SR-03-17-2015-8ACity Council Meeting: March 17, 2015
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, 2014 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, 2014. 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, 2014. 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 included in this letter are presented by the auditors for
presentation only. These reclassifications have not been entered into the financial
system and therefore do not have a financial impact to the City.
The City of Santa Monica has received a clean audit report for more than three
decades. 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 2012 -13 CAFR for the 30th consecutive time
since the City began participating in the program in 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 transparent and user - friendly, staff
has provided an explanation for key financial performance indicators shown in the
report.
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Background
The CAFR is used to communicate the City's financial condition and activity in a
transparent and organized manner. The report 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 /departments /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 current independent auditor is Macias, Gini & O'Connell LLP.
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, unmodified 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 recommendations to management, allowing the City to improve reporting in
future years. In the letter to Council, auditors have summarized what are known as
"passed adjustments" which are adjustments noted during the audit that are not material
enough to warrant recording in the current year. Macias, Gini & O'Connell LLP consults
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with staff regarding each of these entries. The adjustments are not required and are
considered immaterial. Staff assesses the auditors' recommendations and determines
the appropriate course of action for each one, typically implementing those which
improve the transparency and financial reporting on the City's financial records.
A clean report is defined as one without audit - related findings. The City of Santa
Monica has received a clean, unqualified /unmodified audit report and the GFOA Award
for at least the last 30 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 on areas that may have an impact on the City's finances now and in
the future. This includes economic factors as well as budget and management
factors.
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 financial status
® 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 Budget to Actual Comparisons — for the General Fund and other select
major funds
o Notes to the Financial Statements (Notes) — a narrative explanation that
accompanies the Basic Financial Statements
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Required Supplementary and Supplementary Information Sections
• Pension Information — 3 years of pension funding information
• OPEB Information — 3 years of OPEB funding information
• A breakout of individual funds — for funds that were presented in a cumulative
manner in the Financial Section
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 2013 -14 has received an unmodified, or clean, opinion by
the City's independent auditor, Macias, Gini & O'Connell LLP.
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.
Overall, the City's CAFR shows that City finances are stable. 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
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$366.0 million as of June 30, 2014. This balance is comprised of a number of
categories, as follows:
® $35.1 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;
® $212.7 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
® $118.2 million in unassigned funds as follows:
o $47.5 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 $57.5 million for public works infrastructure expenditures; and
o $3.5 million fund balance.
The strong fund balance and rainy day and economic uncertainty reserves play a key
role in Santa Monica's 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 $18.2 million from the prior year, primarily due
to the spending down of funds set aside in prior years. These include RDA funds paid
to the State as part of the settlement agreement, loan and bond proceeds spent on the
construction of Tongva Park, Ken Genser Square and Parking Structure 6, and capital
reserves spent on the Pico Neighborhood Library. Fund balance has been assigned to
help offset increases to the Workers' Compensation self- insurance fund contributions, to
offset the first two years of OPEB prefunding costs, for an additional $5.0 million PERS
paydown to be made in FY 2014 -15, and for capital projects, a portion of which has
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already been appropriated in FY 2014 -15. More information on the General Fund fund
balance can be found in Note 13, page 83 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, 2014. The total net position 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, intangibles, infrastructure and
utility systems, and construction in progress. Intangible assets provides rights of use of
things like software and payments for Santa Monica's cost of improvements to the City
of Los Angeles sewage treatment system. Capital assets include the following notable
new items as of June 30, 2014:
® $30.3 million final cost for Parking structure 6
® $40.9 million final cost for Tongva Park and Ken Genser Square
® $9.5 million final cost for the Pico Branch Library
® $19.2 million for 38 new 40 foot buses acquired by the Big Blue Bus
® $6.1 million for construction in progress related to Pier infrastructure
improvements
® $2.9 million in capital payments made to the City of Los Angeles for Santa
Monica's shared cost of the Amalgamated System in the Wastewater Fund
Restricted Net Position ($148.2 million)
These assets are subject to agreements with creditors, developers, grantors, or laws or
regulations of other governments. Approximately 50% of this amount is restricted for
affordable housing and committed to various projects, 19% is restricted per federal,
state and other grant regulations, 10% is restricted according to development
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agreement terms, and the remaining amount is restricted for the Cemetery's trust fund,
debt service reserve, and other grant and legislative constraints.
Unrestricted Net Position ($492.6 million)
67% 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. In June
2014, $7.8 million in Hyperion Project Revenue Refunding 2005 bonds were redeemed.
$7.7 million in debt service payments were made 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. The City did not issue any new debt for the fiscal year ended June 30,
2014. More information on long term debt can be found in Note 9, page 76 of the
CAFR.
