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HomeMy WebLinkAboutAudited Palm Desert Recreational Facilities Corporation (PDRFC) Financial Reports FYE 06-30-2018MEETING DATE: PREPARED BY: REQUEST Recommendation STAFF REPORT CITY OF PALM DESERT FINANCE DEPARTMENT January 24, 2019 Jose Luis Espinoza, CPA, Assistant Finance Director Receive and File the Palm Desert Recreational Facilities Corporation audited financial reports for the fiscal year ended June 30, 2018 By Minute Motion, that the City Council receive and file the audited financial statements of the Palm Desert Recreational Facilities Corporation (PDRFC) for the fiscal year ended June 30, 2018. Strateqic Plan Obiective Not applicable. Committee Recommendation The Audit, Investment and Finance Committee received the audited financial statements for the PDRFC at their January 22, 2019 meeting, and recommended that the statements for the fiscal year ended June 30, 2018 be received and filed by the City Council. Backqround The Palm Desert Recreational Facilities Corporation is a corporation that provides food and beverage services exclusively to the Desert Willow Golf Resort. Lance, Soll & Lunghard, LLP performed and completed the annual independent audit for the fiscal year ended June 30, 2018, for the PDRFC in accordance with generally accepted auditing standards. In the auditor's opinion, the basic financial statements present fairly, in all material respects, the financial position of the PDRFC as of June 30, 2018, and the results of its operations of the year then ended are in conformity with accounting principles generally accepted in the United States of America. In conducting the audit, the auditors are also required to test the PDRFC's internal controls. Attached is the report issued by the auditors for the year ended June 30, 2018. Staff requests that the Council receive and file the Palm Desert Recreational Facilities Corporation's audited financial reports for the fiscal year ended June 30, 2018. \\srv-fil2k3\groups\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Nudit Staff Reports 2018\SR - Council audit 2018 PDRFC.docx Staff Report Receive and file PDRFC reports for Fiscal Year ended June 30, 2018 January 24, 2019 Page 2of2 Fiscal Impact There is no fiscal impact associated with this action. LEGAL REVIEW DEPT. REVIEW FINANCIAL REVIEW CITY MANAGER N/A Robert W. Hargreaves J et M. Moore City Attorney Director of Finance Ol of M. Moore Lauri Aylaian Director of Finance City Manager CONTENTS: Palm Desert Recreational Facilities Corporation Audited Financial Report for Fiscal Year Ended June 30, 2018, and the Independent Auditors' Report on Internal Control over Financial Reporting and on Compliance and Other Matters based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards JLE:nmo \\srv-fil2k3\groups\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Audit Staff Reports 2018\SR - Council audit 2018 PDRFC.docx PALM DESERT RECREATIONAL FACILITIES CORPORATION ANNUAL FINANCIAL REPORT WITH REPORT ON AUDIT BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR THE YEAR ENDED JUNE 30, 2018 PALM DESERT RECREATIONAL FACILITIES CORPORATION TABLE OF CONTENTS June 30, 2018 Independent Auditors' Report Page Number Management's Discussion and Analysis 3 Basic Financial Statements: Exhibit A - Statement of Net Position 9 Exhibit B - Statement of Revenues, Expenses and Changes in Net Position 10 Exhibit C - Statement of Cash Flows 11 Notes to Basic Financial Statements 12 Independent Auditors' Report on Internal Control over 16 Financial Reporting and Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards LSUo 000 0*• •• CPAs A11L r > INDEPENDENT AUDITORS' REPORT To the Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California Report on the Financial Statements We have audited the accompanying financial statements of Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, California, as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the Corporation's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. PrimeGlobal Mrar:�J. •r.l..�.�r.�d c � -.� LS[2::: To the Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, California, as of June 30, 2018, and the respective changes in financial position and, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 8, 2019 on our consideration of the Corporation's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of the effectiveness of the Corporation's internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Corporation's internal control over financial reporting and compliance. Brea, California January 8, 2019 PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS June 30, 2018 Our discussion and analysis of the financial performance of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, provides an overview of the Corporation's financial activities for the fiscal year ended June 30, 2018. Please read it in conjunction with the Palm Desert Recreation Facilities Corporation's financial statements. FINANCIAL HIGHLIGHTS • Palm Desert Recreational Facilities Corporation's net position deficit decreased by $287,466 from $1,124,827 to $ 837,361. • Palm Desert Recreational Facilities Corporation's gross income of $3,030,343 increased by $349,318 (13%) from the previous year. • Palm Desert Recreational Facilities Corporation's gross profit increased by $278,123 (14%) from last year. The gross profit margins increased to 73%. • Palm Desert Recreational Facilities Corporation's cost of goods sold increased by $71,195 (9%). • Palm Desert Recreational Facilities Corporation's Selling and Administrative Expense Percentage was held constant at 63%. