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SR 02-12-2019 3D City Council Report City Council Meeting: February 12, 2019 Agenda Item: 3.D 1 of 14 To: Mayor and City Council From: Gigi Decavalles-Hughes, Director, Finance Department, Financial Operations Subject: Transmission 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 (CAFR), the independent auditors’ unmodified report for the City’s financial statements for the fiscal year ended June 30, 2018, and the Auditors’ Letters to Council. Summary Each year, local governments in California are required to file the results of an independently audited statement of their finances. The Comprehensive Annual Financial Report (CAFR; attachment A) communicates the City’s financial position and activity for the fiscal year ended June 30, 2018. Overall, the City’s operations show stability and growth, reflecting its long record of prudent and sound management practices. However, the General Fund revenue growth has begun to slow after several years of strong increases and the threat of recession could alter revenue projections. 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 $1,582.0 million at June 30, 2018, compared to $1,567.2 million at June 30, 2017, which is an increase of $14.8 million or 0.9%.  The General Fund balance increased by $89.3 million (to $435.8 million) over the prior year, primarily due to the reporting of bond proceeds from the issuance of two bonds for major construction projects. 2 of 14  The City’s various pension plans are over 74% funded with a combined unfunded long-term actuarial liability of approximately $467 million.1 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, 2018 (essentially reflecting no significant concerns about the adequacy of the handling and record-keeping of the City’s financial transactions). This audit is performed in compliance with City Charter requirements. An attached submittal letter states that the City’s independent auditors encountered no difficulties and had no disagreements with management during the audit and notes no corrected or uncorrected misstatements found during the audit. An additional report on the City’s internal control over financial reporting and compliance notes no instances of non - compliance. 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 34 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. Council established an Audit Subcommittee in 2015 to oversee the work of the City’s auditor. The Committee has received the last three annual CAFR reports which included details of the audit process and the financial reports, a presentation by the independent external auditors, and an opportunity for Subcommittee members to ask questions of the auditors. On February 28, 2017, Council directed staff that future presentations of the CAFR should continue to receive a detailed review by the Audit Subcommittee and come to the Council as a Consent Calendar item. 1 All pension figures presented in the CAFR are based on GASB 68 valuations that have a measurement date of June 30, 2017. These valuations are used for financial reporting purposes only and are separate from the CalPERS funding valuations that are used to determine the City’s annual contribution requirements). 3 of 14 Discussion 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 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/annual#/. 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 that includes members of the Audit Subcommittee as proposal reviewers. The City’s current independent auditor, Lance, Soll & Lunghard (LSL) CPAs, is in their third 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 (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. The City’s CAFR includes the following major sections and information: Introductory Section 4 of 14  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  Management’s Discussion and Analysis (MD&A) – provides an analytical overview of the City’s financial status and results for the year o Basic Financial Statements – reports finances at a point in time (assets - liabilities) and throughout the year (revenues - expenditures), and cash flowsCity-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  Budget to Actual Comparisons – for all governmental funds with a legally adopted budget  Pension Information – schedule of changes in the net pension liability and related ratios; schedule of contributions by plan  OPEB Information – schedule of changes in the net Other Post-Employment Benefits (OPEB) liability and related ratios; schedule of contributions  A breakout of individual non-major funds – for funds that were presented in a cumulative manner in the Financial Section Statistical Section (current and historical information – up to 10 years) 5 of 14  Financial Trends  Revenue Capacity Information  Debt Capacity Information  Demographic and Economic Information  Operating Information The attached CAFR for FY 2017-18 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 . The external auditor conducted a conference call with Subcommittee Chair Sue Himmelrich and Subcommittee member Elizabeth VanDenburgh the week before the January 15, 2019 Audit Subcommittee meeting to discuss the results of the audit without staff present. The CAFR was presented to the Audit Subcommittee of the Council on January 15, 2019 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 various materiality levels and methodology used for the audit, a summary of the accounting change caused by implementing GASB Statement 6 of 14 No. 75 Accounting and Financial Reporting for Post-Employment Benefits Other Than Pensions and the effect on the financial statement, and the effect that CalPERS’ investment returns have on the future of pension liability. The Audit Subcommittee received and filed the CAFR with a 4-0 vote. The City of Santa Monica has received an unqualified/unmodified audit report and the GFOA Award for 34 years, since the City first participated in the GFOA program in FY 1983-84. 