SR-04-08-2014-8ACity Council Meeting: April 8, 2014
Agenda Item:
To: Mayor and City Council
From: Gigi Decavalles- Hughes, Director of Finance /City Treasurer
Subject: Presentation of the City's Comprehensive Annual Financial Report
Recommended Action
Staff recommends that the City Council receive and file the independent auditors'
unmodified (clean) report for the City's financial statements for the fiscal year ended
June 30, 2013 and the attached Auditor's Letter to Council.
Executive Summary
The Comprehensive Annual Financial Report (CAFR) communicates the City's financial
condition and activity for the year ended June 30, 2013. Overall, the City's operations
show signs of stability, a result of the prudent and sound management practices and
efforts of the City of Santa Monica.
The independent auditor's unmodified (clean) report provides the assurance that the
CAFR, and audited information within, present fairly the City's financial position for the
year ended June 30, 2013. This audit is performed in compliance with City Charter
requirements. A letter from the City's independent auditors communicating audit
findings and other matters is also submitted with this report. The uncorrected
recommended reclassifications were proposed for presentation only and have no impact
on the financial condition of the City funds.
The City of Santa Monica has received a clean audit report for the last 30 years. Also,
the City has been awarded the Certificate of Achievement for Excellence in Financial
Reporting by the Government Finance Officers' Association of the United States and
Canada for the FY 2011 -12 CAFR for the 28th consecutive time since the City began
participating in the program (FY 1983 -84). Staff anticipates that the current CAFR also
conforms to the Certificate of Achievement program requirements. In an effort to make
the CAFR more user - friendly, staff has provided an explanation for key financial
performance indicators shown in the CAFR.
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Background
The CAFR is used to communicate the City's financial condition and activity in a
transparent and organized manner. In addition, the CAFR presents historical and
comparative information that can be useful to City staff, elected officials, and external
users, such as debt rating agencies, businesses, other public agencies and the City's
residents. The most recent CAFR and several prior year reports are available at the
City's libraries and on the City's Finance website at:
http://www.smgov.net/dei)artments/finance/.
As required by the City Charter, financial statements are prepared by the City and
audited by independent auditors who are contracted through a competitive procurement
process. The City's independent auditor is Macias, Gini and O'Connell.
The quality of the City's work and the CAFR is measured in two ways: (1) a clean audit
report by the independent auditors; and (2) the Certificate of Achievement for
Excellence in Financial Reporting, awarded by the Government Finance Officers'
Association of the United States and Canada (GFOA). The attainment of the latter is
the highest form of recognition in governmental accounting and financial reporting.
Auditors follow audit industry standards established by the American Institute of
Certified Public Accountants (AICPA). These standards require auditors to provide an
opinion on specific areas of the City's financial statements based on observations,
inquiries, testing of transactions and analysis.
A clean, unqualified opinion communicates to users that the Financial Statements are
fairly presented and that the information used in the report is reliable. Other minor
issues that would not warrant a change in the auditor's opinion are presented in the
form of public auditor findings or comments to management, allowing the City to
improve operations and reporting in future years. In the letter to Council, auditors have
identified sensitive disclosures related to the dissolution of the City's Redevelopment
Agency, have summarized audit differences, and recommended reclassifications to the
financial statements. The uncorrected recommended reclassifications were proposed
for presentation only and have no impact on the financial condition of City funds.
The City of Santa Monica has received a clean, unqualified audit report and the GFOA
Award and for at least the last 28 years, since the City began participating in the GFOA
program in FY 1983 -84.
The City's CAFR includes the following major sections and information:
Introductory Section
® Letter of Transmittal — prepared by management and used to communicate
information in a simple straightforward manner
Financial Section (the main body of the CAFR for current year information)
• Independent Auditor's Report —the City's report card on the content of the CAFR
® Management's Discussion and Analysis (MD &A) — provides an analytical
overview of the City's activities
® Basic Financial Statements — show finances at a point in time (assets - liabilities)
and throughout the year (revenues - expenditures), budget to actual revenues
and expenditures, and cash flows
o City -Wide Statements — overview of financial information
o Fund Financial Statements — a detailed look at funds, showing Balance
Sheet and Statement of Revenues, Expenditures and Changes in Fund
Balance
o Notes to the Financial Statements (Notes) — a narrative explanation that
accompanies the Basic Financial Statements
o Budget to Actual Comparisons — for the General Fund and other select
major funds
Supplementary Information
® Pension Information — 3 years of pension funding information
® A breakout of individual funds — for funds that were presented in a cumulative
manner in the Financial Section
K
Statistical Section (current and historical information — up to 10 years)
• Financial Trends
• Revenue Capacity Information
• Debt Capacity Information
• Demographic and Economic Information
• Operating Information
Discussion
The attached CAFR for FY 2012 -13 has received an unmodified, or clean, opinion by
the City's independent auditor, Macias, Gini and O'Connell.