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The Statement of Net Position and Statement of Revenues, Expenses and Changes in Net Position (on pages 9 and 10) provide information about the activities of the Palm Desert Recreational Facilities Corporation as a whole, and present a long- term view of the Corporation's operations. ' The gross profit margin is calculated by dividing gross profit by gross sales. The gross profit margin indicates how well sales are performing when compared to expectations and the industry. The corporation expected an industry gross profit margin of approximately 68%. 2 The selling and administrative expense percentage is calculated by dividing the sum of the Maintenance & Operations and the General & Administrative costs by the gross sales. This percentage indicates how well the corporation's overhead is maintained in relation to sales. The goal is to arrive at overhead cost of approximately 64% or lower. See independent auditors' report. -3- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2018 REPORTING THE COMPONENT UNIT AS A WHOLE The Statement of Net Position and the Statement of Revenues, Expenses and Changes in Net Position: Our analysis of the Palm Desert Recreational Facilities Corporation as a whole begins on page 9. The Corporation plays an independent, yet vital role in completing the overall project known as Desert Willow Golf Resort (a municipal golf course owned by the City of Palm Desert). The Corporation's only function is providing the Food and Beverage operations at the Desert Willow Clubhouse. The restaurant operation within the environment of the golf industry is a necessary complement to a round of golf. The main focus of our analysis of the Palm Desert Recreational Facilities Corporation's operations is the profitability of the food and beverage activities and tailoring the restaurant to meet the expectations of all golf enthusiasts alike. What is the outcome for the food & beverage operations for this fiscal year? The Statement of Net Position and the Statement of Revenues, and the Expenses and Changes in Net Position report information about the Component Unit as a whole and about its activities. This report along with the financial highlights, noted above, illustrates the operations and the profitability of the food and beverage activities. These statements include all assets and liabilities of the Corporation using the accrual basis of accounting. With the accrual basis of accounting, all of the current year's revenues are recognized when earned instead of received, and all expenses are recorded when incurred instead of when paid. These two statements report the Palm Desert Recreational Facilities Corporation's net position and changes in net position. Net position is the difference between assets and liabilities, which is one way to measure the Corporation's financial health, or financial position. Over time, increases or decreases in the Corporation's net position is an indication of whether its financial health is improving or deteriorating. To determine the profitability of the Corporation, consideration should also be given to other non -financial factors such as the changes in consumer spending as a direct result of the overall economic indicators, as well as changes in the significant industry factors such as price per golf round and level of tourism. THE COMPONENT UNIT AS A WHOLE The Palm Desert Recreational Facilities Corporation's net position deficit decreased by $287,466 from $1,124,827 to $837,361. The restaurant operations recognized a 13 % increase in gross revenues with a corresponding increase in overall costs of 11 %. A stronger economy has positively influenced the tourism and retail market, which in turn increased utilization of the restaurant for corporate outings, weddings and banquets. See independent auditors' report. -4- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2018 THE COMPONENT UNIT AS A WHOLE (CONTINUED) Group outings and banquet events have increased from the prior year which provided the change in gross revenues. An improved economy and increased corporate outings are major factors that will continually contribute to the restaurant operations and generate enough gross revenues to provide a positive net position. Our analysis below focuses on the net position (Table 1) and changes in net position (Table 2) of the Corporation. Table 1 Condensed Statements of Net Position Fiscal Fiscal Year Year 2018 2017 Assets: Current assets $ 187,019 $ 276,038 Total Assets 187,019 276,038 Liabilities: Other liabilities 1,024,380 1,400,865 Total Liabilities 1,024.380 1,400,865 Net Position: Unrestricted (837,361) (1,124,827) Total Net Position $ (837.361) % I l .l 24.827) Current assets decreased by $89,019, which is related directly to the decrease in cash related to the repayment of the advances from related parties liability; which decreased by $356,010. Other Liabilities decreased by $376,485 (27%), from $1,400,865 in fiscal year end 2017 to $1,024,380 in fiscal year end 2018. The reduction of $356,010 from the advances from related party liability