AGENDA ITEM
TO:
HONORABLE MAYOR
AND MEMBERS OF THE CITY COUNCIL
FROM:
SHARON DEL ROSARIO
ADMINISTRATIVE SERVICES OFFICER/FINANCE DIRECTOR
SUBJECT:
title
ANNUAL COMPREHENSIVE FINANCIAL REPORT FOR FISCAL YEAR 2020-21
summary
Summary:
The Annual Comprehensive Financial Report (ACFR) is an independently audited summary report of the financial transactions of the City for Fiscal Year (FY) 2020-21, providing relevant financial information to the City Council, citizens, current and future employees, grant entities, creditors, bond investors, rating agencies, and other interested parties. This audit is performed in compliance with City Charter requirements with the results presented to the City Council for their review.
The audit was completed by the City's independent auditor, CliftonLarsonAllen LLP, Certified Public Accountants, which issued an unqualified opinion, otherwise known as a “clean opinion”, finding nothing of material concern in the City’s internal controls, financial, and bookkeeping practices. The independent auditor’s unmodified report provides assurance that the ACFR, and the audited information within, present fairly the City’s financial position for the year ending June 30, 2021.
recommendation
Recommendations:
1. Receive and file the City’s Annual Comprehensive Financial Report for FY 2020-21.
2. Approve the proposed appropriations from FY 2020-21 to FY 2021-22 reserve balances and the current year FY 2020-21 General Fund operating surplus of $5.8 million.
3. Adopt the resolution, entitled:
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SIGNAL HILL, CALIFORNIA, AUTHORIZING APPROPRIATIONS FROM THE FISCAL YEAR 2020-21 GENERAL FUND OPERATING SURPLUS AND CURRENT YEAR APPROPRIATION ADJUSTMENTS, AMENDING THE FISCAL YEAR 2021-22 BUDGET
4. Direct staff to distribute copies of the Annual Comprehensive Financial Report for FY 2020-21 as required, as well as to the Office of the City Clerk to be placed on file for the general public and posted on the City’s website.
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Fiscal Impact:
FY 2020-21 closed with General Fund revenues exceeding expenditures, including net transfers, in the amount of $5,774,588. The proposed appropriations for the FY 2020-21 surplus include the following:
• Replenishment and augmentation of reserve funds (page 10, Table 5) - $5,483,275
• Carryover appropriations (page 11, Table 6) - $34,813
• New appropriations (page 12, Table 7) - $256,500
Strategic Plan Objectives:
Goal No. 1: Ensure long-term fiscal stability.
Obj. No. 1.1.3: Monitor and respond to proposed legislation affecting City revenues.
Obj. No. 1.1.8: Adequately fund reserves.
Goal No. 6: Promote a transparent and open government.
Background:
The City’s Charter requires that an annual audit be performed relating to the City's financial transactions, records, inventories, and reports. Accordingly, the City retains an independent external auditor. The auditor’s responsibility is to express opinions on the financial statements and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The results of these efforts are incorporated in the ACFR (Attachment A), which is a set of financial statements that present the City’s financial results at the end of the fiscal year.
The ACFR was prepared in accordance with Generally Accepted Accounting Principles (GAAP) as set forth in the pronouncements of the Governmental Accounting Standards Board (GASB), an organization that regulates governmental accounting as the source of generally accepted accounting principles. In addition to standards of reporting, GASB issues statements, interpretations, bulletins and other guidelines for financial reporting.
Local Economy and Financial Landscape
The COVID-19 pandemic and the resulting public health crisis put an end to the nation’s longest modern economic expansion. Since the beginning of 2020, to control the spread of COVID-19, federal, state, and local governments established and followed varied health mandates and guidelines. The practical application of these mandates and guidelines had significant impacts across every economic sector.
As economists continued to follow the anticipated and unanticipated impacts of COVID-19, the consensus was that a full-recovery could be reached dependent on the ability to control the virus. While the initial vaccine rollout has been effective in reducing the spread of COVID-19 and controlling the severity of COVID-19 complications, the rise in variant infections continues to challenge communities throughout the country.
Based on actual performance indicators along with industry forecasts, it is clear that COVID-19 has permanently altered the economic landscape for every business sector. While some sectors struggled early on, most sectors experienced improved conditions by the end of 2021, and some have even seen record growth. The U.S. Real GDP ended in double digits as of June 2021 reflecting the rebounding of consumer confidence and spending as well as significant government stimulus measures. At the same time, rapid inflation emerged and continues to threaten our economic recovery. However, there are economists who believe the current inflationary trend is temporary. Economic growth has also been bolstered by significant increases in wages along with decreasing unemployment rates.
