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HomeMy WebLinkAboutPalm Desert Recreational Facilities Corporation (PDRFC) Financial Reports FYE 06-30-2016CITY OF PALM DESERT FINANCE DEPARTMENT Staff Report REQUEST: RECEIVE AND FILE THE PALM DESERT RECREATIONAL FACILITIES CORPORATION AUDITED FINANCIAL REPORTS FOR THE FISCAL YEAR ENDED JUNE 30, 2016 DATE: February 9, 2017 SUBMITTED BY: Jose Luis Espinoza, CPA, Assistant Finance Director CONTENTS: Palm Desert Recreational Facilities Corporation Audited Financial Report for Fiscal Year Ended June 30, 2016, 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 Recommendation 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, 2016. Strategic Plan Obiective Not applicable. Committee Recommendation The Audit, Investment and Finance Committee received the audited financial statements for the PDRFC at their January 24, 2017 meeting, and recommended that the statements for the fiscal year ended June 30, 2016 be received and filed by the City Council. Background The Palm Desert Recreational Facilities Corporation is a corporation that provides food and beverage services exclusively to the Desert Willow Golf Resort. White Nelson Diehl Evans LLP performed and completed the annual independent audit for the fiscal year ended June 30, 2016, 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, 2016, 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. G:\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Audit Staff Reports 2016\SR - Council audit 2016 PDRFC.docx Staff Report Receive and file PDRFC reports for Fiscal Year ended June 30, 2016 February 9, 2017 Page 2of2 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, 2016. 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, 2016. Fiscal Impact There is no fiscal impact associated with this action. Submitted by: Jose Lui pino , CPA Assista Fi an Director oore r of Finance / City Treasurer JLE:nmo Approved by: Laura Aylaian City Manager G:\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Audit Staff Reports 2016\SR - Council audit 2016 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, 2016 PALM DESERT RECREATIONAL FACILITIES CORPORATION TABLE OF CONTENTS June 30, 2016 Page Number Independent Auditors' Report 1 Management's Discussion and Analysis (Required Supplementary Information) 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 Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 19 tit., i'1i, ri tit,ttltl1i31� INDEPENDENT AUDITORS' REPORT Board of Directors Palm Desert Recreational Facilities Corporation Palm Desert, California Report on the Financial Statements We have audited the accompanying component unit 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, 2016, and the related notes to the 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 this component unit 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. Auditors' Responsibility Our responsibility is to express an opinion 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 auditors' 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 auditors consider internal control relevant to the Corporation'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 Corporation'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 opinion. -1- 2875 Michelle Drive, Saute 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties Opinion In our opinion, the component unit financial statements referred to above present fairly, in all material respects, the financial position of the Palm Desert Recreational Facilities Corporation as of June 30, 2016, 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 Matter Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, identified as Required Supplementary Information (RSI) in the accompanying table of contents, 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 RSI 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 the audit of the basic financial statements. We do not express an opinion or provide any assurance on the RSI because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 16, 2016, 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 to describe the scope of our testing of 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. /),`?znt) I e4,2 z_ / Irvine, California December 16, 2016 2 PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS June 30, 2016 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, 2016. 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 $149,425 from $1,495,986 to $1,346,561. • Palm Desert Recreational Facilities Corporation's gross income of $2,599,831 decreased by $71,799 (3%) from the previous year. • Palm Desert Recreational Facilities Corporation's gross profit increased by $5,118 (.3%) from last year. The gross profit margin' was held constant at 71%. • Palm Desert Recreational Facilities Corporation's cost of goods sold decreased by $66,681 (8%). • Palm Desert Recreational Facilities Corporation's Selling and Administrative Expense Percentage2 decreased from 68% to 65%. 