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 $435.8 million as of June 30, 2018. This balance is comprised of a number of categories, as follows:  $113.0 million nonspendable, restricted or committed resources that are requ ired for specific purposes according to legal/contractual agreements or by ordinance or resolution of the City Council, including $94.5 million for bond funded projects;  $256.3 million assigned funds set aside for specific purposes based on budget priorities (i.e., completing capital improvements projects; future projects; Gillette Boeing settlement funds assigned for pollution remediation projects; prior year encumbrances; expenditure control budget; and other projects necessary to advance the City’s strategic initiatives and framework outcomes); and  $66.5 million in unassigned funds as follows: o $59.2 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 $5.4 million unrealized loss; 7 of 14 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. 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 increased by $89.3 million over the prior year, primarily due to bond proceeds from two bond issuances totaling $102.8 million and related premiums of $12.2 million. 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, 2018. The total net po sition 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 ($1,158.4 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 cap ital projects that were underway as of June 30, 2018 are:  City Services Building  Fire Station 1  City Yards Modernization  Sustainable Water Infrastructure Project (SWIP)  Clean Beaches Project for the Pier Watershed  Beach Playground Enhancements and the North Beach Trail  Early Childhood Lab School  Bus Replacements 8 of 14 Restricted Net Position ($232.8 million) These assets are subject to agreements with creditors, developers, grantors, or laws or regulations of other governments. Approximately 59% of this amount is restricted for affordable housing and committed to various projects, 19% is restricted per federal, state and other grant regulations, and the remaining amount is restricted for the Cemetery’s trust fund, debt service reserve, development agreement ter ms, and other grant and legislative constraints. Unrestricted Net Position ($190.8 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 $171.2 million, a $93.8 million increase from the previous year. The increase is primarily due to two bond issuances in FY 2017 -18. On August 22, 2017, the Santa Monica Public Financing Authority issued $68.6 million (par value) in Lease Revenue Green Bonds with a thirty-year term to fund construction of the administrative services building behind City Hall. On June 6, 2018, the Santa Monica Public Financing Authority issued $34.2 million (par value) in Lease Revenue Bonds with a thirty-year term to fund construction of a new Fire Station 1 in the Downtown area. On September 21, 2017, the City entered into a Construction Installment Sale agreement with the State Water Resources Control Board to fund the Sustainable Water Infrastructure Project (SWIP). The agreement provides funding in the amount of $56.9 million and is payable with interest at 1.8% annually over a period of 30 years beginning June 11, 2021. 9 of 14 On December 21, 2017, the $3.5 million par value of the 2009 Lease Revenue Bonds for the Public Safety Facility were defeased. As a result of the defeasement, the City realized a net benefit of $55,632. More information on Long Term Debt can be found in Note 9, page 58 of the CAFR. Pension Liability As noted in the Statement of Net Position on page 1 of the CAFR, the City’s largest liability is the unfunded actuarial pension liability, which was $466.8 million as of June 30, 2018, an increase of $6.1 million from the $460.7 million liability at June 30, 2017. 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. This is the difference between a total pension liability of approximately $1.79 billion and plan assets of approximately $1.33 billion, making the City’s various pension plans over 74% funded. 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. The City continues to implement numerous cost-saving measures related to pensions. The Miscellaneous employee bargaining group approved a second tier of reduced retirement benefits for new employees starting on or after July 1, 2012, and Miscellaneous group employees continue to contribute to a portion of their pension costs, while Public Safety employee bargaining groups have approved annual incremental increases to their employee pension contributions. Over the past eight years, Police and Fire sworn employees have increased their contributions towards pensions to reach up to 29% of the total pension cost for Classic CalPERS members (those joining CalPERS before January 1, 2013), while Classic Miscellaneous employees are contributing over 29% 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, 10 of 14 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. Since FY 2010-11, the City has made $77.5 million in payments beyond the actuarially required contribution determined by California Public Employees’ Retirement System (CalPERS). This has resulted in over $8.0 million in annual pension contribution savings. In 2014, after a series of pay downs funded from year end savings, Council adopted a policy that, provided that there are sufficient funds, the annual budget would include a minimum set-aside of $1.0 million in the General Fund, and commensurate set-aside amounts in all other funds, to be used towards pay downs of the CalPERS unfunded liability. Based on the availability of additional