Pension Costs
A key liability carried by the City, but not shown in the financial statements, is future
pension spending. A detailed explanation of unfunded pension liability is included in the
Notes section (see Note 16, pages 89 through 96). In an effort to make pension
accounting more transparent, 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 an additional $25 million paid
toward the City's unfunded pension liability, have worked to mitigate pension cost
increases for the City. However, as shown on page 93 of the CAFR, the City's various
pension plans are approximately 71% funded, leaving a combined unfunded actuarial
liability in excess of $385 million. As reported to Council on January 27, 2015,
CalPERS, the City's pension plan provider, has begun the process of increasing
contribution rates in an effort to lower unfunded liabilities and to better reflect
demographic trends. The City will continue its more aggressive Council— adopted policy
to pay down at least an additional $1 million of its unfunded liability every year. And, as
reported on January 27, employees are also doing their part to decrease the costs of
pensions by increasing their pension contributions each year.
Settlement with the State
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 payment of $56.8 million over four equal installments
beginning on January 15, 2014 and ending on July 15, 2015. The City paid down the
total settlement on January 14, 2015, leading the State to issue a Finding of Completion
to the Successor Agency. Among other things, the finding of completion allows the
Successor Agency to make certain loan repayments to the City and utilize proceeds
from bonds issued prior to January 1, 2011 in a manner consistent with the original
bond covenants.
Cash and Investments
The CAM also includes detailed information on the City's cash and investments. As of
June 30, 2014, the City had $735 million in total cash and investments, 83% of which is
in the form of investments authorized by the California Government Code and the City's
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investment policy. More information on cash and investments is found in Note 5, page
59 of the CAFR.
There is no immediate financial impact or budget action necessary as a result of the
recommended action.
Prepared by: Stephanie Manglaras, Accounting Manager
Approved:
Gigi Dec" avalles-Hughes
Director of Finance /City Treasurer
Attachments:
A. Auditor's Letter to Council
Forwarded to Council:
�(- PAL,
Elaine M. Polachek
Interim City Manager
B. Comprehensive Annual Financial Report for the year ended June 30, 2014
F,
Los Angeles
�9
777 S. Figueroa Street, Suite 2500
"... '..' a_' ed Public Accou to ts. Los Angeles, CA 9
213.40II.8700 8700
Sacramento
Walnut Creek
March 6, 2015 Oakland
Century City
To the Honorable City Council
City of Santa Monica, California Newport Beach
We have audited the financial statements of the governmental activities, the business -type activities, each San Diego
major fund, and the aggregate remaining fund information of the City of Santa Monica (City) for the fiscal Sarni.
year ended June 30, 2014. Professional standards require that we provide you with information about our
responsibilities under generally accepted auditing standards, Government Auditlng 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 1, 2014. Professional standards also
require that we communicate to you the following information related to our audit.
Significant Audit Findings
Qualitative Aspects ofAccoanting 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 1 to the financial statements. As described in
Note 1B, the City adopted the provisions of Governmental Accounting Standards Board (GASB) Statement
No. 65, Items Previously Reported as Assets and Liabilities; GASB Statement No. 66, Technical
Corrections — 2012, an amendment of GASB Statenients No. 10 and No. 62; and GASB Statement No. 70,
Accounting and Financial Reportingfor Nonexchange Financial Guarantees during fiscal year 2014. 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.
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 using the straight -line method. 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.
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 postemployment 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
postemployment benefits obligation in determining that they are reasonable in relation to
the financial statements taken as a whole.
www.mgocpa.com
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 AB1X26 and AB 1484. On October 14, 2014, the State Controller's
Office issued their preliminary findings on their review of the asset transfers. The findings
identified two transfers that purportedly did not comply with the redevelopment dissolution
statute. Although the City disagrees with the findings, the Successor Agency has recorded
a receivable from the City in the amount of $19,149,679 as of June 30, 2014.
The financial statement disclosures are neutral, consistent, and clear.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing our
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 oftbis 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 repot. 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 27, 2015.
Management Consultations mith 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 out-
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
We applied certain limited procedures to management's discussion and analysis, pension funding
information and other postemployment benefit funding information, which are required supplementary
information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of
management regarding 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 did not audit the RSI and do
not express an opinion or provide any assurance on the RSI.
We were engaged to report on the combining and individual fund statements and schedules, which
accompany the financial statements but are not RSI. With respect to this supplementary information, 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.
We were not engaged to report on the introductory section and statistical section, which accompany the
financial statements but are not RSI. We did not audit or perform other procedures on this other information
and we do not express an opinion or provide any assurance on it.
