SR 02-12-2019 3D
City Council
Report
City Council Meeting: February 12, 2019
Agenda Item: 3.D
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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.
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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).
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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
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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)
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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
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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;
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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
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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.
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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,
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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
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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
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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
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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.
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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