TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Libby Bretthauer, Finance Director
Julie Bondarchuk, Financial Controller
SUBJECT:Title
Presentation of the Fiscal Year 2024-2025 Annual Comprehensive Financial Report (No Budget Impact) (Finance Director Bretthauer).
(Estimated Time: 30 Mins.)
RECEIVE AND FILE
Body
_________________________________________________________
RECOMMENDATION:
Staff recommends that the City Council receive and file this report.
FISCAL IMPLICATIONS:
There are no fiscal implications associated with the recommended action. The results of fiscal year (FY) 2024-2025 are summarized below and are included in the attached Annual Comprehensive Finance Report (ACFR).
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 (May 2025) and the final audit (September/October 2025). 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.
The audit results and the FY 2024-2025 ACFR financial statements were presented and discussed with the Finance Subcommittee at the December 18, 2025, meeting.
The audit firm of Lance, Soll and Lunghard (LSL) issued the City an unmodified opinion on the FY 2024-2025 financial statements, which are prepared in all material respects and complying with governmental accounting practice. The opinion is issued once auditors obtain sufficient and appropriate audit evidence to the financial statements due to their testing. An unmodified opinion is the best possible outcome.
DISCUSSION:
Attached to this report is the City’s ACFR for the fiscal year ended June 30, 2025. This independently audited report is prepared with the assistance of the City’s auditor, LSL, the certified public accountancy firm selected by the City Council. Staff would like to take this opportunity to acknowledge the auditor’s professionalism and diligence in the completion of the audit.
At the conclusion of the FY 2025 audit, the City received one “significant deficiency” finding for COVID-related expenditures later reimbursed by the Federal Emergency Management Agency (FEMA). The expenditures were originally recorded on the City’s general ledger in FY 2021 and FY 2022 and were not eligible to be recorded in the Schedule of Expenditures of Federal Awards (SEFA) until the funds are obligated by FEMA. In FY 2025, the City recorded the FEMA revenue received but did not include the corresponding prior year expenditures on the SEFA, which resulted in this finding.
Additionally, LSL issued a management letter providing a recommendation to maintain income statement accounts and fund balance accounts separately. Income statement accounts are revenues and expenditures, while fund balance accounts (or balance sheet accounts) are assets, liabilities, and equities. Historically, the City has a practice of recording non-budgetary (non-cash) related transactions (e.g. depreciation) and interfund transfers through balance sheet accounts. For this practice to work, staff has performed additional reconciliations to regroup these balance sheet accounts as revenues and expenditures. Without these additional reconciliations, there will be fund balance variances in the auditor’s books. While this practice has historically worked for the City and its external auditors, the increasing number and complexity of accounting standard pronouncements has required staff to spend an excessive amount of time reconciling these entries for the auditors.
With additional GASB pronouncements expected, staff recommends changing this historical practice. Beginning with the Mid-Year Budget Update report that will be presented on February 17, 2026, non-budgetary transactions (e.g. depreciation) and interfund transfers will be presented within the appropriate revenue and expenditure categories to comply with best practices.
Annual Comprehensive Financial Report Summary
The attached ACFR contains detailed information about the City’s financial results for FY 2024-2025. 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 FY 2024-2025. A review of the transmittal letter will help readers 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, comprised of 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, 2025.
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 occurred) 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, 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 and Capital Improvement) and major enterprise funds (Water, Wastewater, 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 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 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
• Financial Policies
• Major Initiatives
• Factors Affecting Financial Condition
• Executive Financial Overview
Staff recommends readers, at a minimum, review the Letter of Transmittal and MD&A located in the introductory sections of the ACFR.
Highlights and Trends
As of June 30, 2025, the City’s net position totaled $252.3 million government-wide, an increase of $7.4 million compared to FY 2023-2024.
Governmental Funds
Total net position in Governmental Activities (General, Capital Improvements, and Special Revenue) in FY 2024-2025 was $114.3 million. This was an increase of $2.2 million compared to the prior year due to an increase in investment in capital assets. Revenues in the Governmental Activities totaled $117.8 million, an increase of $6.7 million (6.1%) from the prior year driven by the performance in the categories of taxes, services and use of money and property. Expenditures totaled $114.8 million, down $4.1 million (3.44%) due to a decrease in pension expense.
General Fund balance was at $30.5 million, down $9.9 million compared to the prior year. The General Fund operating surplus totaled $4.5 million; however, the decrease in General Fund balance was due to net transfers out totaling $15.7 million. Transfers out included $15,415,471 to the Capital Improvement Fund primarily for the purchase of property at 400 Manhattan Beach Blvd, $258,535 to the Street Lighting Fund, and $266,114 to the Fleet Fund. Transfers out were slightly offset by $230,407 in excess revenues from the County Parking Lot Funds. The subsidies to the Street Lighting Fund will continue unless a Proposition 218 assessment vote can be passed to fund operations going forward. The General Fund balance at the end of the fiscal year temporarily did not meet policy reserves; however, the City subsequently issued Certificates of Participation for the purchase of 400 Manhattan Beach Boulevard in August 2025, so the General Fund balance will be replenished as of FY 2025-2026.
Enterprise Funds
The total Business-Type Activities net position totaled $137.6 million, up $5.2 million from the prior year. Fund revenues totaled $33.4 million, up $5.1 million compared to the prior year. Operating expenses totaled $27.8 million, an increase of $4.0 million from the prior year. Operating surplus before transfers totaled $5.6 million, up $1.0 million from the prior year. Unrestricted net position increased $2.6 million to $38.6 million due to the construction of capital projects that absorb working capital and increase investments in capital assets.
Pension Contributions
In May 2021, the City issued pension obligation bonds, which virtually eliminated the City’s unfunded liability with CalPERS at the time by replacing it with bonded debt. By issuing the POBs, the City was able to finance 100% of the current net pension liability (NPL) at a true interest cost of 2.72%, 4.43% lower than the CalPERS discount rate of 7.15% at the time of issuance. Moreover, the POBs allow the City to budget level debt service payments at $5.5 million annually rather than trying to balance the budget for escalating Net Pension Liability (NPL) payments that would have eventually risen up to $10 million by 2032.
CalPERS investment returns were 9.3% for FY 2023-24, which decreased the net pension liability by $4.1 million to $20.2 million in the current financial statements. The FY 2024-2025 preliminary investment returns of 11.6% will be reflected in the FY 2025-2026 ACFR and is estimated to reduce the City’s net pension liability to about $15 million. The fluctuation of returns year-over-year can dramatically affect the City’s net position.
Managing pension liabilities and meeting retirement obligations remain one of the City’s biggest challenges. Over 95% of retirement costs are attributable to the City’s Governmental Funds and growing pension costs have the potential to crowd out other funding needs. The City has therefore developed an Unfunded Pension Liability Policy to provide a guideline on addressing future NPL. Future pension costs and liabilities will be monitored continuously and addressed to position the City to be able to meet future financial obligations.
In closing, staff is pleased to report that the FY 2024-2025 financial audit resulted in the City once again receiving an unmodified opinion. 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 Department staff, especially Julie Bondarchuk, Emy-Rose Hanna, Amira Khodari, and Marcelo Serrano. LSL will also be available during the City Council meeting on January 20, 2026, to answer questions.
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.
ATTACHMENT/ATTACHMENTS:
1. Fiscal Year 2024-2025 Annual Comprehensive Financial Report (ACFR)
2. Report on Internal Control
3. Management Letter
4. Audit Communication Letter
5. PowerPoint Presentation