was the main factor in the overall reduction of other liabilities. See independent auditors' report. -5- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2018 THE COMPONENT UNIT AS A WHOLE (CONTINUED) Table 2 Condensed Statements of Revenues, Expenses and Changes in Net Position Operating Revenues: Food and beverage sales Total Revenues Operating Expenses: Cost of goods sold Maintenance and operations General and administrative Total Expenses Change in Net Position Component Activities Fiscal Year 2018 $ 3,030,343 3,030,343 831,623 1,685,460 225,794 2,742,877 Fiscal Year 2017 $ 2,681,025 2,681,025 760,428 1,484,250 214,613 2,459,291 287,466 $ 221,734 Total revenue increased by $349,318 (13%) from $2,681,025 to $3,030,343. Continued patronage in regular dining and banquet business allowed the restaurant to recognize the overall increase in gross revenues. This fiscal year was the seventeenth year of operation at the Desert Willow Clubhouse. During this fiscal year the Palm Desert Recreation Facilities Corporation continued to market their banquets and outings aggressively in the national, regional and local markets and advertising campaign to minimize the impact of the sluggish tourism economy, and maximize the newer larger facilities with the focus on: • Attracting new and repeat business. • Continued patronage of customers and corporate groups. • Increased banquet and outing operations. • Marketing to golfers on the golf course. As Table 2 above indicates, total expenses recognized an increase of $283,586 from $2,459,291 to $2,742,877. The majority of the increase was represented in maintenance and operations; specifically payroll costs. The mandated increase in the hourly minimum wage rate from $10.50 to $11 plus the increased sales resulted in an overall payroll increase of $148,493 (1 l%). Cost of Goods sold accounted for $71,195 (9%) of the increase, while the other costs center recognized minimal increases. See independent auditors' report. -6- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2018 THE COMPONENT UNIT AS A WHOLE (CONTINUED) During the 2017-2018 fiscal year, management continued to focus on retaining repeat business, continued patronage, and growing the corporate and group market as the economy improves. There was no major change in the mix of business. Another key focus of the restaurant during the 2017-2018 fiscal year was efficient management of labor costs and other expenditures, while recognizing an increase in operational activity. The Gross Profit Margin increased from 72% to 73%. The Selling and Administrative Expense Percentage was consistent with the prior year and held constant at 63%. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets/Debt Administration The Palm Desert Recreational Facilities Corporation does not own or lease any capital assets; subsequently, there is no debt related to capital assets presented on their financial statement. More details are presented in the Notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS In preparing the budget for 2018-19, management looked at the following economic factors: Prices: The prices for goods and services in the golf industry continue to experience downward pressure resulting from the lagging economy. In an effort to maintain the integrity of the products served at the restaurant, The Palm Desert Recreational Facility has increased menu prices between 5-10% in response to the increased pressure on costs associated with labor and supplies. Secondarily, management continues to implemented better cost control measures to eliminate wastage. In addition, the Palm Desert Recreational Facilities Corporation will continue to aggressively market and advertise to secure their market share in the local and regional golf industry. National Economy: The golf and hospitality industries rely heavily on a strong national and local economy. With a strong national economy, the market demand for leisure activities such as golf and dining is increased; however, in an economic downturn or a slowing of the economy, the typical trend is for consumers to reduce their consumption of leisure activities. The state of the current economy was taken into consideration when budgeting for the 2018-2019 fiscal year. See independent auditors' report. -7- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2018 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS (CONTINUED) • Labor cost: The State of California has mandated increased minimum wage rates, which is scheduled to increase from $11 per hour to $12 per hour effective January 1, 2019. The increase minimum wage rate coupled with the mandated changes in employer provided health care benefits (Affordable Care Act) places pressure on an already fragile food industry. The Palm Desert Recreational Facilities Corporation has taken measures to manage labor costs without affecting customer service, and will continue to seek effective and efficient methods to implement in their daily operations. A copy of the Corporation's 2018-2019 financial plan can be obtained by contacting the Palm Desert Recreational Facilities Corporation (see below). CONTACTING THE CORPORATION'S FINANCIAL MANAGEMENT This financial report is designed to provide the users with a general overview of the Palm Desert Recreational Facilities Corporation, a component unit of the City of Palm Desert. If you have