funds, staff would annually assess the set-aside of additional CalPERS payments against other unfunded needs, and present the Council with a recommendation. This policy will remain in effect until there is no remaining net pension liability. Additionally, the City continues its policy of prepaying the annual employer contributions to CalPERS to the extent allowable under new PERS rules implemented in FY 2017-18. Discounts received from such prepayments are used for pay downs of the net pension liability. However, CalPERS has made a number of changes to actuarial assumptions that have increased the City’s contribution rates. On December 21, 2016, the CalPERS Board of Administration approved lowering the discount rate for the long term rate of return from 7.5% to 7.0%, resulting in an increase to the unfunded liability in FY 2017 -18 that was offset with a $45.0 million payment to CalPERS in June 2017 (due to GASB reporting, the impact of this payment was not reflected in the net pension liability until the FY 2017-18 CAFR). CalPERS will also shorten the period over which future actuarial gains and losses are amortized from 30 years to 20 years with the payments computed using a level dollar amount, will remove the 5-year ramp-up and ramp-down on unfunded actuarial liability bases attributable to assumption changes and non -investment gains and losses, and will remove the 5-year ramp-down on investment gains and losses. These changes will 11 of 14 apply to new unfunded liability bases and will likely further increase contributions beginning in FY 2021-22. It is critical for the City to continue to work both with its actuaries and with its employees to identify measures to mitigate increases in the City’s unfunded pension liability to ensure fiscal sustainability over the long-term. The City and the City Manager’s Pension Advisory Committee, made up of City residents and City workforce union representatives, recently completed work with an independent actuary to deve lop a set of options for mitigating the unfunded liability. The recommendations of the Pension Advisory Committee and staff were initially previewed to the Council for consideration at their January 22, 2019 meeting in the discussion regarding the City’s 10-year financial forecast. While the Council specifically directed the upcoming FY 2019-21 Biennial Budget be prepared in conformance with the recommendations developed by the Committee (and strongly endorsed by the City Manager), formal adoption of a plan to mitigate the unfunded liability will be further considered by Council prior to the adoption of the final budget. A detailed explanation of the Employee Benefits Programs including detailed pension information by plan is included in Note 16 (pages 78 through 94) and the Required Supplementary Information (pages 107 through 112). Other Postemployment Benefits (OPEB) For the fiscal year ended June 30, 2018, the City adopted GASB Statement No. 75 Accounting and Financial Reporting for Post-Employment Benefits Other Than Pensions. This change in accounting principles required the City to report the cumulative effect of the accounting change as a prior period adjustment in the City-wide and Fund financial statements. The statement also requires the City to present the net OPEB liability as the difference between the OPEB plan assets maintained in an IRS Section 115 irrevocable trust and the total OPEB liability as determined by actuarial valuation—the unfunded liability. In past years, the reported OPEB amount represented only the unpaid actuarial required contribution. This resulted in a significant increase in the liability, $26.4 million as compared to $10.5 million in last year’s CAFR. A detailed 12 of 14 explanation of OPEB is included in Note 16 (pages 78 through 94) and the Required Supplementary Information (pages 113 through 114). Pollution Remediation During FY 2017-18, the City revised its estimate of both the Olympic Well Field and Charnock Well Field remediation liability based on the most current information available, including proposals received by the City, consultants’ reports, and the expertise of the City’s Water Resources staff based on past history. As such, the revised figures more accurately portray the City’s estimated pollution remediati on liability. Cash flow projections discounted at a rate of 5% were used through completion of the remediation work and estimates included contingencies to account for uncertainty in future Federal and State water regulations. Charnock Wellfield remediation began in December 2010, when the Charnock Treatment Plant was permitted by the California State Water Resources Control Board, Division of Drinking Water (DDW) and operations commenced. The City has maintained and operated the facility continuously for the past eight years. The future remediation costs for the Charnock Wellfield are summarized in the following categories 1) groundwater monitoring and modeling, 2) future permitting work, and 3) treatment/remediation costs. The City reassessed the categories of costs for the Charnock remediation, which previously included items that the City would continue even after the remediation process was complete. It is anticipated that the wellfield would be remediated within the next five years and the necessary permits obtained in seven years. The City is currently restoring the Olympic Wellfield by pumping from existing production wells and combining water from the Olympic Wellfield with other groundwater sources (e.g. Charnock and Arcadia) at the Arcadia Water Treatment Plant, where the water is treated to meet drinking water requirements. While the City is currently treating Olympic Wellfield water, the path, timing, and cost of project completion for this wellfield is difficult to outline and quantify, largely due to uncertainty