TO:
Honorable Mayor and Members of the City Council
THROUGH:
Mark Danaj, City Manager
FROM:
Bruce Moe, Finance Director
Henry Mitzner, Controller
Libby Bretthauer, Financial Analyst
SUBJECT:Title
Fiscal Year 2014-2015 Comprehensive Annual Financial Report
RECEIVE REPORT
Line
_________________________________________________________
Recommended Action
RECOMMENDATION:
Staff recommends that the City Council receive this report.
EXECUTIVE SUMMARY:
We are pleased to report that once again, the City has received the best possible opinion, an unmodified (formerly unqualified) audit opinion, meaning that the auditor believes that the City’s financial statements are fairly presented in all material respects in conformity with Generally Accepted Accounting Principles (GAAP). Further, the auditor reported no material deficiencies (see Attachment #3).
FISCAL IMPLICATIONS:
There is no fiscal implication associated with the recommended action. The results of fiscal year 2014-2015 are summarized below, and are included in the attached Comprehensive Annual Financial Report (CAFR).
DISCUSSION:
Attached to this report is the City’s CAFR for the year ended June 30, 2015. 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 FY 2014-2015. The document, which is in 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 2014-2015. 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. 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, 2015.
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 as is done in private industry. The statements included in this section are the statement of net position (formerly statement of net assets) 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, waste water, storm water, refuse and parking.
The Fund Financial Statements include governmental funds reported on a budgetary modified accrual basis and proprietary funds reported on a full accrual basis. Major governmental funds (General Fund, Capital Improvement Fund) and major enterprise funds (Water, Waste Water, Refuse and 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 detail 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.
Staff recommends that the City Council, at a minimum, review the Letter of Transmittal, and MD&A portions of the report. These will provide an overview of the audit results and financial highlights.
The audit results were discussed with the Finance Subcommittee.
Governmental Accounting Standards Board (GASB) Statement 68
This year, there is a significant change in the reporting model in accordance with Governmental Accounting Standards Board (GASB) Statement 68. In prior years, pension liabilities were discussed only in the footnotes; no pension liabilities were presented in the statements. Statement 68 now requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability, and to more comprehensively and comparably measure the annual costs of those benefits. As a result, Manhattan Beach is now reporting net pension liabilities for the defined benefit plans with CalPERS of $44,047,457.
It is important to note that these are not new pension liabilities for the City; GASB 68 simply requires that pension liabilities are now reported on the City’s financial statements. Previously this information was located in the footnotes.
Please see the Management Discussion and Analysis section of the CAFR for more detailed information regarding GASB 68.
Summary of Results
General Fund
Overall, General Fund results were better than budgeted projections. Revenues exceeded expenditures by $1,847,117 (please note that page 28 of the CAFR shows revenues exceeding expenditures by $1,846,065; this difference is due to the sale of capital assets which the CAFR states separately from revenues, but which are included in the City’s statement of revenues) . When considering net transfers to and from other funds, and sale of capital assets, General Fund balance increased by $1,866,415 from the prior year. Transfers out, which totaled $231,024, were due to the General Fund subsidizing the Street Lighting & Landscape District Fund activities since expenditures exceeded revenues, and the Fund has a $-0- balance.
By category, revenues exceeded the final (amended) budget by $3,097,534 and expenditures came in under final (amended) budget by $1,431,961 as detailed in Attachment 1.
The total fund balance in the General Fund as of June 30, 2015 was $22,764,750. Utilizing governmental accounting standards classifications for governmental type funds (GASB 54), the fund balance is as follows:
Unassigned: $21,036,975
Restricted: 32,566
Non-Spendable: 1,695,209
Total $22,764,750
The Unassigned category includes the City Council financial policy reserve of $12.1 million (20% of expenditures) and the Economic Uncertainty Reserve of $4 million. Once all City Council established internal reserves and designations have been accounted for, the General Fund had an available balance as of June 30, 2015 of $4.9 million (please note that this amount does not reflect subsequent appropriations from the available fund balance including those in the fiscal year 2015-2016 budget).
General Fund Revenue Highlights
Total revenues exceeded budget by $3,097,534, or 5.2% (see Attachment #1). Property Tax exceeded the budget by 2.2% ($524,034), and surpassed the prior year by 4.6% ($1.1M). As a category, Other Taxes (Sales, TOT, Franchise, etc.) exceeded FY 13-14 by $911,993 or 5.0%, and exceeded budget by $936,235 (5.1%). Transient Occupancy Tax (TOT) exceeded the prior year by $390,115 (10.9%), and budget by $286,209 (7.8%). Sales Tax totaled $9,171,515 in FY 14-15, came in slightly ahead of budget by $58,642 (.6%) and $35,709 (.4%) more than FY 2013-2014.
Licenses and permits came in $444,860 (25.7%) more than the prior year, and $134,763 (6.6%) above budget. This category includes building permits which came in $165,182 ahead of FY 13-14 and $36,592 (3.2%) over budget. Film permits in this category also performed well, increasing by $49,115 from FY 13-14; an 83% increase.
Fines and Forfeitures performed below budget by $45,630 or 1.8%, but outperformed FY 13-14 by $69,170 (2.8%). In this group, Parking Citations were $53,372 under budget (2.3%) but were ahead of the prior year by $65,112 (2.9%).