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. -3- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2016 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 a 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 main 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, deferred outflows of resources, liabilities and deferred inflows of resources, 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 are 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 $149,425 from $1,495,986 to $1,346,561. The restaurant operations recognized a 3% decrease in gross revenues with a corresponding decrease in overall costs of 7.5%. During the fiscal year the FireCliff course was closed for renovation which impacted gross restaurant revenue by reduced golfer traffic utilizing the restaurant. Secondarily, the lagging economy continues to impact the tourism and retail market which in turn continues to directly affect the utilization of the restaurant for corporate outings, weddings and banquets. -4 PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2016 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 is a major factor that will contribute to the restaurant operations and generate enough gross revenues to provide net assets. Our analysis below focuses on the net position (Table 1) and changes in net position (Table 2) of the Corporation. Assets: Current and restricted assets Total Assets Liabilities: Other liabilities Total Liabilities Table 1 Condensed Statements of Net Position Fiscal Fiscal Year Year 2016 2015 $ 224.110 $ 168,874 224,110 168,874 1,570,671 1,664,860 1,570,671 1.664.860 Net Position: Unrestricted (1,346,561) (1.495,986) Total Net Position $ (1.346.5611 $ (1.495.9861 Current assets increased by $55,236, which is related directly to the decrease in turnaround time with accounts receivable resulting in a higher cash ending balance from the prior year. During the 2015-2016 fiscal year, management continued to focus on retaining repeat business and continued patronage, given the still recovering corporate and group market. The impact of the closure of the FireCliff Golf Course the last month and a half of the fiscal year directly resulted in the reduced gross revenues of $71,799 (3%). Management anticipated the closure and effectively responded which resulted in a net profit of $149,425 at the fiscal year end. There was no major change in the mix of business. Another main focus of the restaurant during the 2015-2016 fiscal year, was efficiency in labor, expenditures, and Cost of Goods sold. These efforts were recognized in an overall expense savings of $201,259, which represents 8% of the total expenditures. -5- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2016 THE COMPONENT UNIT AS A WHOLE (CONTINUED) Operating Revenues: Food and beverage sales Total Revenues Table 2 Condensed Statements of Revenues, Expenses and Changes in Net Position Fiscal Fiscal Year Year 2016 2015 $ 2.599.831 2,599,831 $ 2,671.630 2,671.630 Operating Expenses: Cost of goods sold 762,314 828,995 Maintenance and operations 1,491,162 1,614,115 General and administrative 196.930 208.555 Total Expenses 2.450.406 2,651,665 Change in Net Position $ 149.425 19.965 Component Activities Total revenue decreased by $71,799 (3%) from $2,671,630 to $2,599,831. Gross revenues dropped due to reduced golfer traffic caused by the FireCliff course closure. This fiscal year was the fifteenth 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 a significant decrease of $201,259 from $2,651,665 to $2,450,406. The decreased labor costs of $69,520 (5%) represented 35% of the overall total decrease in costs. Cost of Goods sold represented $66,681 (8%) of the decrease in costs. These decreases in expenditures allowed Palm Desert Recreation Facilities Corporation to increase their operating profit while experiencing an overall decrease in total revenue. 6 PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2016 THE COMPONENT UNIT AS A WHOLE (CONTINUED) The Gross Profit Margin increased from 69% to 71 %. The Selling and Administrative Expense Percentage decreased from 68% to 65%. 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 detail is presented in the notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS In preparing the budget for 2016-17, 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 held prices constant and 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 the consumer to reduce their consumption of leisure activities. The state of the current economy was taken into consideration when budgeting for the 2016-2017 fiscal year. • Labor cost: The State of California has mandated increased minimum wage rates which was increased from $9 per hour to $10 per hour effective January 1, 2016. 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 2016-2017 financial plan can be obtained by contacting the Palm Desert Recreational Facilities Corporation (see below). -7- PALM DESERT RECREATIONAL FACILITIES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) June 30, 2016 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 Palm Desert Recreational Facilities Corporation at 38-995 Desert Willow Drive, Palm Desert, California 92260. 