SR 03-06-2018 3C
City Council
Report
City Council Meeting: March 6, 2018
Agenda Item: 3.C
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To: Mayor and City Council
From: Gigi Decavalles-Hughes, Director, Finance Department, Financial Operations
Subject: Presentation of the City's Comprehensive Annual Financial Report
Recommended Action
Staff recommends that the City Council receive and f ile the City’s Comprehensive
Annual Financial Report, the independent auditors’ unmodified report for the City’s
financial statements for the fiscal year ended June 30, 2017, and the attache d Auditors’
Letters to Council.
Executive Summary
The Comprehensive Annual Financial Report (CAFR; attachment A) communicates the
City’s financial position and activity for the fiscal year ended June 30, 2017. Overall, the
City’s operations show stability and steady growth, reflecting its prudent and sound
management practices.
The Statement of Net Position, similar to a balance sheet, reports total assets and
liabilities of the City. The total net position of the City for all activities was $1.6 billion.
The General Fund balance decreased by $40.8 million (to $346.3 million) over the prior
year, primarily due to an additional payment of $35.6 million paid to CalPERS in June
2017, which represents the General Fund’s portion of the $45 million overall pay down
of the City’s unfunded pension liability.
While, overall, the City’s financial position is strong, the largest concern is the growing
liability for future pension obligations. The City’s various pension plans are
approximately 72% funded with a combined unfunded long-term actuarial liability of
approximately $461 million.
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The independent auditors’ unmodified report communicates that the CAFR, and audited
information within, fairly present the City’s financial position for the fiscal year ended
June 30, 2017. This audit is performed in compliance with City Chart er requirements.
An attached submittal letter (attachment B) states that the City’s independent auditors
encountered no difficulties and had no disagreements with management during the
audit. An additional report on the City’s internal control over financial reporting and
compliance (attachment C) notes no instances of non-compliance. The letters include
corrected and uncorrected misstatements found during the audit and management has
provided detailed responses.
The City of Santa Monica has received an unmodified audit report for more than three
decades and has been awarded the Certificate of Achievement for Excellence in
Financial Reporting by the Government Finance Officers’ Association of the United
States and Canada (GFOA) for its CAFR for 33 consecutive years, since it began
participating in the program. To make the CAFR more transparent, staff has provided
an explanation for key financial performance indicators shown in the report.
The City’s external auditors, Lance, Soll & Lunghard (LSL) CPAs, presented the CAFR
to the Audit Subcommittee on January 16, 2018. The presentation included details of
the audit process and the financial reports, and provided an opportunity for
Subcommittee members to ask questions of the auditors. The Audit Subcommit tee
approved the CAFR and recommended that it be presented to the full Council with a 5 -0
vote.
Background
The CAFR communicates the City’s financial condition and activity in a transparent and
organized manner and in compliance with accounting and financial reporting standards
established by the Governmental Accounting Standards Board (GASB). 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 over 10 years of prior
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year reports are available at the City’s libraries, the City’s Finance Department, and on
the City’s Finance website at: https://finance.smgov.net/budgets-reports.
As required by the City Charter, financial statements are prepared by the City and
audited by independent auditors. The City selects its independent auditor through a
competitive procurement process in which Audit Subcommittee members take part as
evaluators. The City’s current independent auditor, Lance, Soll & Lunghard (LSL)
CPAs, is in their second year auditing the City.
The quality of the City’s financial reporting and the CAFR are measured in two ways: (1)
an unmodified 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 (G FOA). 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.
