Hercules Wastewater Fund
(An Enterprise Fund of the City of Hercules, California)
Hercules, California
Independent Auditors’ Report and
Basic Financial Statements
For the Year Ended June 30, 2021
Hercules Wastewater Fund
(An Enterprise Fund of the City of Hercules, California) Basic Financial Statements
For the Year Ended June 30, 2021
Table of Contents
Page
Independent Auditors’ Reports:
Report on the Financial Statements................................................................................................................. 1
Report on Internal Control Over Fi nancial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ............................................................................... 3
Basic Financial Statements:
Statement of Net Position .................................................................................................................................... 7 Statement of Revenues, Expenses, and Changes in Net Position ........................................................................ 8 Statement of Cash Flows ..................................................................................................................................... 9 Notes to the Basic Financial Statements ........................................................................................................... 11
Required Supplementary Information
Schedules of the Proportionate Share of the Plan’s Net Pension Liability ....................................................... 37 Schedules of Contributions to the Pension Plan ................................................................................................ 38 Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) (PEHMCA) ........................... 39 Schedules of Contributions to the OPEB Plan (PEHMCA) .............................................................................. 40 Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) (SOMAR) .............................. 41 Schedule of Contributions to the OPEB Plan (SOMAR) .................................................................................. 42
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INDEPENDENT AUDITORS’ REPORT
To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California
Report on the Financial Statements
We have audited the accompanying fi nancial statements of the Hercules Wastewater Fund (the “Fund”), an enterprise fund of the City of Hercules, California (the “C ity”), as of and for the year ended June 30, 2021, and the related notes to the financial statements, which collectivel y comprise the Fund’s basic financial statements as listed in the table of contents.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the prepara tion and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepte d 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers intern al control relevant to the Fund’s preparation and fair presentation of the financial statements in order to design audit procedures th at are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of th e Fund’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates ma de by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all mate rial respects, the financial position of the Fund as of June 30, 2021 , and the changes in financial position and cash flows, thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.c
pa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California
2 Emphasis of Matter
As described in Note 1 to the basic financial statements, these financial statements present only the Hercules Wastewater Fund and do not purport to and do not pr esent fairly the financial position of the City as of June 30, 2021, the changes in its fina ncial position, or where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.
Other Matters
Required Supplementary Information
Accounting principles generally accepted in the Unite d States of America require that the Schedules of Proportionate Share of the Plan’s Net Pension Liability, th e Schedules of Contributions to the Pension Plan, the Schedule of Proportionate Share of the Plan’s Net Ot her Postemployment Benefits Liability (Asset) - PEHMCA, the Schedules of Contributions to the OPEB Plan – PEHMC A, the Schedule of Proportionate Share of the Plan’s Net OPEB Liability (Asset) – SOMAR, and the Schedule of C ontributions to the OPEB Plan - SOMAR as listed in the table of contents be presented to supplement the basic financial statemen ts. Such information, although not a part of the basic financial statements, is required by th e Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placi ng the basic financial statements in an appropriate operational, economic, or historical context. We ha ve applied certain limited procedures to the Required supplementary Information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consis tency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our a udit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Management has omitted the Management ’s Discussion and Analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financ ial statements. Such missing information, although not a part of the basic financia l statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operati onal, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our re port dated January 19, 2022 on our consideration of the Fund's internal control over financia l reporting and on our tests of its compliance with certain provisions of laws, regulations, contra cts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Fund’s internal control over financial reporting or on compliance. That report is an integr al part of an audit performed in accordance with Government Auditing Standards in considering the Fund’s internal control over financial reporting and compliance.
Santa Ana, California
January 19, 2022
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
Independent Auditors’ Report
To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California
We have audited, in accordance with the auditing standa rds generally accepted in the United States of America and the standards applicable to fi nancial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Hercules Wastewater Fund (the “Fund”), an enterprise fund of the City of Hercules, California (the “City”), as of and for the year ended J une 30, 2021, and the related notes to the basic financial statements, which collectively comprise the Fund’s basic financial statements, and have issued our report thereon dated January 19, 2022.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial stat ements, 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 opini on on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control. Accordingly, we do not express an opinion on the effectiveness of the Fund'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 assi gned 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 pur pose described in the first paragraph of this section and was not designed to identify all defici encies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, duri ng our audit we did not identify any defi ciencies 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 Fund 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 co mpliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opi nion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.c
pa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California
4 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 entity'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 entity's internal control and co mpliance. Accordingly, this communication is not suitable for any other purpose.