Los Angeles County’s economy was hit by the same COVID-19 impacts experienced throughout the nation. However, economists anticipate that economic recovery is expected to continue with an estimated 2021 GDP of $815 million, reflecting a faster growth rate as compared to the rest of the nation.
COVID-19 impacts varied widely across local governments and a city’s particular general fund revenue portfolio (i.e., property tax, sales tax, transient occupancy tax, franchise fees, etc.) and the elasticity of these sources determined a city’s fiscal exposure during the pandemic. As a “low property” tax city, the City’s most significant revenue source for General Fund operating revenues is sales tax. Although retail in general has suffered, the specific mix of businesses in Signal Hill have proven in the short-term to be pandemic-resilient, with overall sales tax revenue returns coming in higher than anticipated as sales tax receipts from April through June were 19.6% above the second quarter sales period in 2020. In addition, the City received its first remittance from Signal Hill Measure R (SHR) representing April to June 2020 sales of $1.1 million. The City continued to benefit from the increase in online shopping state-wide with the City’s allocation from the County sales tax pools increasing by 23%; however, moving forward this allocation is expected to follow more traditional trends seen after the implementation of AB 147.
The City’s major sales tax industry groups include business and industry, autos and transportation, general consumer goods, and building and construction. Three of the City’s larger business groups that saw strong gains year over year include autos and transportation (27%), building and construction (16%), and general consumer goods (13%). The Fuel and Service Station sector continues to struggle with a decline of -7%, albeit performing better than last year’s -31%. The Business and Industry sector also saw a decline of -7% after the prior year increase of 7%, but this sector is expected to see slow growth. The Restaurants and Hotel sector is at -12.1% and is expected to take much longer to recover from COVID-19 impacts.
Property taxes account for the next largest revenue source for the General Fund. California home prices continued to climb with Los Angeles experiencing increases of 26%, according to the California Association of Realtors. Home sales have recovered from their record low during the initial months of COVID-19. Home sales and home prices strengthened within Signal Hill due to low inventory and low interest rates and prices are expected to continue to rise through 2022. Despite the strong performance of the residential market, the City’s overall net taxable property value only changed by 0.1% as it is highly affected by oil and gas assets within the City. These property value changes are likely related to oil price fluctuations experienced during 2020 caused by COVID-19. As the property tax roll is set prior to commencement of the fiscal year, property tax revenue is projected to remain flat for FY 2021-22.
Based upon industry forecasts, historical and current data, and in accordance with the City’s tradition of fiscal prudence, the City applied conservative budgeting principles during the budget development process for FY 2021-22. The City’s FY 2021-22 Operating Budget includes adjustments to all major general fund revenue categories to reflect current industry estimates based on full economic recovery while still maintaining a conservative view and preparing for long-term recovery. The City’s sales tax estimates were adjusted to reflect Measure SHR, a new three-quarter cent per dollar general transaction and use (sales) tax. The budget also reflects the utilization of government relief program funding in the City’s capital plan. The City’s expenditures were developed as a conservative spending plan addressing City Council and community priorities while focusing on returning operations to full capacity, addressing deferred maintenance and operational needs, and delivering quality core municipal services with a skilled and talented workforce.
Analysis:
ACFR Components
The ACFR includes three main sections: 1) Introductory; 2) Financial; and 3) Statistical.
Introductory Section (pages i thru xii)
This section includes the guide to the report and one of two key narratives, the Transmittal Letter, which provides a broad financial outlook of the City and legal requirements for financial reporting.
Financial Section (pages 1 thru 129)
This section includes the second key narrative, the Management’s Discussion and Analysis (MD&A) section. The MD&A is audited information and is similar to financial reports in the private sector. The MD&A section of the ACFR provides a narrative overview of the City’s previous year’s activity and financial performance. This information should be read in conjunction with the basic financial statements and the extended footnotes to get an accurate overall representation of the City’s financial health. The Notes to the Basic Financial Statements provide narrative information about the City’s significant accounting policies and detailed disclosures on key financial matters. In addition, the MD&A includes a discussion of factors affecting the current year’s budget.
Also included in this section is the Independent Auditor’s Report, the Basic Financial Statements, the Fund Financials and the Notes to the Basic Financial Statements and other required supplementary information (RSI). The Government-Wide Financial Statements report information on all activities of the City, with the exception of where the City acts as a trustee for another agency, such as the Successor Agency; in addition, transfers of funds between City entities and reserves have been removed from these statements, and the statements only reflect events that resulted from activities between the City and non-City associations. Governmental activities, which normally are supported by taxes and grant revenues, are reported separately from business-type activities, such as the Water Department, which instead rely on user fees and charges that come from receiving a service.