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 Auditors’ Report – the City’s report card on the content of the CAFR
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Management’s Discussion and Analysis (MD&A) – provides an analytical
overview of the City’s financial status and results for the year
Basic Financial Statements – reports finances at a point in time (assets -
liabilities) and throughout the year (revenues - expenditures), and cash flows
o City-Wide Statements – overview of financial information including all of
the City’s operations by financial activity
o Fund Financial Statements – a detailed look at funds, reporting the
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
Required Supplementary and Supplementary Information Sections
Pension Information – schedule of changes in the pension liability and related
ratios; schedule of contributions by plan
OPEB Information – schedule of Other Post-Employment Benefits funding
information
Budget to Actual Comparisons – for all governmental funds with a legally
adopted budget
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
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The attached CAFR for FY 2016-17 has received an unmodified opinion by LSL. An
unmodified opinion communicates that the financial statements are fairly presented and
that the information used in the report is reliable. In their written communications to
Council, the auditors note that they encountered no significant difficulties with
management in performing or completing the audit.
Statement on Auditing Standards (SAS) 114 establishes standards for the auditors’
communication with those charged with governance. SAS 115 provides guidance on
communicating matters related to the City’s internal controls over financial reporting that
have been identified in an audit of the financial statements. These statements require
the auditors to consider and report on internal controls, significant audit findings, and
other matters as prescribed in the standards as they relate to the audit of the financial
statements. The letters that satisfy the SAS requirements are attached to this report.
At the request of the Audit Subcommittee, the external auditor conducted a conference
call with Subcommittee Chair Sue Himmelrich and Subcommittee member Elizabeth
VanDenburgh on January 10, 2018 to discuss the results of the audit without staff
present. The CAFR was presented to the Audit Subcommittee of the Council on
January 16, 2018 by LSL. Subcommittee members were given the opportunity to
review the report and ask questions to the external auditor and staff. The topics
discussed included the required communication and responsibilities of the external audit
firm, the background of significant accounting estimates such as pensions and pollution
remediation, internal control improvements as noted in the SAS 115 letter, and a new
Accounting pronouncement implemented by GASB Statement 75 Accounting and
Financial Reporting for Postemployment Benefits Other Than Pensions. The Audit
Subcommittee received and filed the CAFR with a 5 -0 vote.
The City of Santa Monica has received an unqualified/unmodified audit report and the
GFOA Award for 33 years, since the City first participated in the GFOA program in FY
1983-84.
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Overall, the City’s CAFR shows that City finances are stable. The following is an
explanation of some key indicators reported 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 assets exceeded
liabilities by $346.3 million as of June 30, 2017. This balance is comprised of a number
of categories, as follows:
$22.1 million nonspendable, restricted or committed resources that are required
for specific purposes according to legal/contractual agreements or by ordinance
or resolution of the City Council;
$256.1 million assigned funds set aside for specific purposes based on budget
priorities (i.e., continuing and future capital projects; project financing equity, prior
year encumbrances, and expenditure control budget); and
$68.1 million in unassigned funds as follows:
o $57.0 million rainy day contingency (15% of annual operating and
revenue-supported capital expenditure budget);
o $9.7 million economic uncertainty reserve to mitigate potential revenue
losses;
o Offset by a $1.6 million unrealized loss;
o $3.0 million other unassigned fund balance.
The strong fund balance and rainy day and economic uncertainty reserves play a key
role in Santa Monica’s AAA general obligation bond rating from all three national rating
agencies. 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 $40.8 million over the prior year, primarily due
to an additional payment of $35.6 million paid to CalPERS in June 2017, which
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represents the General Fund’s portion of the $45 million overall pay down of the City’s
unfunded pension liability.
Citywide Net Position
The Statement of Net Position, similar to a balance sheet, reports total assets and
liabilities of the City as of June 30, 2017. The total net position of the City for all
activities was $1.6 billion. Net position is broken out into three categories: capital,
restricted, and unrestricted.