Santa Ana, California
January 19, 2022
BASIC FINANCIAL STATEMENTS
5 This page intentionally left blank.
6 ASSETS
Current assets:
Cash and investments 21,611,402$
Cash and investments with fiscal agent 7,679,725
Accounts receivable 10,822
Total current assets 29,301,949
Noncurrent assets:
Advances to Private Purpose Trust Fund (Note 5) 10,587,627 Net OPEB asset (PEHMCA) 28,052
Capital assets:
Nondepreciable 1,160,287
Depreciable, net 38,827,505
Total noncurrent assets 50,603,471
Total assets 79,905,420
DEFERRED OUTFLOWS OF RESOURCES
Pensions-related deferred outflows of resources 180,108 OPEB-related deferred outflows of resources (PEHMCA) 15,581 OPEB-related deferred outflows of resources (SOMAR) 16,614 Total deferred outflows of resources 212,303
LIABILITIES
Current liabilities:
Accounts payable 674,700
Salaries and benefits payable 30,880
Accrued interest payable 529,166
Long-term debt - due within one year 1,438,960
Total current liabilities 2,673,706
Noncurrent liabilities:
Long-term debt - due in more than one year 32,076,356
Net pension liability 779,817
Net OPEB liability (SOMAR) 86,665
Total noncurrent liabilities 32,942,838
Total liabilities 35,616,544
DEFERRED INFLOWS OF RESOURCES
Pensions-related deferred outflows of resources 6,347
OPEB-related deferred outflows of resources (PEHMCA) 90,361 OPEB-related deferred outflows of resources (SOMAR) 19,465 Total deferred inflows of resources 116,173
NET POSITION
Net investment in capital assets 7,230,469
Restricted for debt services 7,679,725
Unrestricted 29,474,812
Total net position 44,385,006$
Hercules Wastewater Fund
Statement of Net Position
June 30, 2021
See accompanying Notes to the Basic Financial Statements. 7 OPERATING REVENUES:
Charges for services 5,769,396$
Total operating revenues 5,769,396
OPERATING EXPENSES:
Salaries and benefits 741,239
Services and supplies 927,703
Depreciation 1,023,383
Total operating expenses 2,692,325
Operating income 3,077,071
NONOPERATING REVENUES (EXPENSES):
Interest income 4,537
Interest (expense) (1,202,095)
Total nonoperating revenues (expenses), net (1,197,558) CHANGES IN NET POSITION 1,879,513
NET POSITION:
Beginning of year 42,505,493
End of year 44,385,006$
Hercules Wastewater Fund
Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 8 CASH FLOWS FROM OPERATING ACTIVITIES:
Cash receipts from customers 5,758,574$
Cash paid to suppliers for goods and services (4,214,704) Cash paid to employees for services (655,087)
Net cash provided by operating activities 888,783
CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES:
Payments related to the acquisition of capital assets (968,587) Principal repayments related to capital purposes (1,386,397) Interest repayments related to capital purposes (858,615) Net cash (used in) capital and related
financing activities (3,213,599)
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest received 4,537
Net cash provided by investing activities 4,537
NET CHANGES IN CASH AND CASH EQUIVALENTS (2,320,279)
CASH AND CASH EQUIVALENTS:
Beginning of year 31,611,406
End of year 29,291,127$
RECONCILIATION OF CASH AND CASH EQUIVALENTS
TO STATEMENT OF NET POSITION:
Cash and investments 21,611,402$
Cash and investments with fiscal agent 7,679,725
Total cash and cash equivalents 29,291,127$
RECONCILIATION OF OPERATING INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Operating income 3,077,071$
Adjustments to reconcile operating income
to net cash provided by operating activities:
Depreciation 1,023,383
(Increase) decrease in assets and deferred outflows
Pensions-related deferred outflows 13,495
OPEB-related deferred outflows 1,766
Increase (decrease) in liabilities and deferred inflows Accounts receivable (10,822)
Accounts payable (2,127,780)
Retentions payable (1,159,221)
Salaries and benefits payable 6,056
Net pension liability 85,090
Net OPEB liability (29,570)
Pensions-related deferred inflows (28,403)
OPEB-related deferred inflows 36,789
Compensated absences 929
Total adjustments (2,188,288)
Net cash provided by operating activities 888,783$
Hercules Wastewater Fund
Statement of Cash Flows
For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 9 This page intentionally left blank.