The reporting includes the auditing standards of GASB Statement No. 68 (GASB 68), which requires that a governmental entity recognize its net pension liability (unfunded accrued liability) in the statement of net position (balance sheet). Under GASB Statement No. 75 (GASB 75), the City’s net Other Post-Employment Benefits Liability (OPEB) is recorded and extended discussions and disclosures are provided as part of the supplementary information in the footnotes. Under the reporting standards of GASB 68 and 75, City-wide financial statements present the net pension and OPEB liabilities.
Statistical Section (pages 133 thru 154)
This section consists of information pertaining to the City, including financial trends, revenue and debt capacity, demographics and economic information and other operating information.
General Fund Analysis
The General Fund is the City’s primary operating fund, comprised of local tax revenues and fees for services to fund core municipal services such as public works, police, planning, and recreation. The General Fund ended FY 2020-21 with revenues exceeding expenditures (including transfers) by $5,774,588.
The independent auditor reported that the FY 2020-21 General Fund Operating and Non-Operating Revenues were $28.1 million, which is $7.9 million above the FY 2020-21 final budget of $20.2 million and $3.4 million over the prior year FY 2019-20 actuals of $24.7 million. The increase over the FY 2020-21 Operating Budget was due to an overall increase in most revenue line items with the largest increase in sales tax revenues of $3.4 million. This increase reflects sales tax revenues coming in higher than estimated as well as the first quarter remittance of the City’s add-on sales tax (Measure SHR).
The General Fund Operating and Non-Operating Expenditures were $22.1 million, which is $1.4 million below the FY 2020-21 Operating Budget of $23.5 million and $0.2 million below the prior year FY 2019-20 actuals of $22.3 million. All departments ended the year with expenditures below budget, reflecting the implementation of employee furloughs, hiring freezes, and cost-containment strategies across all departments in anticipation of COVID-19 impacts.
Net Transfers Out were $0.3 million, which is $0.4 million higher than the FY 2020-21 Operating Budget. This is largely due to the completion of the Los Cerritos Storm Water Capture Facility capital project, which resulted in additional expenditures of $545,000 funded through the CIP Reserve Fund.
The General Fund Operating Results are summarized in Table 1. Revenues and transfers in less operating expenditures and transfers out resulted in year-end savings of $5,774,588. The Beginning Fund Balance in the FY 2020-21 Operating Budget was $42.3 million. After reflecting revenues, expenditures, and net transfers, the actual Ending Fund Balance is $48.0 million.
General Fund Reserves
The auditor reported that the General Fund Unassigned Reserve is $20.4 million and the Economic Uncertainties Reserve is $4.4 million for a total of $24.8 million as of June 30, 2021. Based on the FY 2020-21 General Fund expenditures of $22.4 million, the General Fund Unassigned Reserve and Economic Uncertainties Reserve together represent a reserve level of 110.5%, meeting and exceeding the City’s target of maintaining 50% in reserves.
The grand total of the General Fund Committed Reserves and the Unassigned General Fund Balance was $45.3 million on June 30, 2021. The committed fund balance was adjusted this year to include the Successor Agency loan receivable previously included in the non-spendable fund balance classification as this has been committed to paydown the 2018 Library Lease Revenue Bond debt. The Committed Reserves are classified fund balances that can only be used for the specific purposes determined by the City Council through the adoption of a resolution prior to the end of the fiscal year.
Committed Reserves balances and changes are summarized in Table 2.
GASB 68 and GASB 75
The City’s net pension liability is $31.8 million and the OPEB liability is $10.7 million. Net pension liability is the present value of projected benefit payments to current employees and retirees, less pension assets that are invested and maintained by CalPERS. Net pension liability associated with pensions for safety personnel is $17.8 million and for non-safety personnel is $14.0 million. Of the City’s two pension plans, the weighted average funding status is approximately 75.1% based on the most recent GASB 68 actuarial valuation, which is above the average funded status of approximately 70%. The City has established committed reserve funds to address future CalPERS rate increases and OPEB costs.
Beginning in 2009, the City and its employees recognized the need to take proactive measures to address the rising costs of the pension and OPEB plans. All employees began contributing a portion of their compensation toward their pension plan costs, reducing the City’s employer-paid costs. In 2010, the City established new pension plans for employees hired after June 2010 (Tier II) that offered reduced retirement benefits in order to lower long-term pension liability. In 2013, the State passed the Public Employees’ Pension Reform Act (PEPRA) that affects employees hired on or after January 1, 2013. PEPRA capped the annual pension benefit that can be received, established a lower-cost pension formula for safety and non-safety employees with requirements to work longer in order to reach full retirement age, and capped the amount used to calculate a pension.