8 Exhibit A PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF NET POSITION June 30, 2016 ASSETS: Cash and investments $ 157,958 Accounts receivable 15,827 Inventories 41,190 Prepaid costs 9,135 TOTAL ASSETS 224,110 LIABILITIES: Accounts payable 32,896 Accrued liabilities 13,817 Advances from related party 1,455,647 Unearned revenues 68,311 TOTAL LIABILITIES 1,570,671 NET POSITION: Unrestricted (deficit) (1,346,561) TOTAL NET POSITION $ (1,346,561) See accompanying notes to basic financial statements. -9- Exhibit B PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the year ended June 30, 2016 OPERATING REVENUES: Food and beverage sales $ 2,599,831 TOTAL OPERATING REVENUES 2,599,831 OPERATING EXPENSES: Cost of goods sold 762,314 Maintenance and operations 1,491,162 General and administrative 196,930 TOTAL OPERATING EXPENSES 2,450,406 OPERATING INCOME/CHANGE IN NET POSITION 149,425 NET POSITION - BEGINNING OF YEAR (1,495,986) NET POSITION - END OF YEAR $ (1,346,561) See accompanying notes to basic financial statements. - 10- PALM DESERT RECREATIONAL FACILITIES CORPORATION STATEMENT OF CASH FLOWS For the year ended June 30, 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers Payments to suppliers Exhibit C $ 2,602,199 (2,501,154) NET CASH PROVIDED BY OPERATING ACTIVITIES 101,045 CASH FLOWS FROM NONCAPITAL AND RELATED FINANCING ACTIVITIES Cash paid to related party (15,323) NET CASH USED BY NONCAPITAL AND RELATED FINANCING ACTIVITIES (15,323) NET INCREASE IN CASH AND CASH EQUIVALENTS 85,722 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 72,236 CASH AND CASH EQUIVALENTS - END OF YEAR $ 157,958 RECONCILIATION OF OPERATING INCOME TC NET CASH PROVIDED BY OPERATING ACTIVITIES: Operating income $ 149,425 Adjustments to reconcile operating income to net cash provided by operating activities: Changes in assets and liabilities: (Increase) decrease in accounts receivables 25,487 (Increase) decrease in inventories 4,670 (Increase) decrease in prepaid costs 329 Increase (decrease) in accounts payable and accrued liabilities (55,747) Increase (decrease) in unearned revenues (23,119) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 101,045 See accompanying notes to basic financial statements. - 11 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS June 30, 2016 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 a discrete component unit 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 on 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 accordance with accounting principles generally accepted in the United States of America as applicable to government units. The Governmental Accounting Standards Board is the accepted standard -setting body for establishing governmental accounting and financial reporting principles. 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. - 12 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2016 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. New GASB Accounting Pronouncements: Current Year Standards: In fiscal year 2015-2016, the Corporation implemented Governmental Accounting Standards Board (GASB) Statement No. 72, "Fair Value Measurement and Application ". GASB Statement No. 72 requires the Corporation to use valuation techniques which are appropriate under the circumstances and are either a market approach, a cost approach or income approach. GASB Statement No. 72 establishes a hierarchy of inputs used to measure fair value consisting of three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs, and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. GASB Statement No. 72 also contains note disclosure requirements regarding the hierarchy of valuation inputs and valuation techniques that were used for the fair value measurements. There was no material impact on the Corporation's financial statements as a result of the implementation of GASB Statement No. 72. GASB Statement No. 73, "Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68", was required to be implemented in the current fiscal year, except for those provisions that address employer and governmental nonemployer contributing entities for pensions that are not within the scope of GASB Statement No. 68, and is effective for periods beginning after June 15, 2016, and did not impact the Corporation. GASB Statement No. 76, "The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments ", was required to be implemented in the current fiscal year, and did not impact the Corporation. - 13 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): d. New GASB Accounting Pronouncements (Continued): Current Year Standards (Continued): GASB Statement No. 79, "Certain External Investment Pools and Pool Participants", was required to be implemented in the current fiscal year, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing, which are effective for periods beginning after December 15, 2015, and did not impact the Corporation. GASB Statement No. 82, "Pension Issues an Amendment of GASB Statements No. 67, No. 68 and No. 73 ", changed the measurement of covered payroll reported in required supplementary information and has been early implemented. Pending Accounting Standards: GASB has issued the following statements, which may impact the Corporation's financial reporting requirements in the future: • GASB 73 - "Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68", contains provisions that address employer and governmental nonemployer contributing entities for pensions that are not within the scope of GASB 68, effective for periods beginning after June 15, 2016. • GASB 74 - "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans", effective for periods beginning after June 15, 2016. • GASB 75 - "Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions", effective for periods beginning