Cities and Towns Finance
In accordance with Arizona Revised Statutes (A.R.S.) §9‑481.
Cities—Required to have annual financial statement audits. Additionally, cities that expend more than $750,000 in federal awards during a fiscal year must also have an annual compliance audit (single audit) under the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.
Towns—Required to have either annual or biennial financial statement audits. Additionally, towns that expend more than $750,000 in federal awards during a fiscal year must also have an annual compliance audit (single audit) under the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.
A certified public accountant currently licensed or granted reciprocity privileges by the Arizona State Board of Accountancy and who is not an employee of the city or town must perform these audits.
When preparing financial statements, cities and towns should refer to the Governmental Accounting Standards Board’s (GASB) Codification of Governmental Accounting and Financial Reporting Standards for current authoritative accounting and financial reporting guidance. Additionally, we provide county reporting guidelines that include illustrative examples of financial statements, disclosures, and schedules, as well as the auditor’s reports. City and town decision-makers can also refer to the Financial Report User Guide for counties to identify and understand the information presented in their financial reports that may be similar for a city or town.
Yes. A.R.S. §9-481 requires cities and towns to post their audited financial statements in a prominent location on their official websites within 7 business days of filing the reports with the Arizona Auditor General. The financial statements must be accessible on the website for at least 60 months. A.R.S. §41-1279.07 requires financial statements to be filed by March 31, within 9 months after the close of each fiscal year. For cities or towns that do not meet the March 31 filing deadline pursuant to A.R.S. §9-481, the city or town must post on its official website a Notice of Pending Financial Statement Filing form we prescribe. This form must be posted on the city’s or town’s website until the financial statements are filed with us.
Effective September 29, 2021, A.R.S. §9-481, as amended by Laws 2021, Ch. 427, §1, directs that the city and town councils require their auditors to present audit results and any findings to the council in a regular meeting without the use of a consent agenda within 90 days of audit completion.
After completing the required annual or biennial financial and compliance audits, the auditor who performed the audit should present the following audit reports and results to the council:
- Financial statement audit report—Present the auditors’ opinions as to whether the city’s or town’s basic financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles.
- Financial statement internal control and compliance audit report—Present any deficiencies in internal control; fraud; noncompliance with provisions of laws, regulations, contracts, or grant agreements; and abuse relevant to the audit of the financial statements that are identified and required to be reported.
- Federal program internal control and compliance audit report, if a federal single audit is required—Present the auditors’ opinion on the city’s or town’s schedule of expenditures of federal awards and opinions on federal program compliance, as well as any control deficiencies, instances of noncompliance, questioned costs, or fraud affecting federal programs that are identified and required to be reported.
City or town management should work closely with their auditors throughout the audit process and coordinate with them to ensure the council presentation occurs within 90 days of completing required audits.
A.R.S. §9-481(B)(2) requires that city and town audit reports include a determination as to whether the city or town used highway user revenue fund (HURF) monies the city or town received pursuant to A.R.S. Title 28, Chapter 18, Article 2, and any other dedicated State transportation revenues the city or town received solely for the authorized transportation purposes.
When a city or town procures audit services, it should make audit firms aware of A.R.S. §9-481(B)(2)’s reporting requirements and the scope of services expected. Specifically, the city or town should indicate that it expects the auditors to report on compliance in conjunction with the financial statement audit or perform a separate compliance examination engagement.
To fulfill the HURF reporting requirements and to comply with professional standards, auditors should use 1 of the following:
- If the audit firm reports on compliance in conjunction with the financial statement audit, the audit firm should use the American Institute of Certified Public Accountants’ (AICPA) Codification of Statements on Auditing Standards, AU-C §806—Reporting on Compliance with Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements.
- If the audit firm performs a separate compliance examination engagement, the audit firm should use the AICPA Statements on Standards for Attestation Engagements, AT-C §315—Compliance Attestation.