The format and content of the CAFR document is largely prescribed in order to meet
governmental accounting standards. In an effort to make this complicated and large
document more user - friendly, staff has provided a more in -depth explanation of the
CAFR in this staff report.
As economic news indicates that an economic recovery is underway, the City's CAFR
shows that City finances are starting to stabilize. However, there are several
unpredictable factors that will require the City to continue to exercise caution and
restraint over the next few years. The following is an explanation of some key indicators
shown in the CAFR.
General Fund Balance
The most notable measure of a City's financial health is the General Fund balance. As
presented in the Basic Financial Statements, the City's General Fund had a balance of
$384.2 million as of June 30, 2013. This balance is comprised of a number of
categories, as follows:
• $46.5 million nonspendable, restricted or committed resources that are either
inventory or are required for specific purposes according to legal /contractual
agreements or by ordinance or resolution of the City Council;
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® $220.4 million assigned funds set aside for specific purposes based on budget
priorities (i.e., continuing capital projects, assets for use per the RDA settlement,
expenditure control budget, and pollution remediation funds); and
® $117.3 million in unassigned funds as follows:
o $44.8 million rainy day contingency (15% of annual operating and capital
expenditure budget);
o $9.7 million economic uncertainty reserve to mitigate potential revenue
losses;
o $57.2 million for public works infrastructure expenditures; and
o $3.7 million fund balance.
The strong fund balance and rainy day and economic uncertainty reserves play a key
role in Santa Monica's position as one of eight cities in the country with a AAA bond
rating. In addition to being an indicator of very strong financial health, the high bond
rating allows the City to pursue lower cost financing structures.
The General Fund balance decreased by almost $32 million from the prior year,
primarily due to bond and loan proceeds spent on construction of Tongva Park and
Parking Structure 6. Offsetting the decrease were one -time cash inflows from pollution
remediation settlements. These one -time inflows are not available for use as they
create obligations that must be addressed by the City in future years. For instance, as
of June 30, 2013, the City had received $54.3 million in funds from recent pollution
remediation settlements, but had obligated $95.5 million in liabilities for pollution
remediation related to these settlements. The remainder of these settlements, which
will cover the related liabilities in full, will be collected over several years. More
information on the General Fund fund balance can be found in Note 13, page 79 of the
CAFR.
Citywide Net Position
The Statement of Net Position, similar to a balance sheet, shows total assets and
liabilities of the City as of June 30, 2013. The total net position (previously "net assets ")
of the City for all activities was $1.8 billion. Net position is broken out into three
categories: capital, restricted, and unrestricted.
Net Capital Position ($1.2 billion)
Capital assets include land, buildings, improvements, infrastructure and utility systems,
and construction in progress. Capital assets include the following notable new items as
of June 30, 2013:
• $21.4 million for construction in progress on Parking Structure 6 (now completed)
• $29.1 million for construction in progress on Tongva Park and Ken Genser
Square (now completed)
• $3.4 million for construction in progress on the new Pico Branch Library (to be
completed by the end of FY 2013 -14)
• $12.6 million for 20 new 40 -foot buses and a new farebox system purchased by
the Big Blue Bus
• $4.1 million for payments made to maintain and upgrade Wastewater
infrastructure
Restricted Net Position ($140.6 million)
These assets are subject to agreements with creditors, developers, grantors, or laws or
regulations of other governments. Approximately 48% of this amount is restricted for
affordable housing and committed to various projects, 19% is restricted per federal,
state and other grant regulations, 11% is restricted according to development
agreement terms, and the remaining amount is restricted for the Cemetery's trust fund,
debt service reserve, and other grant and legislative constraints.
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Unrestricted Net Position ($499.1 million)
68% of this amount is composed in part from the unrestricted portions of General Fund
balance shown above (i.e. committed, assigned and unassigned). The remaining
amount is held as reserves in other funds, such as the Water and Wastewater Funds.
Healthy capital and operating reserves outside of the General Fund support rate
stabilization and disaster recovery strategies for the City's many activities.
Long Term Liabilities
While short term liabilities are considered current and payable within a year after the
date of the financial statements, long -term liabilities are due after a year and are an
important factor in the City's financial planning. The primary source of long term
liabilities is in the form of bonds and the debt service that is owed on them. Non-
Redevelopment debt has been reduced by $5.3 million, or 4.4 %, as the City continues
to make debt service payments on one general obligation bond for the Main Library
construction, five General Fund revenue bonds for various parking structures and the
Public Safety Facility, and two revenue bonds for Wastewater improvements.