Net Capital Position ($1,177.2 million)
Capital assets include land, buildings, improvements, intangibles, infrastructure and
utility systems, and construction in progress. Intangible assets represent rights of use
for items such as software and payments for Santa Monica’s cost of improvements to
the City of Los Angeles sewage treatment system. Some notable capital projects that
were underway as of June 30, 2017 are:
City Services Building
Fire Station 1
Fire Station 3
Fire Apparatus Replacement
Enterprise Resource Planning System
City Yards Modernization
Pier Bridge Electrical Upgrades
Restricted Net Position ($217.6 million)
These assets are subject to agreements with creditors, developers, grantors, or laws or
regulations of other governments. Approximately 63% of this amount is restricted for
affordable housing and committed to various projects, 18% is restricted per federa l,
state and other grant regulations, and the remaining amount is restricted for the
Cemetery’s trust fund, debt service reserve, development agreement terms, and other
grant and legislative constraints.
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Unrestricted Net Position ($172.5 million)
This represents the balance of net position that is neither part of capital assets nor
restricted. Healthy capital and operating reserves in the business -type activities support
rate stabilization and recovery strategies for the City’s many activities.
Long Term Debt
The primary source of long term debt is in the form of bonds issued by the City. At the
end of the current fiscal year, the City’s total long-term debt outstanding (excluding
issuance premiums) was $77.4 million. Principal payments of $6.2 million 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 one
revenue bond to fund a proportionate share of capital improvements of the Cit y of Los
Angeles Hyperion wastewater treatment facility. On July 1, 2016, final payment was
made on the Parking Authority Refunding 2002 Lease Revenue bonds . More
information on long term debt can be found in Note 9, page 57 of the CAFR.
Pension Liability
Like all cities in the State CalPERS pension fund, Santa Monica faces significant long-
term unfunded pension liabilities. GASB 68, implemented in FY 2014-15, was a
pronouncement intended to provide greater transparency for pension accounting by
requiring entities to report unfunded liability in the financial statements rather than in the
footnotes. These GASB pronouncements do not affect either the amount of
contributions a government makes to pension plans or the total net pension liability,
which is still actuarially determined. Total net pension liability, or unfunded liability, is
based on projected future benefit payments attributed to the current and past
employees’ service, less the assets accumulated to pay those liabilities.
As shown on the Statement of Net Position, page 1 of the CAFR, the City has a net
unfunded actuarial liability of approximately $461 million: the difference between a total
pension liability of approximately $1.62 billion and plan assets of approximately $1.16
billion, making the City’s various pension plans approximately 72% funded. The
unfunded liability amount increased from $387 million as shown in the prior year’s
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CAFR, to $461 million, primarily due to the actual returns on the investment portfolio
being less than CalPERS’ projected returns. Since plan assets are based on market
value, changes in investment values can have a drastic impact on the overall funding
ratio of the plans, positively or negatively. The City’s annual payments include a portion
to fund current benefits as well as an amount to pay down the unfunded liability. Annual
actuarial valuations provide the City with the amount of the contribution that must be
paid annually into the plan to ensure that the current unfunded liability is paid off over
the following 30 years. In FY 2016-17, the portion of the actuarially determined
employer contribution (ADEC) dedicated to paying down the unfunded liability was
$26.7 million, or 53% of the total $50.2 million ADEC.
A detailed explanation of the Employe e Benefits Programs including detailed pension
information by plan is included in Note 16 (pages 76 through 87) and the Required
Supplementary Information (pages 99 through 104).
State-mandated pension reform and Council-approved cost saving measures mitigate
pension cost increases. Over the past three years, Police and Fire sworn employees
have increased their contributions towards pensions to reach over 28% of the total
pension cost, while Miscellaneous employees are contributing over 25% of the pension
cost. The passage of the Public Employee Pension Reform Act, or PEPRA, in
September 2012 is working to further control cost increases in the future, as new
employees entering PERS after January 1, 2013 are receiving reduced retirement
benefits and cities are encouraged to further increase employees’ share of contribution
costs. To date, approximately 32% of the City’s permanent workforce is receiving
reduced pension benefits. The City will continue its Council-adopted policy to pay down
at least an additional $1 million of the unfunded liability every year.