10 Hercules Wastewater Fund
Notes to the Basic Financial Statements
For the Year Ended June 30, 2021
11 Note 1 – Summary of Significant Accounting Policies
The financial statements of the Hercules Wastewater Fund (“Fund”), an enterprise fund of the City of Hercules, California (the “City”), have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) as applied to governmental ag encies. The Governmental Accounting Standards Board (“GASB”) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The following is a summary of the City’s significant policies relating to the Fund:
A. Reporting Entities
The Hercules Wastewater Fund is an enterprise fund of the City’s financial statements. This Fund accounts for wastewater treatment to the cities of Hercules and Pinole and for the maintenance of the City’s sewer lines and related facilities. It is a self-supporting activity which provides services on a user charge basis to residences and businesses.
These financial statements present only the Wastewater Fund and do not purport to and do not present fairly the financial position of the City as of June 30, 2021, the changes in its financial position, or where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
B. Measurement Focus and Basis of Accounting
Financial Statements include a Statement of Net Position, a Statement of Revenues, Expenses and Changes in Net Position, and a Statement of Cash Flows.
The Statement of Net Position reports separate sections for Deferred Outflows of Resources, and Deferred Inflows of Resources, when applicable.
Deferred Outflows of Resources represent outflows of resources (consumption of net position) that apply to future periods and that, therefore, will not be recognized as an expense until that time.
Deferred Inflows of Resources represent inflows of resources (acquisition of net position) that apply to future periods and that, therefore, are not recognized as revenue until that time.
Proprietary funds are accounted for using the "economic resources" measurement focus and the accrual basis of accounting. Accordingly, all assets, deferred outflows of reso urces, liabilities (whether current or noncurrent), and deferred inflows of resources are included on the Statement of Net Position. The Statement of Revenues, Expenses and Changes in Fund Net Position presents increases (revenues) and decreases (expenses) in total Net Position.
Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. In these funds, receivables have been recorded as revenue and provisions have been made for uncollectible amounts.
Operating revenues are those revenues that are generated from the primary operations of the fund. All other revenues are reported as non-operating revenues. Operating expenses are those expenses that are essential to the primary operations of the fund. All other expenses are reported as non-operating expenses.
C. Cash and Investments
All cash and investments of the Fund ar e held in the City’s investment pool. These cash pools have the general characteristics of a demand deposit account, therefore, all cash and investments in the Fund are considered cash and cash equivalents for statement of cash flows purposes.
Investments are stated at fair value (quoted market price or best available estimate thereof).
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
12 Note 1 – Summary of Significant Accounting Policies (Continued)
D. Cash and Investments with Fiscal Agents
Cash and investments are held by fiscal agents for the redemption of bonded debt and maintaining required reserves.
E. Revenues
Wastewater revenues (wastewater disposal services) are recorded as billed to customers on a cyclical basis. All wastewater customers are billed annually by the Contra Costa County Treasurer-Tax Collector Office.
F. Capital Assets
Capital assets are recorded at historical cost or estima ted historical if purchased or constructed. Donated capital assets are valued at their estimated acquisition value on the date donated. City policy has set the capitalization threshold for reporting capital assets with an initial, individual cost of more than $2,500 for general capital assets and $5,000 for infrastructure capital assets, and an estimated useful life of one year or more.
Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets is included as part of the capitalized value of the assets constructed.
The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized
.
Capital assets used in operations are depreciated over their estimated useful lives using the straight-line method.
The estimated useful lives used for depreciation purposes are as follows:
Wastewater structure 30 Years
Machinery and equipment 5-20 Years
Infrastructure 15-50 Years
G. Accounts Payable
Accounts payable consists of general administration costs incurred and construction services performed during the fiscal year, but paid after the fiscal year.
H. Long-Term Debt
Long-term debt and other long-term obligations are reported as liabilities in the Statement of Net Position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method.
Bonds payable are reported net of the applicable bond premium or discount.