Restriction on Use
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,
i
ucius
Los Angeles, California
CITY OF SANTA MONICA Attachment
Summary of Uncorrected Misstatements - Government Wide
Jume 30, 2014
Passed doun pal Emstea
Description Debit Credit)
Cs ret AdA nifi,,
I interestlncome S 520,000
Be&innia, Net Position 'S (520,000)
"Pa ",,grri l in",W inronr.J., FY20f0 -II mrdFY2011 -12
Ihoe n.1 recnrd•d in Fp2013 -14, No mr ➢acron euda,FY20f3-
74 neQmrilim,
2 Es neditenes 444,256
Cash
To rerord rhi renee be0ceen bet&recmmiliulm nrr Ill,
gmernl ledgm oryrm end. ftaeancilhrg irons ry u ..H, dv n' in
11"fo11mang stmrm.
3 Restrided Cash 919,406
Retention Payable
IDrneareenrdngepnrmrcnmr relenhon nobaimf civil
proceav f ier held by COnh ,mss aryrm' -end Na inryn Im,
and,,,g FY 2013 -1 {net ➢osimos,
4 Accounts Payable I 104,627
Ez e6 Oelldita, (1
t'n ngrue sacmmk s,,,ble balanres e, the derailedlisting.
/ncreurar N'Y2013- Hna + ➢osihon by SlO {•629.
5 Umealied less 560,133
To rerord Om nnreahred lore oflmxsanerrID as of.hme 30, 20M
The Cut l picalll, holds mrern „enlr m maturity ohm, nu gain nr
lass a mmlized.
6 Convection in Progress 1,468,280
Expense
To reesmbllsh mmm�ns rcimed m,1keue iu lun ddubile Ifarne
Tm[-consnnnhmr nn prolnxes dramas ineorrcetry, nvilmn ff
7 Improvements Other Than Building 12,337,066
Constmction in Pmaress
Beginning Net Positive 226,009
Accumulated Depreciation
Depreciation Expense 292,016
To reela"if ean,pkledprojeemfrom emuh,rc(iau inprngrexs
(o ingnm,.nerulher Ihon h,rddings rod rerord reln(ed
dpxmiallo➢. Bull. rnnslnmhon inprag'ess and mr ➢roeeraenls
olber llmn bnildrngs<ne """ nut a....hurarsels.
r, , lx-Am, A I vi(ier
Revenue 265,551
Deposit Payable
Tb reconcile dywni(pyv ble recnrdedin dregenernlledger u*j,
sabsld , ledgrsJrr Rartmrrnn Recorep. nodRegding Fnnd
mrddiq�ar(Fur0.
m
CITY OF SANTA MONICA Attachment I (Continued)
Summary of Uncorrected Misstatements -Fund Based
June 30, 2014
Description Debit
Geneidl Frtnrl
i interest income $ 520,000
&&.mg Fmld M.,v o $
1•'.recognrize interest mcmue fm n'2010-11 and FY 2011 -12
that Ira recnrdzd is FY 2013 -]d. No lnrpad on endingFY2013-
Nfrn0brdnnce.
2 Exyendit 444,256
Cash
TprecorddA renee bmn ,a bank recwmihwji,, mrddie
goreral ledger ary ear urd R,.01iug irenrs pYicni!) dery in
lhcfi Ilaoiug mmd/r
3 ReslsicWCash 918,406
Retention Payable
To reflra recordo, ,,.t ... ll.n.. ,,l on liab iliry,fmvreu•
pro sofmo er Gdd by connaulors atpraruul No inrpnct
mr endbg FY 2013- 1 4frmd balance.
4 Ac.,nMsPayable I 104,627
Expenditwes
To agree accmrntrryry•able balmras m the ddri/rd 1h1h,
Inarares F1' 2013 -1 d find balance by S 104, 627.
5 Unrealiaedlom 56,133
Lrveshnents
7'. ".,d pre.... lord lass afiureai 1, nr pfdnne 30,
2011 Th, Oly typi..fl, holds inresnnems to ,W ityu0mnm
gain w, loss it rmlized
6 Defencdfiffl.of Resources 151,759
Revenue (151,
To ndlj .. drjerrnl it flmrs ro moreh REAM ...em ble balm..
Fntmnr F rd- Airnnn Fnnd
7 Rental Deposit Payable 91,326
Rental income
To rcconede &posit pa/mble.,dd in the ge,,. Iledger
with snbsidimpdedgerr fns Ahp)ii Fnu1.
4geree 1 R ne Fads
8 Demolition Fees 336,877
Deposit Payable
To reconcile deposit payable recorded in the general ledger
pithsubsidimy ledgersfor Resmnee Re,elhu and Recovery
Farad.
wl
Reference:
Attachment B is available at
the City Clerk's Office
File with Staff Report 03/17/2015, Item 8A
Within Legislative File 201 -002