Redevelopment debt is now shown in a separate fund that is funded by the
Redevelopment Property Tax Trust Fund (RPTTF) as distributed by the Los Angeles
County Auditor Controller and based on approved Recognized Obligation Payment
Schedules (ROPS). The City did not take any new debt related to Bonds or loans for
the fiscal year ended June 30, 2013. More information on long term debt can be found
in Note 9, page 72 of the CAFR.
Pension Costs
A key liability carried by the City, but not shown in the financial statements, is future
pension spending. At this point, a detailed explanation of unfunded pension liability is
included in the Notes section (see Note 16, pages 84 -88). Responding to the high
levels of agency unfunded pension liability across the country, the Governmental
Accounting Standards Board (GASB) will be requiring government entities to include
unfunded liability on the face of their financial statements beginning in FY 2014 -15.
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Pension costs remain a challenge for the City. Recent State - mandated reforms and
cost saving measures approved by Council, including $20 million paid toward the City's
unfunded pension liability, have worked to mitigate pension cost increases for the City.
However, as shown on page 88 of the CAFR, the City's various pension plans are
approximately 80% funded, leaving a combined unfunded actuarial liability in excess of
$258 million. As reported to Council on February 11 2014, beginning in FY 2015 -16,
CalPERS, the City's pension plan provider, will be increasing contribution rates in an
effort to lower unfunded liabilities and to better reflect demographic trends. However, it
is important for the City to lower its unfunded liability at a more aggressive rate than that
used for other CalPERS member cities, whose financial health ranges dramatically.
The Council recently approved a policy to annually set aside at least $1 million in
General Fund balance and corresponding amounts in other funds to continue the City's
practice of paying down its unfunded liability.'
RDA Dissolution
On October 28, 2013 the City and the Successor Agency entered into a settlement
agreement with the State Department of Finance, the State Controller's Office, and the
Board of Equalization stipulating that payment of $56.8 million over four equal
installments beginning on January 15, 2014 and ending on July 15, 2015, represents
the full remittance and payment to the Auditor - Controller of all uncommitted or
unobligated cash and cash balances previously held by or paid to the Redevelopment
Agency of the City of Santa Monica or the Successor Agency. This $56.8 million
liability is included in the General Fund financial statements, as funds were transferred
to the General Fund per a Master Cooperation Agreement that pre -dated the
dissolution. However, the City is still awaiting the findings of the State Controller Audit,
which could have an additional impact on the City's assets. More information on the
SuccessorAgency is found in Note 17, page 91 of the CAFR.
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Cash and Investments
The CAFR also includes detailed information on the City's cash and investments. As of
June 30, 2013, the City had $748 million in total cash and investments, 91 % of which is
in the form of investments authorized by the California Government Code and the City's
investment policy. More information on cash and investments is found in Note 5, page
57 of the CAFR.
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended action.
Prepared by: Gigi Decavalles- Hughes, Director of Finance /City Treasurer
Approved: Forwarded to Council:
Gigi Decavalles - Hughes'
Director of Finance /City Treasurer
Attachments:
A. Auditor's Letter to Council
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Rod Gould
City Manager
B. Comprehensive Annual Financial Report for the year ended June 30, 2012
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Los Angeles
{ 777 S. Figueroa Street, Suite 2500
,,Certified Public Accountants. Angeles, Ca 700'.7
-- 213.406.8700
Sacramento
Walnut Crack
March 10, 2014
Oakland
Century City
To the Honorable City Council
City of Santa Monica, California
Newport Beach
San Diego
We have audited the financial statements of the governmental activities, the business -type activities, each Seattle
major fund, and the aggregate remaining fund information of the City of Santa Monica (City) for the year
ended June 30, 2013. Professional standards require that we provide you with information about our
responsibilities under generally accepted auditing standards, Government Auditing Standards, and OMB
Circular A -133, as well as certain information related to the planned scope and timing of our audit. We
have communicated such information in our letter to you dated July 30, 2013. Professional standards also
require that we communicate to you the following information related to our audit.
Significant Audit Findings
Qualitative Aspects of Accounting Practices
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note I to the financial statements. As described in
Note IB, the City adopted the provisions of Governmental Accounting Standards Board (GASB)
Statement No. 60, Accounting and Financial Reporting far Service Concession Arrangements, GASB
Statement No. 61, The Financial Reporting Entity: An Amendment of GASB Statements No. 14 and No.
34, GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in
Pre - November 30, 1989 FASB and AICPA Pronouncements, and GASB Statement No. 64, Financial
Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position during
fiscal year 2013. None of the adopted pronouncements had a material impact on the City's financial
statements. We noted no transactions entered into by the governmental unit during the year for which
there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in
the financial statements in the proper period.