I. Compensated Absences
City employees have vested interest in varying levels of vacation, sick leave and compensatory time based on their length of employment. It is the policy of the City to pay all accumulated vacation pay and all or a portion of sick pay when an employee retires or terminates. Compensated absences are expensed in the period they are earned, and the unpaid liability is recorded as a long-term liability.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
13 Note 1 – Summary of Significant Accounting Policies (Continued)
J. Pensions
For purposes of measuring the aggregate net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, info rmation about the fiduciary net position of the plans and additions to/deductions from the plans’ fiduciary net position have been determined on the same basis as they are reported by the plans (Note 7). For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with benefit terms. Investments are reported at fair value.
The following timeframes are used for pension reporting:
CalPERS
Valuation Date June 30, 2019
M easurement Date June 30, 2020
Measurement Period July 1, 2019 - June 30, 2020
Gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferre d outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss. The difference between projected and actual earnings is amortized straight-line over 5 years. All other amounts are amortized straight-line over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period.
Pension benefits are expensed to the various funds in the period they are earned, and the unpaid liability is recorded as a long-term liability.
K. Other Postemployment Benefits (“OPEB”)
For purposes of measuring the net OPEB liability, deferred outflows of resources and deferred inflows of resources related to OPEB, and OPEB expense, information about the fiduciary net position of the plans and additions to/deductions from OPEB Plan's fiduciary net position have been determined on the same basis as they are reported by the plan (Note 8). For this purpose, the OPEB plan recognizes benefit payments when due and payable in accordance with the benefit terms. Investments are reported at fair value.
The following timeframes are used for OPEB reporting for PEMHCA and SOMAR:
OPE B - PE MHCA a nd S OMAR
Valuation Date June 30, 2021
M easurement Date June 30, 2021
Measurement Period July 1, 2020 - June 30, 2021
Gains and losses related to changes in total OPEB liability and fiduciary net position are recognized in OPEB expense systematically over time. The first amortized amounts are recognized in OPEB expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to OPEB and are to be recognized in future OPEB expense. The amortization period differs depending on the source of gain or loss. The difference between projected and actual earnings is amortized on a straight-line basis over 5 years. All other amounts are amortized on a straight-line basis over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) at the beginning of the measurement period.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
14 Note 1 – Summary of Significant Accounting Policies (Continued)
L. Net Position
Net position is classified as follows:
Investment in Capital Assets – This component of net position consists of capital assets, net of accumulated depreciation, related debt, and deferred inflows of resources.
Restricted – This component of net position consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets.
Unrestricted – This component of net position is the amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position.
When expenses are incurred for purposes for which both restricted and unrestricted components of net position are available, the City’s policy is to apply the restricted component of net position first, then the unrestricted component of net position as needed.
M. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Note 2 – Cash and Investments
Cash and investments at June 30, 2021 consisted of the following:
Cash and investments pooled with City 21,611,402$
Cash and investments with fiscal agents 7,679,725
Total 29,291,127$
A. Cash and Investments Pooled with City
The Fund pools its cash and investments with the City in order to achieve a higher return on investment. Certain funds which are held and invested by independent outside custodians through contractual agreements, are not pooled. Interest earned on investments is allocated using the LAIF factor and average quarterly balances.
Required disclosure information regarding investments and other deposit, and related risk disclosures can be found in the City’s financial statements. The City’s financial statements may be obtained by contacting the City’s Finance Department’s office at 111 Civic Drive, Hercules, California.
At June 30, 2021, the Fund has deposited $21,611,402 in the City’s investment pool. Investments held in the City’s investment pool are available on demand and are stated at cost plus accrued interest, which approximates fair value.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
15 Note 2 – Cash and Investments (Continued)
B. Investments Authorized by the California Government Code and the City's Investment Policy
The table below identifies the investment types that are authorized by the City's investment policy and the California Government Code. The table also identifies certain provisions of the California Government Code (or the City's investment policy, if more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City's investment policy.