At the December 21, 2016 meeting, the CalPERS Board of Administration approved
lowering the CalPERS discount rate assumptions, the long term rate of return from
7.5% to 7.0%. Due to timing, it did not affect the liability reported in this year’s CAFR,
but will likely increase the liability in the CAFR beginning next year.
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In June 2017, responding to the prospect of additional significant pension contribution
rate increases beginning in FY 2018-19, Council approved a $45 million pay down of
the City’s pension unfunded liability. Due to the requirements of GASB 68 reporting, the
impact of this payment will not be reflected in the net pension liability until the FY 2017 -
18 CAFR. Based on updated estimate from CalPERS that take all these factors into
consideration, the combination of the additional pay down and a better than anticipated
experience level resulting from City employees retiring later is contributing to a 1/3
decrease in the projected growth of pension costs over the next 5 years that will help
minimize the impact of the discount rate change.
Cash and Investments
The CAFR also includes detailed information on the City’s cash and investments. As of
June 30, 2017, the City had $764 million in total cash and investments, all of which are
in the form of investments authorized by the California Government Code and the City’s
investment policy or in compliance with bond indenture agreements. More information
on cash and investments is found in Note 5, page 37 of the CAFR.
Financial Impacts and Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended action to receive and file this annual report.
Prepared By: Stephanie Manglaras, Accounting Manager
Approved
Forwarded to Council
Attachments:
A. Comprehensive Annual Financial Report FYE2017 (Weblink)
B. Audit Communication Letter
C. Report on Internal Control
December 18, 2017
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
We have audited the financial statements of the governmental activities, the business-type activities, each
major fund, and the aggregate remaining fund information of the City of Santa Monica, California
(the City) for the year ended June 30, 2017. Professional standards require that we provide you with
information about our responsibilities under generally accepted auditing standards,
Government Auditing Standards and the Uniform Guidance, 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 May 24, 2017. 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 the notes to the financial statements.
As described in Note 18 to the basic financial statements, certain events occurred during the fiscal year
2016-17 which resulted in the reporting of special items. These special items are categorized as such
because of their infrequent and unusual nature, but unlike extraordinary items, the effect of special items
is within the control of City management. The City’s General Fund forgave a note to the Airport Fund.
The effect of the forgiveness of this note resulted in the City’s General Fund reporting a loss of
$1,103,146, with the Airport Fund reporting a gain of $1,103,146. The respective gain and loss related to
the note forgiveness was reported as such in both the fund level statements and the governmental and
business-type activities in the government-wide statements. The City also made a $45,000,000 payment
to CalPERS to pay down the unfunded pension liability. Of this payment $36,317,543 is the share of
governmental funds and is reported as an expenditure in the fund level statements. The payment is
reported as a deferred outflow in the governmental and business-type activities in the government-wide
statements.
We noted no transactions entered into by the City 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. Material estimates affecting the City’s financial statements were:
Management’s estimate of the net pension liability and the net other post-employment
benefits (OPEB) obligation is based on actuarial standards utilized in the relating actuarial
reports. We evaluated the key factors and assumptions used to develop the net pension
liability and net OPEB obligation in determining that it is reasonable in relation to the
financial statements taken as a whole.
203 N. Brea Blvd., Suite 203 Brea, CA 92821 Phone: 714.672.0022
An Association of Independent Accounting Firms
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
The disclosure of Pollution Remediation in Note 4 to the basic financial statements
discusses the City’s obligation for pollution remediation costs. Multiple methods for
estimating the value of the obligation are available under GASB Statement No. 49 –
Accounting and Financial Reporting for Pollution Remediation Obligations, including
measuring the obligation at current value, expected total outlays, or expected future cash
flow. The City has elected to measure the liability using the expected cash flow method,
and includes an additional 10% contingency for unforeseen costs. As of June 30, 2017,
the City has estimated that its total obligation for pollution remediation is $111,381,464,
with $3,233,674 of that amount expected to be paid out during fiscal year 2017-18.
