo~s abully 10 rewrd, process, sumrn.:rize.
a:1d' report fmanciaT data corufsteOl v,irh the ~.sertioos oC rnan.agcmcn{ in llx: financial
sial ements.
RfrJoo,aNe OmdiliorlS
ACCEL should mainlain a fQ(maf ~.Lof hooks. and accounts...
Currently. ACC"EL tral"sacGollS tire Dot recon)cd in a fOfma1' ilCCOlUl!1ng ~ys.tem. The
ajministrative cbecklng occount is mCllnlnirtcd on a pC"r$on~i c,Jmputer ho\.\'evcr~ nO olher
lro:rMactioos are fexffi<ll'1y recorded' dClring the year. This preChHks. the abJLty to Supply
lbe Board T;I.'ilfl accurate:, timely.fin.'m6ai dala. AddiLionaTI;' .. tbe lack 0( formal accounting
records abows the non-payment of recciV<Jbles .and payables \Q E'o nodctected throug1lout
the year.
During our exarrunation,. v.'c Doted that [he fin<lnciaJ reports. suppried t() lb-: BeMa lJr.crc
nnl comprel1ensive in scope. The Board rcceives. [""0 sepaf<Jtc finiln...'ia! rep-.')(tS; one K)f
adminlsLra~ checking aclivily and one .fur iD'.'t~.s.tmenl activity. The5e repocts presenl .a
fragmenled' piclur\;. of AD:'£L"s actMl:. A CC'mpleLe accrual -basEs fir.aociat stah~:meru
provid~ the: Board v,,1.th II more accuralc portrayal 0( the d'w.:.rall. financial status of
ACCEL .. ·hics is necessO!I)' for making sound finaTll.."1a1 declslons..
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Board d Oirec\Of> d Au/hocily ra<
California Otic> Exc= LiabU>'Y
FcbroaI)' I, 1990
Pagel
Other Matters
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]n -addition.. ceJUjn. £w$el"\'ations v,'*;re made tlJ at ct>Uld tau!'. in efficiencies in «nail)
adminislTawc ar.e,as and' other improvements in in!emal c:cmtroL These obM:rvations atc
summarized in the attached' memorandum.
This report is intended sole7y for the inrormalioll and' use of 1he Board of. DirecuJfs,
management and' <>tbe.rs spe6fied by management
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___ -l>..-..': ________ ~ _______ ; __ .~. , ...... _ ... , ___ " ... ~.,.. _____ ~
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A UTHO~' FOR CAUFORNU CITIES EX~s' LlABILI1Y
RECOMME.'-.'DATIONS TO IMPROVE L'TER"lAL AO:OUN'1.'1G
CONTROLS M'D ADMlNlSTRATIVE EFF1ClENCY
~Cl:£L members sbould evaluate the accounting pofi~ currently in use 10 ~:W:S5
romptiance witb changes in generany accepted a:.countine principles issued subsequenl 10
June )Q 19S9.
The Go¥emmental' Accounting: Standards Board tssued Stl'ltmeo! Number 10, A.ccquntine
and' FmapciaJ Reporting for Risk Fmancing and Re:T.aled Insurance bsues which is effective:
for periods beginning after Jtme ]5. 1990. This DCW accounting pronouncement may affect
bow incfivlduaI member cities must account for premiums pajd 10 Ao:EL as well as bow
Ao::EL """""DU for its activi!ks. A timely ass<.ssrn<nl 0( the i.;:opact 0( these new principles
anov.'S tfJe Board the opportuniry liO plan future polley decisions which recognize: this change.
ACCEL should consider the possibiJir' cL cl'langing its fisca] year to expedite Ihe ret?Q(1jng
proccn ..
Currc:ntly~ A.a::E.L members do no( re::civc timely information foc use in member financial
S'l'atcments due 10 the length 0( tirm: necessary 10 accumulate financial inf()('TI]ailoIl and
complete the actuarial and audil proces.s lOr ACUL A change 10 i! Maret! 31 year end
would an()\l,-th.: issuance of audited financial stalcmeolS in the June -July period L;erefore
mating tnem .3\-al1abre at a time the members need the:: inFocmat"Km f()f L"l-Jeir QV,U year end
clo'!iinC_ .
Ahhougb ACCEL may be. a taJ[ exempt ('IfganizatK1o pursuant 10 fRe SeCtiOO 115(1). • may
be: requir~d 10 file a federal income tal: retum Tax ReguI .. tions Section L6012-2{aXl)
prO'-'ides that every ccxpocation, as defined in IRe SeclJOIl 7101(aX3).. 'Subject to taxatlon
under Subtitle A (acepl cbarifable and oWer organlz31Lons "'7th unrelated busir)e!i L!').;;orne
<:ind' certaIn foreign c.orporations) s'ha~ make a reltlrll of income regardless of ,.,-be!..heT it bas
taxable income or ngardfess of [be amount of its gross income. Tne IRS has nquircd, in at
least one instance.. a similar gO\'emmentp} joint venture was 10 ft1e a f.ed~r.u l2...~ return eveEl
tnou£h their income from operations was excludable from gross income. By filing 411 ruEng
request ask3"ng the IRS for a detenninarioo as 10 its tax status,. Ao..""'EL ""ould eruninale
dOLlht and prohibit the imposrtKlD of any tax. perlalties and intaest if l1le IRS ",'ere 10
sustaIn 2 chancnge t-o ACCEI's Lax el:empt S1atus..
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