Ma x i m um Ma x i m um
M aximum Percentage Investment
Authorized Investment Type Maturity of Portfolio in One Issuer Local Agency Investment Fund (State Pool) N/A $50 M illion $50 M illion U.S. Treasury Obligations 5 Years None None
U.S. Government Agency Issues 5 Years None None
Insured Deposits with Banks and Savings and Loans N/A None None Bankers Acceptance (Must be Dollar Denominated) 180 Days 40% 30% Commercial Paper 270 Days 15% 10%
Negotiable Time Certificates of Deposits 5 Years 30% $100,000 Nonnegotiable Time Certificates of Deposits 5 Years 30% $100,000 Federally Issued Time Deposits 5 Years None $100,000
Repurchase Agreements 30 Days None 10%
Reverse Repurchase Agreements 92 Days 20% None
M edium-Term Notes 5 Years 30% 15%
Mone y Ma rke t Mutua l Funds N/ A 20% 10%
Insured or Passbook Savings Accounts N/A None $100,000
*The table is based on state law requirements or investment policy requirements, whichever is more restrictive.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
16 Note 2 – Cash and Investments (Continued)
C. Investments Authorized by Debt Agreements
Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the investment policy of the City. The table below identifies the investment types that are authorized for investments held by bond trustee. The table also identifies certain provisions of these debt agreements that address interest rate risk and concentration of credit risk.
Ma x i m um Ma x i m um
M aximum Percentage Investment
Authorized Investment Type Maturity of Portfolio in One Issuer Local Agency Investment Fund (State Pool) N/A $50 M illion $50 M illion U.S. Treasury Obligations 30 Years 20% None
U.S. Government Agency Issues 30 Years 20% None
Insured Deposits with Banks and Savings and Loans N/A None None Bankers Acceptance (Must be Dollar Denominated) 6 Months 40% 30% Commercial Paper 6 M onths 15% 10%
Negotiable Time Certificates of Deposits 5 Years 30% $100,000 Nonnegotiable Time Certificates of Deposits 5 Years 30% $100,000 Federally Issued Time Deposits 1 Years 20% None
Repurchase Agreements 30 Days None None
Reverse Repurchase Agreements 92 Days 20% None
M edium-Term Notes 5 Years 30% 15%
Mutual Funds N/A 20% None
Mone y Ma rke t Funds N/ A None None
Insured or Passbook Savings Accounts N/A None $100,000
Guaranteed Investment Contract N/A None None
D. Fair Value Measurement
At June 30, 2021, the Fund’s investment consisted of $21,611,402 invested in the State of California Local Agency Investment fund and $7,679,725 invested in money market mutual funds, which is valued at amortized cost and “uncategorized” under the fair value hierarchy.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
17 Note 2 – Cash and Investments (Continued)
E. Risk Disclosures
Disclosures Relating to Interest Rate Risk
Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment is, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Fund manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.
Information about the sensitivity of the fair values of the Fund’s investments (including investments held by bond trustees) to market interest rate fluctuations is provide d by the following table that shows the distribution of the Fund's investments by maturity:
Maturity
12 Months
Investment Type Total or Less
Cash and investments pooled with City 21,611,402$ 21,611,402 $ Investments with fiscal agents:
Mone y Ma rke t Mutua l Funds 7,679,725 7,679,725 Total 29,291,127$ 29,291,127 $
Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations
Interest rate risk is the market value fluctuation due to overall changes in the interest rates. It is mitigated by limiting the average maturity of the City’s portfolio, not to exceed three years.
As a means of maintaining liquidity and minimizing interest rate risk, the City’s investment policy limits are as follows:
Percentage
Maturity of Portfolio
Up to One Year 10% Minimum
One Year to Five Years 60% M aximum
More Than Five Years 30% Maximum
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
18 Note 2 – Cash and Investments (Continued)
E. Risk Disclosures (Continued)
Disclosures Relating to Credit Risk
Generally, credit risk is the risk that an issuer of an i nvestment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating requir ed by (where applicable) the California Government Code or the City's investment policy, or debt agreements, and the actual rating as of fiscal year end for each investment type.
Mi ni m um
Legal Not
Investment Type Total Rating AAA Rated
Cash and investments pooled with City 21,611,402$ N/A - $ 21,611,402$ Investments with fiscal agents:
Mone y Ma rke t Mutua l Funds 7, 679,725 N/A 7,679,725 - Total 29,291,127$ 7,679,725 $ 21,611,402 $ S&P Rating as of Fiscal Year Ended
Concentration of Credit Risk
The investment policy of the City contains no limitations on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code. The Fund has 100% of its cash and investments pooled with the City.