after June 15, 2017. • GASB 77 - "Tax Abatement Disclosure", effective for periods beginning after December 15, 2015. • GASB 78 - "Pensions Provided through Certain Multiple -Employer Defined Benefit Pension Plans", effective for periods beginning after December 15, 2015. • GASB 79 - "Certain External Investment Pools and Pool Participants", contains certain provisions on portfolio quality, custodial credit risk, and shadow pricing, effective for periods beginning after December 15, 2015. • GASB 80 - "Blending Requirements for Certain Component Units ", effective for periods beginning after June 15, 2016. • GASB 81 - "Irrevocable Split -Interest Agreements ", effective for periods beginning after December 15, 2016. - 14 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): d. New GASB Accounting Pronouncements (Continued): Pending Accounting Standards (Continued): • GASB 82 - "Pension Issues ", effective for periods beginning after June 15, 2016, except for certain provisions on selection of assumptions, which are effective in the first reporting period in which the measurement date of the pension liability is on or after June 15, 2017. e. Deferred Outflows/Inflows of Resources: In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and so will not be recognized as an outflow of resources (expense/expenditure) until that time. The Corporation does not have any applicable deferred outflows of resources. In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to future periods and will not be recognized as an inflow of resources (revenue) until that time. The Corporation does not have any applicable deferred inflows of resources. f. 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 does 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. - 15 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): g. 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. h. 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 $157,958 and the bank balance was $158,516. The difference is represented by $7,967 of deposits in transit and checks outstanding totaling $8,525, for a net total of $558. 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. i. Inventories: J. 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, 2016, inventories consisted of $41,190 in merchandise for sales of food and beverages. 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 which 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. - 16- PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2016 3. RELATED PARTY TRANSACTIONS: Advances from Related Party: As of June 30, 2016, the Corporation owed the following amounts to related parties: Desert Willow Golf Course City of Palm Desert $ 1,170,647 285,000 $ 1.455.647 The Corporation has an operating lease with the City for use of the facilities (see Note 4). 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, 2016 was $96,000. In addition, at June 30, 2016, 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 November 15, 2012 a new three-year management agreement was executed to commence on July 1, 2013 and expired on July 1, 2016. There are two 1-year options to extend the contract which expire on July 1, 2017 and July 1, 2018. The extensions are not guaranteed and must be approved by all parties to the agreement. On December 10, 2015, the first extension to the management contract was approved. 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. - 17 - PALM DESERT RECREATIONAL FACILITIES CORPORATION NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED) June 30, 2016 6. OTHER DISCLOSURES: The Corporation has a net deficit of $1,346,561, which will be eliminated by increasing revenues through banquet and dining reservations. During the 2010-2011 fiscal year the kitchen and the outside dining terrace was renovated to increase the size of the kitchen and banquet space. The expansion project increased the restaurant and kitchen area by 5,000 square feet and the outside terrace seating capacity by and additional 200 seats. The expanded kitchen and terrace allows for larger banquets and normal dining to be served simultaneously. 7. SUBSEQUENT EVENTS: Events occurring after June 30, 2016, have been evaluated for possible adjustments to the financial statements or disclosure as of December 16, 2016, which is the date these financial statements were available to be issued. - 18 - WHITE NELSC )N DIEHL EVANS LLP 111k l PHIlit ,otltt.itt,i.tit,wt, 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 Board of Directors Palm Desert Recreational Facilities Corporation 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 component unit financial statements of Palm Desert Recreational Facilities Corporation (the Corporation) as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Corporation's basic financial statements, and have issued our report thereon dated December 16, 2016. 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 opinion 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 Corporation'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. -19- 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 (Vices located in Orange and .San Diego Counties 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. 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. `7&4J i w e, aJ Zoo Irvine, California December 16, 2016 - 20 -