Yes. A.R.S. §42-17103 requires a city or town to publish its estimate of expenses (the contents of which are described in A.R.S. §42-17102) or a summary of the estimate of expenses, and notice of a public hearing and special meeting of the council to hear taxpayers and make tax levies at designated times and places. A city or town may revise its tentatively adopted budget at any level, including increasing total expenditures, prior to publishing it in accordance with A.R.S. §42-17103. After the public hearing on the budget, a city or town must finally determine and adopt its budget. However, in accordance with A.R.S. §42-17105, the total expenditure amount in the final budget must not exceed the total expenditure amount in the published tentatively adopted budget. This does not preclude an adjustment between departments or a reduction in total expenditures.
A.R.S. §42-17106 does not allow a city or town to revise its adopted budget to increase total expenditures. It also does not allow budgeted expenditures to be exceeded at the department level, although it includes a provision that would allow cities or towns to revise the budget to avoid potential overexpenditures at the department level. Subsection B of the statute allows budgeted expenditures at the department level to be revised by allowing the city/town council to transfer monies between budget items (departments) if all of the following apply: (1) the monies are available; (2) the transfer is in the public interest and based on a demonstrated need; (3) the transfer does not result in a violation of the limitations prescribed in Arizona Constitution, Article IX, §§19 and 20; and (4) a majority of the members of the city/town council votes affirmatively on the transfer at a public meeting.
Cities and towns operating under a voter-approved alternative expenditure limitation (Home Rule) are required to submit only Schedule A—Summary Schedule of Estimated Revenues and Expenditures/Expenses from the adopted annual budgets with the Annual Expenditure Limitation Report. Cities and towns that are not under a Home Rule are not required to submit their adopted budgets to our Office.
Generally, no. A.R.S. §42-17106 prohibits a city or town from spending money for a purpose that is not included in its budget and from spending money or incurring or creating a debt, obligation, or liability in a fiscal year in excess of the amount stated for each purpose in the finally adopted budget, except as provided by law, REGARDLESS of whether the city or town has received at any time, or has on hand, monies or revenue in excess of the amount required to meet expenditures, debts, obligations, and liabilities that are incurred under the budget. Attorney General Opinion I78-132 relating to federal monies received by cities or towns has interpreted this statute as prohibiting cities or towns from spending monies that were received unexpectedly during the current budget year if the expenditures were not included in the current year’s budget.
However, the AG Opinion provides an exception if a city or town is merely a conduit for the expenditure of the monies. The federal grant must be analyzed to determine whether the exception is applicable. Additionally, there may be instances in which additional federal monies may be received for a grant that was already included in the current year’s budget. In such cases, the provisions of A.R.S. §42-17106(B) may allow the city/town council to revise the budget at the department level if that statute's provisions are followed. However, total budgeted expenditures may not be increased.
Budgetary fund balance is used to describe governmental funds total, unspent, available financial resources accumulated, at a specific point in time, such as July 1. For proprietary funds, such as enterprise and internal service funds, the term “net position” is used rather than “fund balance” to describe the financial resources accumulated.
Like budgetary fund balance, governmental fund financial statement fund balance represents current financial resources without the effects of long-term assets, long-term liabilities, and deferred outflows or inflows. However, financial statement fund balance includes nonspendable amounts, such as prepaid amounts and inventories, that are not included in budgetary fund balance.
Proprietary fund financial statement net position differs from budgetary net position by including the effects of long-term assets, long-term liabilities, and deferred outflows/inflows. These long-term items are not reflected in budgetary net position. However, city/town budgets separately identify amounts included in budgetary net position that are reserved for future years debt, capital, or other expenditures.
Additional resources for information on budgetary and financial statement fund balance:
- Official City/Town Budget Forms
- Financial report user guide for State and local governments
- Government Finance Officers Association—Fund Balance Guidelines for the General Fund available at https://www.gfoa.org/materials/fund-balance-guidelines-for-the-general-fund