TO:
Honorable Mayor and Members of the City Council
THROUGH:
Bruce Moe, City Manager
FROM:
Steve S. Charelian, Finance Director
Henry Mitzner, Controller
Julie Bondarchuk, Senior Accountant
Libby Bretthauer, Senior Financial Analyst
SUBJECT:Title
Fiscal Year 2018-2019 Comprehensive Annual Financial Report (Finance Director Charelian).
RECEIVE AND FILE
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council receive and file this report.
Body
EXECUTIVE SUMMARY:
We are pleased to report that the City has received the best possible opinion, an unmodified (formerly unqualified) audit opinion, meaning that the auditor believes the City’s financial statements are fairly presented in all material respects in conformity with Generally Accepted Accounting Principles (GAAP).
FISCAL IMPLICATIONS:
There are no fiscal implications associated with the recommended action. The results of fiscal year 2018-2019 are summarized below, and are included in the attached Comprehensive Annual Financial Report (CAFR).
BACKGROUND:
The City’s financial policies require an annual audit performed by an external auditor. An audit is also required to obtain the Certificate of Achievement for Excellence in Financial Reporting from the Government Financial Officers Association (GFOA) and is oftentimes a requirement for grants or federal awards. This year, the annual audit consists of the interim audit (completed in May 2019), the final audit (completed in October 2019) and the Single Audit (completed in December 2019). During these audits, the external auditors prepare audit working papers in compliance with the General Accepted Government Auditing Standards (GAGAS). These working papers document the information gathered during an audit and provide evidence that sufficient information was obtained by the auditor to support the audit opinion.
DISCUSSION:
Attached to this report is the City’s CAFR for the year ended June 30, 2019. This independent audit report is prepared with the assistance of the City’s auditor, Lance, Soll and Lunghard, the certified public accountancy firm selected by the Council. Staff would like to take this opportunity to acknowledge the auditor’s professionalism and diligence in the completion of the audit.
The attached report contains detailed information about the City’s financial results for Fiscal Year 2018-2019. The document, which is in an industry-standard format, is organized as follows:
Introductory Section
The Introductory Section includes the City’s transmittal letter providing an executive summary of the financial and economic events characterizing Fiscal Year 2018-2019. A review of the transmittal letter will help the reader understand the City's organizational structure and provides performance highlights of the City’s most significant funds and operations.
Financial Section
The Financial Section presents the independent auditor’s report and Financial Statements. The auditor’s report contains two main sections: the Audit Opinion and the Management Discussion & Analysis (MD&A).
Audit Opinion
The Audit Opinion, worded in an industry standard format, provides a statement by the auditor attesting to the fair presentation of financial data in conformity with generally accepted accounting principles and government accounting standards.
Management Discussion & Analysis (MD&A)
The required MD&A is intended to serve as an introduction to the City’s basic financial statements, which comprise three components: 1) Government Wide Financial statements, 2) Fund Financial statements, and 3) notes to the financial statements, which is an overview and analysis of the financial activities of the City of Manhattan Beach for the fiscal year ended June 30, 2019.
Government-wide Financial Statements
The Government-wide financial statements are designed to provide readers with a broad overview of the City’s finances, in a manner similar to a private-sector business. These statements utilize full accrual accounting (which recognizes revenue in the period it is earned, and expenses in the period it occurs) as is done in private industry. The statements included in this section are the statement of net position and the statement of activities. Both government-wide statements are designed to show the annual increase or decrease in net assets and, in doing so, distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include general government, public safety, public works, planning, building and safety, and recreation. The City’s business-type activities include water, wastewater, stormwater, refuse, and parking.
Fund Financial Statements
The Fund Financial Statements include governmental funds reported on a budgetary modified accrual basis (which recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred), and proprietary funds reported on a full accrual basis. Major governmental funds (General Fund, Capital Improvement Fund, Gas Tax, and Proposition C) and major enterprise funds (Water, Waste Water, Parking) are shown individually, while non-major funds are aggregated into a single column (full details are listed later in the document). Internal service funds are considered minor proprietary funds and are aggregated following enterprise funds.
The Notes to the Financial Statements section follows, which provides financial disclosures about the City’s financial statements. That section is followed by the Combining Financial Statements & Schedules and the Statistical Section. The combining statements are presented in the traditional fund manner and report on the details of all non-major funds which appear on a combined basis in the front of the document. The Statistical Section, not subject to audit review and testing, provides general trend information presenting financial and economic data over time.