Custodial Credit Risk
Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will no t be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that in the event of the failure of the counterparty (e.g., broker dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the provision for deposits as disclosed in Note 2A.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
19 Note 3 – Capital Assets
Summary of changes in capital assets for the year ended June 30, 2021, was as follows:
Balance Reclassification/ Balance
July 1, 2020 Additions Transfers June 30, 2021
Nondepreciable assets:
Land 191,700 $ - $ - $ 191,700$ Constrution in progress - 968,587 - 968,587 Total nondepreciable assets 191,700 968,587 - 1,160,287 Depreciable assets:
Structures and improvements 11,335,201 - - 11,335,201 M achinery and equipment 250,345 - - 250,345 Infrastructure 41,847,553 - - 41,847,553 Subtotal 53,433,099 - - 53,433,099 Less: accumulated depreciation:
Structures and improvements (10,718,869) (150,678) - (10,869,547) Machinery and equipment (197,354) (13,353) - (210,707) Infrastructure (2,665,988) (859,352) - (3,525,340) Subtotal (13,582,211) (1,023,383) - (14,605,594) Total de preciable assets, ne t 39,850,888 (1,023,383) - 38,827,505 Total capital assets, net 40,042,588$ (54,796) $ - $ 39,987,792$
Depreciation expense in the amount of $1,023,382 was charged to the Fund for the year ended June 30, 2021.
Note 4 – Long-Term Debt
Summary of changes in long-term debt for the year ended June 30, 2021, was as follows:
Balance Balance Due within Due in M ore
July 1, 2020 Additions Deletions June 30, 2021 One Year Than One Year Publicly Offered:
2010 PFA Wastewater Revenue Bonds 9,535,000$ - $ (285,000)$ 9,250,000 $ 295,000 $ 8,955,000 $ Less: Discount on issuance (145,434) - 7,272 (138,162) - (138,162) Publicly Owned Treatment Works
Construction Loan 25,457,695 - (1,101,397) 24,356,298 1,096,780 23,259,518 Compensated Absences 46,251 29,704 (28,775) 47,180 47,180 - Total 34,893,512 $ 29,704 $ (1,407,900)$ 33,515,316 $ 1,438,960 $ 32,076,356 $
A. 2010 PFA Wastewater Revenue Bonds
The Public Financing Authority issued revenue bonds, series 2010, dated August 1, 2010, totaling $11,765,000.
The purpose of the bonds was to finance improvements to the City’s wastewater system, fund a reserve fund for the bonds, and pay the costs of issuances of the bonds. The interest rates on the bonds range from 2.00% to
5.130%. Principal and interest payment are due annually beginning August 1, 2011, in amounts ranging from $230,000 to $700,000. The bonds mature on August 1, 2040. The balance at June 30, 2021 is $9,250,000.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
20 Note 4 – Long-Term Debt (Continued)
A. 2010 PFA Wastewater Revenue Bonds (Continued)
The Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or receipts, except the Revenues. The full faith and credit of the Authority and the Agency and the City, which are parties to the agreement creating the Authority, are not pledged for the payment of the principal of, or interest on, the Bonds and no tax or other source of funds, other than the Revenues, is pledged to pay the principal and interest on the Bonds.
The annual debt service requirements to maturity for the 2010 PFA Wastewater Revenue Bonds as of June 30, 2021 are as follows:
Year Ending
June 30, Principal Interest Total
2022 295,000 $ 438,288 $ 733,288 $ 2023 305,000 426,288 731,288 2024 315,000 413,691 728,691 2025 330,000 400,181 730,181 2026 345,000 385,622 730,622 2027-2031 1,970,000 1,664,749 3,634,749 2032-2036 2,505,000 1,121,375 3,626,375 2037-2041 3,185,000 413,875 3,598,875 Total 9,250,000$ 5,264,069 $ 14,514,069 $
B. Publicly Owned Treatment Work Construction Loan
In June 2016, the City entered into an installment sale agreement with the California State Water Resources Control Board in the amount of $26,500,000. The funds ar e for construction costs for the Pinole-Hercules Wastewater Pollution Control Plant Improvement Project. The interest rate on the loan is 1.7%. The first principal and interest payment are due August 31, 2019, and is con tingent on the total drawdowns at project completion.
The loan matures on August 31, 2038. The City has drawn down $25,457,695 of the loan principal including construction loan interest as of June 30, 2021. The outstanding balance as of June 30, 2021 was $24,356,298.