Current Services came in over budget by $594,148 (9.7%), and over FY 13-14 by $173,067 (2.7%). This group includes Plan Check, Parks and Recreation, and Police and Fire service fees among others. Plan Check exceeded budget by $60,028 or 4.4% and even with FY 2013-2014.
General Fund Expenditure Highlights
FY 2014-2015 General Fund expenditures as a group came in below budget by $677,509, or 1.1% (see Attachment #1). Within General Fund categories, Salary and Wages came in over budget by $957,195 (3.3%), but was more than offset by savings in other categories. This overage occurred primarily through sworn salaries in the Police Department which exceeded budget by $302,655, and sworn overtime in the Fire Department, which was over budget by $594,902. The Police salary overrun is due to staffing levels above the presumed 4% vacancy factor budgeted in FY 2014-2015, and the permitted cash out of vacation time by sworn personnel. Fire exceeded budget due to injuries as well as a vacancy at the Battalion Chief level, both filled through overtime to maintain minimum staffing levels.
Attachment #1 lists the expenditures across all departments by object class. Highlights include:
1. Capital Outlay came in under budget by $896,910
2. Operating Expenditures (contract services, materials, utilities, etc.) were below budget by $441,181 (2.3%)
3. Debt Service was under budget by $241,777
Capital Outlay expenditures are primarily for Information Systems Master Plan (ISMP) projects, for which planning and development may be protracted. Major projects within this budget include: Document Management Systems ($200,000) for which a contract has been awarded and progress is being made in FY 15-16; Financial and Human Resources Systems Enhancements ($300,000) for which consultants are currently being interviewed; and GIS expansion ($72,500) which was started in FY 13-14.
Other Funds of Note
While most funds performed as expected, several are worth mentioning.
The Insurance Reserve Fund ended the year with a negative net position of $2,083,430. This outcome was expected and reported to the City Council on multiple occasions during FY 14-15 and FY 15-16. In order to cure this imbalance, which was primarily caused by unusually high levels of liability and workers compensation activity, the City Council implemented a recapitalization plan which includes phased General Fund transfers-in over three fiscal years, which started in FY 2015-2016.
The Water Fund continues to build the resources for planned capital improvements needed to sustain the utility’s operation and infrastructure. Net income from operations totaled $7,015,160, an improvement from the prior year which had net operating income of $7,084,879. Revenue from sales declined by 1.1%, while operating expenses (labor, materials, services, etc.) fell by 1.1%. During FY 2010, the City Council approved increased water and waste water rates to support system infrastructure needs as well as to bolster the fiscal integrity of those funds. The new rate structure became effective in January 2010 and provided for annual increases each January through 2014. Accumulated fund balances provide resources for planned capital improvements to the utility’s infrastructure, estimated at $33.4 million over the next five years.
The Waste Water fund net operating income for FY 2014-2015 was $1,919,315 versus $1,595,661 in FY 2013-2014 - a net increase of $323,654, or 20.3%. Operating revenue decreased $63,940 (1.8%) while operating expenses decreased $387,594 (18.9%). This improvement is primarily due to waste water rates implemented along with the water rates in January 2010. Similar to the water utility, the new rates are being utilized to fund needed capital improvements to the waste water system.
Refuse Fund net income from operations totaled $52,056 in FY 2014-2015, a decrease of $13,238 from the prior year. Operating expenses increased by $111,242 (2.9%) and operating revenues increased by $98,004 (2.5%). In FY 2013-2014, the City voluntarily commenced issuing refunds for past street sweeping charges collected on utility bills. The Refuse Fund balance for fiscal year ending June 30, 2014 was restated to recognize the street sweeping refunds issued from prior year revenues which totaled $618,708 (further restatements will be necessary in future years in which refunds continue). Total fund balance as of June 30, 2014 was $541,605. Street sweeping refunds continued in FY 14-15, and totaled $148,522. These refunds required another restatement. Fund balance at June 30, 2015 totaled $325,919, a decrease of $215,686 from FY 13-14 year-end.
The Storm Water Fund net operating loss in FY 2014-2015 totaled $424,468, furthering prior year net losses in FY 2013-2014 ($420,831) and FY 2012-2013 ($57,093). The combination of fixed fees and rising costs currently requires a General Fund subsidy of administrative overhead, and ultimately will require cash subsidies. Additionally, capital improvements due to legislative mandates will also result in increased costs. A Proposition 218 assessment vote will be necessary to properly fund operations going forward. At City Council’s direction, staff is developing a plan to address the revenue shortfall and will present the plan at an upcoming Council meeting.
CONCLUSION:
Staff is pleased to report that the fiscal year 2014-2015 financial audit resulted in the City once again receiving an unmodified opinion. The General Fund performed better than expected, with revenues exceeding expenditures by $1.8 million. City Council policy reserves remain fully funded at the end of FY 2014-2015.
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, Libby Bretthauer and Julie Bondarchuk.
Attachments:
1. FY 2014-2015 General and Enterprise Fund Summary Results
2. FY 2014-2015 Comprehensive Annual Financial Report (CAFR)
3. Report on Internal Control (Management Letter)
4. Audit Committee Letter