The first attachment to this report is the letter of transmittal which has been extracted from the Fiscal Year 2018-2019 CAFR. The Letter of Transmittal provides an overview of the financial information contained in the statements. In addition, there is discussion of
• Profile of the Government
• Budget Process
• Economic Condition
• Financial Policies
• Major Initiatives
• Executive Financial Overview
• Current Trends & Events
Staff recommends that the reader, at a minimum, review the Letter of Transmittal and MD&A portion of the report. Both the Letter of Transmittal and MD&A can be referenced in the introductory sections of the CAFR.
The audit results and the Fiscal Year 2018-2019 CAFR financial statements were discussed with the Finance Subcommittee at their December 5, 2019, meeting.
Highlights and Trends
As of June 30, 2019, the City’s net position totaled $200.4 million government-wide, an increase of $8.8 million from the prior year. Most of this increase is attributed to the City’s Business-Type activities in the Enterprise Funds as described below.
Governmental Funds
Total net position in Governmental Funds (General, Capital Improvements, and Special Revenue) was $99.7 million, an increase of $265,350 from the prior year. Revenue in the Governmental Funds totaled $83.5 million, an increase of $4.0 million (5.1%) from the prior year due to higher revenues from property taxes and charges for services. Expenditures totaled $88.0 million, up $13.0 million (17.3%) compared to the prior year due to an increase in capital expenditures in the Capital Improvements Fund. Total fund balances decreased $6.3 million to $41.1 million.
General Fund balance was at $26.4 million, down $417,460 compared to prior year due to transfers out to other funds as well as one-time funding of Manhattan Beach Unified School District safety and security measures for $1.0 million and the purchase of portable public safety radios in the amount of $1.3 million. Even with these large one-time expenditures, revenues exceeded expenditures by $1.9 million and transfers out totaled $2.3 million.
Transfers out included:
- $1,273,783 to the Stormwater Fund to relieve a deficit fund balance due to operations.
- $600,299 to the Information Systems Fund for new financial software.
- $560,100 to the Capital Improvements Fund to support unfunded projects.
- $144,634 to the Street Lighting Fund to relieve a deficit fund balance.
- $15,480 to the Proposition A Fund to relieve a deficit balance.
General Fund support will continue to increase in the Stormwater Fund and Street Lighting Fund unless a Proposition 218 assessment vote can be passed to fund operations going forward.
Enterprise Funds
The total enterprise funds net position totaled $100.7 million, up $8.6 million from the prior year. Revenue totaled $27.9 million, up $119,114 compared to the prior year due to an increase of sales. Operating expenses totaled $22.3 million, a decrease of $462,657 from the prior year. Operating income totaled $5.57 million, up $581,771 from the prior year, mostly due to the Water and Wastewater Funds.
Pension Contributions
The City paid $7.73 million for pension contributions in FY 2018-2019, compared to $6.65 million in the prior year. Future City contributions of normal service costs and amortization of the unfunded liability are projected to increase in the following years:
Normal Cost Amortization Total Contribution
FY 2019-2020 $4.17 million $5.05 million $9.22 million
FY 2020-2021 $4.62 million $5.69 million $10.31 million
FY 2021-2022 $4.70 million $6.52 million $11.22 million
FY 2022-2023 $4.80 million $7.20 million $12.00 million
FY 2023-2024 $4.89 million $7.62 million $12.51 million
Projected yearly increases over the next five years will average $875,000. Managing the growing net pension liability and meeting retirement obligations remain some of the City’s biggest challenges. Nearly 98% of retirement costs are attributable to the City’s Governmental Funds, and growing pension costs certainly have the potential to crowd out other funding needs.
The issue of rising pension contributions is an issue not just local to the City, but to all public agencies. Finance staff prepared a plan to address the issue of pension costs, and presented it to the Finance Subcommittee in September 2019. The full report and plan will be presented to the City Council in early 2020.
In closing, staff is pleased to report that the fiscal year 2018-2019 financial audit resulted in the City once again receiving an unmodified opinion. Furthermore, City Council policy reserves remain fully funded at the end of Fiscal Year 2018-2019.
The City Manager and Finance Director wish to recognize the dedication, hard work, and attention to detail of all departments during the year that enables the City to achieve the unmodified opinion. Special recognition is in order for Finance staff, particularly Henry Mitzner, Julie Bondarchuk, and Libby Bretthauer.
PUBLIC OUTREACH:
After analysis, staff determined that public outreach was not required for this issue.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENTS:
1. Fiscal Year 2018-2019 Comprehensive Annual Financial Report (CAFR)
2. Fiscal Year 2018-2019 General Fund and Enterprise Fund Summary Results
3. Report on Internal Control (Management Letter)
4. Audit Communication Letter