in future State and Federal regulations (e.g., new regulations that may require additional or more extensive 13 of 14 treatment than currently required) and site conditions (e.g. actual plume capture versus simulated models when pumping rates are increased). Staff has recommended the construction of a $40 million remediation plant and ongoing maintenance that would result in the removal of 87% of the volume of contaminants in the sub -basin within the first 30 years and 95% removal in 50 years. The City adjusted the liability downward to $32.3 million for the Olympic Well Field and to $7.7 million for the Charnock Well Field. As noted previously, the adjustment was determined based on projected future cash flows, discounted at a rate of 5%, which is why the revised liability for the Olympic Well Field of $32.3 million is less than the $40 million remediation plant discussed in the previous paragraph. These adjustments have been reported as Special Items on the Statement of Activities and Sta tement of Revenues, Expenses and Changes in Fund Net position. More information on Pollution Remediation is found in Note 4, page 35 of the CAFR. Cash and Investments The CAFR also includes detailed information on the City’s cash and investments. As of June 30, 2018, the City had $901 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. 14 of 14 Prepared By: Stephanie Manglaras, Accounting Manager Approved Forwarded to Council Attachments: A. Comprehensive Annual Financial Report FYE2018 (Weblink) B. Independent Auditors’ Unmodified Report for the City’s Financial Statements for the Fiscal Year Ended June 30, 2018 C. Auditors' Letter to Council 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, 2018, 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 12, 2018. 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. 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 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. 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 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 12, 2018 December 12, 2018 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 30,2018. 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 June 4,2018.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 16 to the financial statements, the City changed its accounting policies related to other postemployment benefits other than pension reporting by adopting Statement of Governmental Accounting Standards (GASB Statement) No. 75, Accounting and Financial Reporting for Post-Employment Benefits Other Than Pensions in fiscal year 2017-2018.Accordingly, the cumulative effect of the accounting change as of the beginning of the year is reported in the government-wide statement of activities and the proprietary funds statement of revenues, expenses and changes in net position. 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. The most sensitive estimate(s) affecting the City’s financial statements was (were): Management’s estimates of its net pension liability and net other postemployment benefits liability are based on actuarial valuation specialist assumptions. We evaluated the key factors and assumptions used to develop the net pension liability and net other postemployment benefits liability in determining that they are 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.The City adjusted its pollution remediation obligation based on current remediation information and analysis. The City reported a reduction in the obligation of $65,077,602 which is reported as a special item in the financial statements.As of June 30, 2018, the City has estimated that its total obligation for pollution remediation is $43,313,554, with $4,131,184 of that amount expected to be paid out during fiscal year 2018-19. 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 $466,819,562 as compared to $460,663,362 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 $26,375,591 in net OPEB liability as compared to $10,540,517 in the prior year, with the reason for the significant increase being the implementation of GASB 75. This liability now represents the net differences between OPEB plan assets and the total OPEB liability, where previously it represented the unpaid portion of the annual required contributions. 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. No misstatements were found. 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. W e are pleased to report that no such disagreements arose during the course of our audit. To the Honorable Mayor and Members of the City Council City of Santa Monica, California Management Representations We have requested certain representations from management that are included in the management representation letter dated December 12, 2018. 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 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, the schedule of changes in the net OPEB liability and related ratios, and the schedule of contributions –OPEB, 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 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. To the Honorable Mayor and Members of the City Council City of Santa Monica, California 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 Accounting Standards The following new Governmental Accounting Standards Board (GASB) pronouncements were effective for fiscal year 2017-2018 audit: 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. 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 2018-2019 GASB Statement No. 83, Certain Assets Retirement Obligations. GASB Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowing and Direct Placements. Fiscal year 2019-2020 GASB Statement No. 84, Fiduciary Activities. Fiscal year 2020-2021 GASB Statement No. 87,Leases. 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