Certain financial statement disclosures are particularly sensitive because of their significance to financial
statement users. The most sensitive disclosure(s) affecting the financial statements was (were):
As described in Note 16 to the basic financial statements, the city has a defined benefit
pension plan which is part of the Public Agency portion of the California Public
Employees Retirement System (CalPERS), an agent multiple employer plan administered
by CalPERS. The City reported a net pension liability of $460,663,362 as compared to
$386,760,127 in the prior year. This liability represents the net difference between the
pension plan assets and the total pension liability.
Additionally, the City provides other post-employment benefits (OPEB) based on
agreements with various bargaining units. The City reported $10,540,517 in net OPEB
obligation as compared to $10,431,582 in the prior year. This represents the balance of
the unfunded annual required contributions. Beginning in fiscal year 2017-18, the City will
be required to report the unfunded actuarial accrued liability on the face of the financial
statements which as of July 1, 2015, the latest valuation date, was $27,848,131.
The financial statement disclosures are neutral, consistent, and clear.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are trivial, and communicate them to the appropriate level of management.
These differences are described below. In addition, we detected misstatements as a result of audit
procedures which were material, and were subsequently corrected by management. The details of these
misstatements are described in the report on internal controls dated December 18, 2017.
The following is an adjustment that is immaterial in nature that the City elected not to record. The entry is
a “mark to market” entry for a fiscal agent investment account that reverses each year on July 1.
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
Unadjusted Audit Differences
Omission to record fair market value adjustment on investment (20,600)$
Cumulative effect (before effect of prior year differences) (20,600)
Effect of unadjusted audit difference - prior year -
Cumulative effect (after effect of prior year differences) (20,600)$
Current Year Over
(Under) Revenues and
Expenditures/Expenses
and Changes in Fund
Balance/Equity
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 December 18, 2017.
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 City’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 City’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 the management’s discussion and analysis, the schedules of
revenues, expenditures, and changes in fund balance – budget and actual for the general fund, special
revenue source fund, and the low and moderate income housing assets fund, the schedule of changes in
the net pension liability and related ratios, the schedule of contributions – pension plans, and the OPEB
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.
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
We were engaged to report on 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 introductory or statistical sections, which accompany the financial
statements but are not RSI. Such information has not been subjected to the auditing procedures applied
in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide
any assurance on it.
New Auditing Standard No. 130
This new auditing standard is effective for financial periods ending on or after December 15, 2017; for
most California municipalities it is effective for the period July 1, 2016 through June 30, 2017 and future
periods thereafter. The standard allows CPA firms to issue an opinion on the financial statements
conformity with generally accepted accounting principles, as well as an opinion on the operating
effectiveness of internal controls over financial reporting through an integrated audit. This standard does
not change the objectives of a financial statement audit, it only enhances the value and scope of a
financial statement audit and increases the level of assurance provided by CPA firms on financial
controls. Municipalities should look to perform an integrated audit for more assurance on the operating
effectiveness of internal controls over financial reporting.
New Accounting Standards
The following new Governmental Accounting Standards Board (GASB) pronouncements were effective
for fiscal year 2016-2017 audit:
GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets
That Are Not within the Scope of GASB Statement No. 68, and Amendments to Certain
Provisions of GASB Statement Nos. 67 and 68.
GASB Statement No. 74, Financial Reporting for Post-Employment Benefit Plans Other Than
Pension Plans.
GASB Statement No. 77, Tax Abatement Disclosures.
GASB Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit
Pension Plans.
GASB Statement No. 80, Blending Requirements for Certain Component Units-an Amendment of
GASB Statement No. 14.
GASB Statement No. 82, Pension Issues an Amendment of GASB Statements No. 67, No. 68,
and No. 73.