questions about this report or need additional financial information, contact the Controller at the address of the Palm Desert Recreational Facilities Corporation at 38-995 Desert Willow Drive, Palm Desert, California 92260. See independent auditors' report. -8- PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF NET POSITION June 30, 2018 &V016,`]91C.3 Exhibit A Cash and investments $ 120,150 Accounts receivable 2,877 Prepaid costs 16,368 Inventories 47,624 TOTAL ASSETS 187,019 LIABILITIES: Accounts payable 38,922 Accrued liabilities 12,059 Due to Primary Government 893,947 Unearned revenue 79.452 TOTAL LIABILITIES 1,024,380 NET POSITION (DEFICIT): Unrestricted (deficit) (837,361) TOTAL NET POSITION $ (837,361) See independent auditors' report and notes to basic financial statements. Exhibit B PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the year ended June 30, 2018 OPERATING REVENUE: Food and beverage sales TOTAL OPERATING REVENUE OPERATING EXPENSES: Cost of goods sold Maintenance and operations General and administrative TOTAL OPERATING EXPENSES OPERATING INCOME/CHANGE IN NET POSITION NET POSITION - BEGINNING OF YEAR NET POSITION - END OF YEAR See independent auditors' report and notes to basic financial statements. $ 3,030,343 3,030,343 831,623 1,685,460 225,794 2,742,877 287,466 (1,124.827) wilt Exhibit C PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF CASH FLOWS For the year ended June 30, 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers $ 3,027,550 Payments to suppliers (2,765,190) NET CASH PROVIDED BY OPERATING ACTIVITIES 262,360 CASH FLOWS FROM NON -CAPITAL AND RELATED FINANCING ACTIVITIES Cash paid to primary government (356,010) NET CASH USED BY NON -CAPITAL AND RELATED FINANCING ACTIVITIES (356,010) NET INCREASE 1N CASH AND CASH EQUIVALENTS (93,650) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 213,800 CASH AND CASH EQUIVALENTS - END OF YEAR $ 120,150 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATINGACTIVITIES: Operating income $ 287,466 Adjustments to reconcile operating income to net cash used by operating activities: Changes in assets and liabilities: (Increase) decrease in accounts receivables 2,105 (Increase) decrease in inventory (2,303) (Increase) decrease in prepaid expenses (4,433) Increase (decrease) in accounts payable and accrued liabilities (15,577) Increase (decrease) in unearned revenues (4,898) NET CASH PROVIDED BY OPERATING $ 262,360 ACTIVITIES See independent auditors' report and notes to basic financial statements. PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2018 1. ORGANIZATION AND DESCRIPTION OF THE REPORTING ENTITY: The Palm Desert Recreational Facilities Corporation (the Corporation) is a Corporation that provides food and beverage services exclusively to the Desert Willow Golf Resort (the Golf Resort). The Corporation is a component unit of the City of Palm Desert (the City) and is reported as an Enterprise Fund in the City's basic financial statements. The Corporation was incorporated on February 25, 1997. The Board of Directors of the Corporation consists of two members of the City Council and two members of the public at large. The annual Board of Director's meetings is held the second Monday of June at 11:00 a.m. at the principal office of the Corporation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: a. Basic Financial Statements: The basic financial statements are comprised of the Statement of Net Position, the Statement of Revenues, Expenses and Changes in Net Position, the Statement of Cash Flows and the notes to the basic financial statements. b. Basis of Presentation: The basic financial statements of the Palm Desert Recreational Facilities Corporation have been prepared in conformity with generally accepted accounting principles as applicable to government units. The standard -setting body for principles. Governmental Accounting Standards Board is the accepted establishing governmental accounting and financial reporting The accounts of the Corporation are an enterprise fund. An enterprise fund is a Proprietary type fund used to account for operations (a) that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. See independent auditors' report. - 12- PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): c. Measurement Focus and Basis of Accounting: Measurement focus is a term used to describe "which" transactions are recorded within the various financial statements. Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied. The accompanying financial statements are reported using the "economic resources measurement focus", and the "accrual basis of accounting". Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. d. Net Position: In the Statement of Net Position, net position is classified in the following categories: • Net investment in capital assets - This amount consists of capital assets net of accumulated depreciation and reduced by outstanding debt that is attributed to the acquisition, construction, or improvement of the assets. • Restricted net position - This amount is restricted by external creditors, grantors, contributors, or laws or regulations of other governments. • Unrestricted net position - This amount is all net position that do not meet the definition of "net investment in capital assets" or "restricted net position". When both restricted and unrestricted resources are available for use, the Corporation may use restricted resources or unrestricted resources based on the Board's discretion. e. Operating Revenues: Operating revenues, such as food and beverage sales, resulting from exchange transactions associated with the principal activity of the Corporation. Exchange transactions are those in which each party receives and gives up essentially equal values. f. Cash and Investments: For purposes of the Statement of Cash Flows, the Corporation considers all unrestricted highly liquid investments with an initial maturity of three months or less to be cash equivalents. The carrying value was $232,161 and the deposit value was $120,150. The difference is represented by $9,249 of deposits in transit and checks outstanding totaling $121,260 for a net total of $112,011. See independent auditors' report. - 13 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): f. Cash and Investments (Continued): The City has implemented GASB Statement No. 40, "Deposit and Investment Risk Disclosures". This pronouncement is an amendment to GASB Statement No. 3. GASB No. 40 establishes and modifies disclosure requirements related to deposit and investment risks. The information required by GASB Statement No. 40 related to authorized investments, credit risk, etc., is available in the annual report of the City. g. Inventories: Inventories are stated at the lower of cost or market (no adjustments were made to reduce inventory below cost) with cost determined using the Weighted Average Cost Method. At June 30, 2018, inventories consisted of $47,624 in merchandise for sales of food and beverages. h. Budgetary Policies: Kemper Sports Management, Inc. is required to submit to the City an operating budget containing estimates of all the Corporation expenses for the next operating year, including expenditures for: (a) property operation and maintenance, ( b) repairs, replacements and alterations that do not constitute capital improvements, (c) furnishings and equipment and operating inventory, and (d) advertising, sale and business promotion. The budget is required to be reviewed and approved by the City prior to July 1 each year. 3. DUE TO PRIMARY GOVERNMENT: Due to primary government: As of June 30, 2018, the Corporation owed the following amounts to primary government: Desert Willow Golf Course $ 608,947 City of Palm Desert 285,000 S 993.947 The Corporation has an operating lease with the City for use of the facilities (see Note 4). See independent auditors' report. - 14- PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2018 4. COMMITMENTS AND CONTINGENCIES: Operating Leases: The Corporation has an operating lease with the City for use of the facilities that has been amended several times. The original terms of the lease indicated a lease rate of $8,000 per month beginning June 4, 1997. On May 18, 2004, the Corporation approved an increase in the lease payment to begin on July 1, 2004. The July 1, 2004 lease amendment stipulated a new lease payment of $15,000 per month. On May 12, 2009, the Board of Directors approved a decrease in the lease payment from $15,000 to $8,000 commencing on July 1, 2009. The rent expense for the year ended June 30, 2018 was $96,000. In addition, at June 30, 2018, the Corporation owed $285,000 in rent to the City of Palm Desert. Management Agreement: The Corporation is managed by Kemper Sports Management, Inc., under an agreement to manage and operate Desert Willow Golf Course. On April 13, 2017, a new contract was approved and with a commencement date of July 2017 and a termination date of July 1, 2020. There are two 1-year options to extend the management agreement. 5. RISK MANAGEMENT: The Golf Resort is covered by insurance purchased by Kemper Sports Management Inc., which includes commercial liability, automobile, workers' compensation and overall umbrella excess liability insurance through Aon Risk Services, Inc. of Illinois. The Corporation is named as additional insured. 6. OTHER DISCLOSURES: The Corporation has a net deficit of $ 837,361, which will be eliminated by increasing revenues through banquet and dining reservations. See independent auditors' report. - 15 - LSUo 000 000 •• CPAs ANFD ADVISORS INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors Palm Desert Recreational Facilities Corporation City of Palm Desert, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Palm Desert Recreational Facilities Corporation (the Corporation), a component unit of the City of Palm Desert, California, as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the Corporation's basic financial statements, and have issued our report thereon dated January 8, 2019. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Corporation's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control. Accordingly, we do not express an opinion on the effectiveness of the Corporation's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Corporation's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. _/��. PrimeGlobal LSL:,o::: To the Board of Directors Palm Desert Recreational Facilities Corporation City of Palm Desert, California Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Corporation's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Corporation's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. 0; � �, .4 ew V. 4 ; �o4 Brea, California January 8, 2019 17