The annual debt service requirements to maturity for the Publicly Owned Treatment Works Construction Loan as of June 30, 2021 are as follows:
Year Ending
June 30, Principal Interest Total
2022 1,096,780$ 414,057 $ 1,510,837 $ 2023 1,115,425 395,412 1,510,837 2024 1,134,388 376,450 1,510,838 2025 1,153,672 357,165 1,510,837 2026 1,173,285 337,553 1,510,838 2027-2031 6,172,479 1,381,706 7,554,185 2032-2036 6,715,284 838,901 7,554,185 2037-2040 5,794,985 248,363 6,043,348 Total 24,356,298$ 4,349,607 $ 28,705,906 $ Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
21 Note 5 – Advances to the Former Hercules Redevelopment Agency
The Fund has advanced funds to the former Redevelopment Agency (Agency) of the City. At June 30, 2021, the balance was $10,587,627. There was no set repayment schedule as of June 30, 2021.
With the dissolution of the Agency on February 1, 2012, there is uncertainty as to whether the Fund will be repaid the balance in the amount of $10,587,627 loan owed by the Agency and the City to fund costs on behalf of the Agency was signed within two years of the creation of the Agency. The City is currently working with the California Department of Finance to determine the outcome of these loans. The possible outcome of this matter cannot presently be determined. Accordingly, no provision for any allowance for doubtful accounts has been made in the financial statements for possible forgiveness of these loans.
Note 6 – Risk Management
The Fund is exposed to various risks of loss related to tort s, theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disaster. The Fund participates in the City’s insurance programs to insure against these losses.
General Liability Insurance
Coverage is maintained with the Municipal Pooling Aut hority (MPA) with coverage limits of $1,000,000 with self- insured retention of $10,000 and $1,000,001 to $29,000,000 covered by California Affiliated Risk Management Authority (CARMA).
Workers’ Compensation
The City has coverage limits for the following without a deductible:
MPA $0 to $500,000
PRISM $500,000 TO $50,000,000
Liberty Insurance Corporation Statuatory excess of $50,000,000
Miscellaneous Coverages
The MPA provides additional coverage for the following risks incurred by the City:
Coverage
Type Deductibles Limits
Auto - Physical Damage:
Police Vehicles 3,000 $ 250,000 $
All Other Vehicles 2,000 250,000
All Risk Fire & Property 25,000 No limit Cyber Liability 50,000 3,000,000
Pollution Liability 100,000 25,000,000
Crime Coverage 2,500 5,000,000
Boiler and M achinery 5,000 100% of primary $75,000,000; 100% of $25,000,000 excess of $75,000,000
The MPA is governed by a board consisting of representatives from member municipalities. The board controls the operations of the MPA, including selection of management and approval of operating budgets, independent of any influence by member municipalities beyond their representation on the board.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
22 Note 6 – Risk Management (Continued)
Miscellaneous Coverages (Continued)
The City’s deposits with the MPA are in accordance with formulas established by the MPA. Actual surpluses or losses are shared according to a formula developed from overall loss costs and spread to member entities on a percentage basis after a retrospective rating. Audited financial statements can be obtained from the Municipal Pooling Authority, 1911 San Miguel Drive, #200, Walnut Creek, California 94596.
Note 7 – Public Employee Retirement System
A. General Information About the Pension Plans
Plan Descriptions
All qualified permanent and probationary employees are eligible to participate in the City’s Miscellaneous Employee Pension Plans, cost-sharing multiple employer defined benefit pension plans administered by the California Public Employees’ Retirement System (CalPERS). Benefit provisions under the Plans are established by state statute and City resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website.
Benefits Provided
CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full-time employment. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for nonduty disability benefits after 10 years of service.
The death benefit is one of the following: the Basic D eath Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost of living adjustments for each plan are applied as specified by the Public Employees’ Retirement Law.
The Plans’ provisions and benefits in effect at June 30, 2021, are summarized below:
Miscellaneous
Miscellaneous Tier 2
Benefit formula 2.0% @ 55 2.0% @ 62
Benefit vesting schedule 5 years service 5 years service Benefit payments monthly for life monthly for life
Retirement age 50-63 52 - 67
Monthly benefits, as a % of
eligible compensation 1.426 - 2.148% 1.0 - 2.5%
Required employee contribution rate 7.0% 6.25%
Required employer contribution rate 9.680% 6.985%
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
23 Note 7 – Public Employee Retirement System (Continued)
A. General Information About the Pension Plans (Continued)
Employees Covered
At June 30, 2020, the measurement date, the following employees were covered by the Plan’s provisions:
Miscellaneous
Miscellaneous PE PRA
Active employees 35 17
Transferred employees 47 10
S eparated empl oyees 95 14
Retired employees and beneficiaries 87 - Total 264 41
Contributions
Section 20814(c) of the California Public Employees’ Retirement Law (PERL) requires that the employer contribution rates for all public employers are determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The total plan contributions are determined through CalPERS’ annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. Employer contribution rates may change if plan contracts are amended. Payments made by the employer to satisfy contribution requirements that are identified by the pension plan terms as plan member contribution requirements are classified as plan member contributions.