Current contribution rates for Classic Tier I, Classic Tier II, and Public Employees’ Pension Reform Act (PEPRA) employees as follows:
• Classic Safety employees contribute 12%;
• PEPRA Safety employees contribute 13.75%;
• Classic Tier I/Tier II miscellaneous and management employees contribute 7%; and
• PEPRA miscellaneous and management employees contribute 6.75%.
Additionally, non-safety employees contribute 1% of their compensation and safety employees contribute $625 annually to offset the cost of OPEB obligations.
Water Fund
The City’s business-type activities consisted solely of the Water Utilities Enterprise Fund (Water Fund). The Water Fund is used to account for financial activity related to the purchase, production, storage, and distribution of water used by the community, as well as the maintenance, repair, and replacement of related equipment and pipelines. The intent of the Water Fund is to meet all operational costs through regular revenue from rate payers, while also putting monies aside for future infrastructure replacement and repairs.
Water Fund revenues consist of charges for services and investment income which totaled $5.5 million. Operating revenues for the time period increased due to the January 2020 rate adjustment. Non-operating revenues include investment income of $2,546.
Operating expenses totaled $5.2 million, reflecting costs for repairs and maintenance. Interest expenses related to debt service totaled $116,787.
As part of the statement of operations, GASB 68 requires that the year-over-year change to unfunded pension liability be reflected. Consistent with the previous fiscal year, this did not increase actual current operational costs, but the net impact was increased operational costs on the statement of operations. The net operating result was an increase of $384,396 for FY 2020-21. After non-operating results, capital contributions and transfers and financial consolidation entries, the change in net position increased by $270,155.
The Water Fund’s operating results are summarized in Table 4.
Reserve Appropriations and Reallocations of FY 2020-21 Surplus
For FY 2020-21, the General Fund closed with revenues exceeding expenditures in the amount of $5,774,588 (including net transfers) as shown in Graph 1.
The annual surplus is available for a one-time allocation to projects, programs, or reserves as directed by the City Council. Staff has proposed the following allocations for the City Council’s consideration as detailed in Tables 5, 6, and 7.
Reserve Fund Allocations $5,483,275
Carryover Appropriations $34,813
New Appropriations $256,500
TOTAL $5,774,588
Replenishment and augmentation of reserve funds (Table 5).
o Land and Building Reserve ($250,000)
o Capital Improvement Reserve ($2,325,000)
o Insurance Reserve ($250,000)
o PERS Reserve ($900,000)
o OPEB Reserve ($400,000)
o Park Reserve ($183,275)
o Police Radio Reserve ($600,000)
o 100th Anniversary Reserve Fund ($20,000)
o Economic Development Reserve ($555,000)
• Carryover appropriations for items budgeted in FY 2020-21 (Table 6)
o City Council - Council Development
§ Requested carryover: $8,813
§ Carryover requested due to limited opportunities for in-person Council development in FY 2020-21
o Public Works - Street Maintenance
§ Requested carryover: $26,000
§ Purchase of replacement compressor was deferred
• New appropriations for FY 2021-22 (Table 7)
o Administration
§ COVID Relief - Small Business Grant Program: $50,000
§ COVID Relief - Expansion of Brown Bag Food Program: $10,000
§ To maximize program efficiency under the American Rescue Plan Act of 2021 (ARPA) requirements, staff is recommending allocating 100% of ARPA funds for the Water infrastructure project (33rd Street main replacement) and funding the COVID Relief programs out of the General Fund surplus.
o Community Services
§ Part-time employees: $6,500
§ To address COVID-19-related employee recognition of part-time employees.
o Police Department
§ Shooting range compliance upgrades: $75,000
§ License Plate Reader System; $25,000
§ Organizational study: $50,000
§ Evidence storage facility: $10,000
§ Necessary one-time expenditures to support regulatory compliance and modernization of operations.
o Public Works
§ City Hall & Library Security Software: $30,000
§ Necessary one-time emergency expenditure to update security software.
Next Steps
Staff will present the mid-year FY 2021-22 financial results at the Febrary 22, 2021 Council meeting. This will be followed by the biennial budget cycle reporting for FY 2022-24 that will also include the year end projections for FY 2021-22.
Approved:
_________________________
Hannah Shin-Heydorn
Attachments