During the year, the City reassigned the Charnok related portion of the Special Revenue Source Fund to
the Water Fund, which will oversee the remaining pollution remediation activities. The reassignment of
the settlement proceeds were recorded as a Special Item in the Special Revenue Source Fund and the
related asset and pollution remediation liability were recorded on the Water Fund. All other assets,
liabilities and fund balances were transferred to the Water Fund through Transfers In and Transfers Out.
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's knowledge and experience about past and current events and assumptions about
future events. Certain accounting estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events affecting them may differ
significantly from those expected. The most sensitive estimates affecting the governmental activities' and
business -type activities' financial statements were:
Management's estimate of depreciation is based on the estimated useful lives of capital
assets. We evaluated the key factors and assumptions used to develop the depreciation
expense in determining that it is reasonable in relation to the financial statements taken as
a whole.
www.mgocpa.com
Management's estimate of the claims payable is based on reports prepared by third party
administrators, actuarial valuations, and the reports prepared by management. We
evaluated the key factors and assumptions used to develop the claims payable in
determining that it is reasonable in relation to the financial statements taken as a whole.
Management's estimates of the net pension asset and other post - employment benefits
obligation is based on reports prepared by third party administrators and actuarial
valuations. We evaluated the key factors and assumptions used to develop the net pension
asset and the other post- employment benefits obligation in determining that they are
reasonable in relation to the financial statements taken as a whole.
Management's estimate of the pollution remediation obligation is based on expected
outlays to be incurred to settle those liabilities. We evaluated the key factors and
assumptions used to develop the pollution remediation obligation in determining that it is
reasonable in relation to the financial statements taken as a whole.
Certain financial statement disclosures are particularly sensitive because of their significance to financial
statement users. The most sensitive disclosure affecting the financial statements was:
The disclosure in Note 17 to the financial statements, which discusses the State of
California Department of Finance's (DOF) determination regarding the Due Diligence
Review required under redevelopment dissolution law. On October 28, 2013 the
Successor Agency entered into a settlement agreement with the Department of Finance,
the State Controller and Board of Equalization (collectively "the State "). The agreement
resolves the lawsuit by the City and the Successor Agency against the State relating to the
State's implementation of AB 1X26 and AB 1484.
The financial statement disclosures are neutral, consistent, and clear.
Difftulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing oui
audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are clearly trivial, and communicate them to the appropriate level of
management. The attached schedule summarizes uncorrected misstatements of the financial statements.
Management has determined that their effects are immaterial, both individually and in the aggregate, to
the financial statements taken as a whole. In addition, none of the misstatements detected as a result of
audit procedures and corrected by management were material, either individually or in the aggregate, to
each opinion unit's financial statements taken as a whole.
Disagreements with Management
For purposes of this letter, a disagreement with management is a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial
statements or the auditor's report. We are pleased to report that no such disagreements arose during the
course of our audit.
Management Representations
We have requested certain representations from management that are included in the management
representation letter dated February 19, 2014.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves
application of an accounting principle to the governmental unit's financial statements or a determination
of the type of auditor's opinion that may be expressed on those statements, our professional standards
require the consulting accountant to check with us to determine that the consultant has all the relevant
facts. To our knowledge, there were no such consultations with other accountants.
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the governmental unit's auditors. However,
these discussions occurred in the normal course of our professional relationship and our responses were
not a condition to our retention.
Other Matters
With respect to the supplementary information accompanying the financial statements, we made certain
inquiries of management and evaluated the form, content, and methods of preparing the information to
determine that the information complies with accounting principles generally accepted in the United
States of America, the method of preparing it has not changed from the prior period, and the information
is appropriate and complete in relation to our audit of the financial statements. We compared and
reconciled the supplementary information to the underlying accounting records used to prepare the
financial statements or to the financial statements themselves.
This information is intended solely for the use of City Council and management of the City of Santa
Monica and is not intended to be, and should not be, used by anyone other than these specified parties.
Very truly yours, 6 d
Los Angeles, California
March 10, 2014
CITY OF SANTA MONICA
Summary of Uncorrected Audit Differences
June 30, 2013
DESCRIPTION
ACTIVITIES
Journal
To correct prior year's net position and fixed assets due to the EXPO project. Ending net
- GOVERNMENTALFUND
as a
Accounts
AGGREGATE REMAINING OPINION UNIT
To adjust prior year's over stated revenues. Ending net position ivas corrected in FY2013.
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27.361.4171
Reference:
ATTACHMENT 6
Available at the City Clerk's
Office
Filed with Staff Report
04/08/2014, Item 8A
Within Legislative File 201 -002