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
The following Governmental Accounting Standards Board (GASB) pronouncements are effective in the
following fiscal year audit and should be reviewed for proper implementation by management:
Fiscal year 2017-2018
GASB Statement No. 75, Accounting and Financial Reporting for Post-Employment Benefits
Other Than Pensions.
GASB Statement No. 81, Irrevocable Split Interest Agreements.
GASB Statement No. 85, Omnibus 2017.
GASB Statement No. 86, Certain Debt Extinguishment Issues.
Fiscal year 2018-2019
GASB Statement No. 83, Certain Assets Retirement Obligations.
Fiscal year 2019-2020
GASB Statement No. 84, Fiduciary Activities.
Restriction on Use
This information is intended solely for the use of the City Council and management of the City of
Santa Monica, California, and is not intended to be, and should not be, used by anyone other than these
specified parties.
Very truly yours,
Brea, California
INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS
BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE
WITH GOVERNMENT AUDITING STANDARDS
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, the financial statements of the governmental
activities, the business-type activities, each major fund, and the aggregate remaining fund information of
the City of Santa Monica, California, (the City) as of and for the year ended June 30, 2017, and the related
notes to the financial statements, which collectively comprise the City’s basic financial statements, and
have issued our report thereon dated December 18, 2017.
Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City’s internal control
over financial reporting (internal control) to determine the audit procedures that are appropriate in the
circumstances for the purpose of expressing our opinions on the financial statements, but not for the
purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not
express an opinion on the effectiveness of the City’s internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and
was not designed to identify all deficiencies in internal control that might be material weaknesses or
significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were
not identified. However, we identified certain deficiencies in internal control that we consider to be material
weaknesses and significant deficiencies.
A deficiency in internal control exists when the design or operation of a control does not allow management
or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct,
misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in
internal control such that there is a reasonable possibility that a material misstatement of the entity’s
financial statements will not be prevented, or detected and corrected on a timely basis. We consider the
following deficiencies to be material weaknesses:
2017 – 1: Deposits Payable
We noted the City’s deposits payable detailed schedule for the Resource, Recovery & Recycling Fund did
not agree to the deposits payable recorded in the general ledger, with a variance of $687,124. The deposits
payable recorded in the general ledger are less than the identified deposits payable outstanding in the
subsidiary ledger, presenting the risk that certain deposits have been recorded as refunded in the general
ledger, although the nature of such deposits are unidentified. We recommend the City perform a thorough
review of all deposits payable to ensure that the items recorded in the GL are valid deposits, and update
the information annually to avoid any errors or missed payments.
203 N. Brea Blvd., Suite 203 Brea, CA 92821 Phone: 714.672.0022
An Association of Independent Accounting Firms
To the Honorable Mayor and Members of the City Council
City of Santa Monica, California
Management Response: Management agrees with the noted deficiency. In March 2017, management
engaged Moss Adams to conduct an internal audit of the Resource, Recovery & Recycling Fund deposit
payables process, and Moss Adams will issue their report in January 2018. The audit should establish an
improved process with an emphasis on how to reconcile the subsidiary payables ledger with the general
ledger deposit account to ensure deposits are accurately tracked and recorded going forward.
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. We
consider the following deficiencies to be significant deficiencies:
2017 – 2: Cash & Accrued Liabilities Misstatement
We noted that the City’s cash and accrued liabilities were understated by $412,931 due to a 6/24/17 payroll
entry that left balances in the payroll clearing fund that should have zeroed out at yearend.
Management Response: Management agrees that an error was made in clearing out the payroll clearing
fund due to the timing of a payroll payment, and will confirm that the payroll clearing fund account is zero
at yearend prior to providing the trial balance to the auditors.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City’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.
City’s Response to Findings
The City’s response to the findings identified in our audit was not subjected to the auditing procedures
applied in the audit of the financial statements and, accordingly, we express no opinion on it.
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 City’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 City’s internal control and compliance. Accordingly,
this communication is not suitable for any other purpose.
Brea, California
December 18, 2017