The City contributed $102,423 towards the Fund’s share of the Miscellaneous Pension Plan during the year ended June 30, 2021.
B. Net Pension Liability
Actuarial Methods and Assumptions Used to Determine Total Pension Liability
The June 30, 2019 valuation was rolled forward to determine the June 30, 2020 total pension liability, based on the following actuarial methods and assumptions:
Actuarial Cost M ethod Entry Age Normal in accordance with the requirements of GASB 68 Actuarial Assumptions:
Discount Rate
Inflation
Salary Increases
Morta l i ty Ra te Ta bl e
1 Post Retirement Benefit Increase
7.15%
2.50%
Varies by Entry Age and Service
Derived using CalPERS’ M embership Data for all Funds.
The lesser of contract COLA or 2.50% until Purchasing Power Protection Allowance floor on purchasing power applies, 2.50% thereafter.
1The mortality table used was developed based on CalPERS-specific data. The probabilities of mortality are based on the 2017 CalPERS Experience Study for the period from 1997 to 2015. Pre-retirement and Post-retirement mortality rates include 15 years of projected mortality improvement using 90% of Scale MP-2016 published by the Society of Actuaries. For more details on this table, please refer to the CalPERS Experience Study and Review of Actuarial Assumptions report from December 2017 that can be found on the CalPERS website.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
24 Note 7 – Public Employee Retirement System (Continued)
B. Net Pension Liability (Continued)
Long-term Expected Rate of Return
The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expecte d returns, net of pension plan investment expense and inflation) are developed for each major asset class.
In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all of the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11+ years) using a building-block approach. Using the expected nominal returns for both short- term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the rounded single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equal to the single equivalent rate calculated above and adjusted to account for assumed administrative expenses. The expected real rates of return by asset class are as followed:
Asset Class
1 New Strategic
Allocation
Real Return Years
1 - 10
1 Real Return Years
11 +
2 Global equity 50.0% 4.80% 5.98%
Fixed income 28.0% 1.00% 2.62%
Inflation assets 0.0% 0.77% 1.81%
Private equity 8.0% 6.30% 7.23%
Real assets 13.0% 3.75% 4.93%
Liquidity 1.0% 0.00% -0.92%
1 An expected inflation of 2.00% was used for this period. 2 An expected inflation of 2.92% was used for this period. 1In the System's ACFR, Fixed Income is included in Global Debt Securities; Liquidity is included in Short-term Investments; Inflation Assets are included in both Global Equity; Securities and Global Debt Securities.
Discount Rate
The discount rate used to measure the total pension liability was 7.15%. The projection of cash flows used to determine the discount rate assumed that contributions from plan members will be made at the current member contribution rates and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on those assumptions, the Plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on plan investments was applied to all periods of projected benefit payments to determine the total pension liability.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
25 Note 7 – Public Employee Retirement System (Continued)
C. Proportionate Share of Net Pension Liability
The following table shows the plan’s proportionate share of the risk pool collective net pension liability over the measurement period:
Plan Total Pension Plan Fiduciary Net Pension
L iability Net Position L iability/(Asset)
Miscellaneous
Balance at: 6/30/19 (Valuation date) 2,786,680$ 2,091,953 $ 694,727 $ Balance at: 6/30/20 (Measurement date) 2,956,801 2,176,984 779,817 Net changes during 2019-2020 170,121 $ 85,031 $ 85,090 $
The Fund’s proportionate share of the City’s net pension liability for the retirement plans is measured as the proportionate share of the net pension liability. The net pension liability of the retirement plans is measured as of June 30, 2020, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2019 rolled forward to June 30, 2020 using standard update procedures. The Fund’s proportion of the net pension liability was based on a projection of the Fund’s long-term share of contributions to the pension plans relative to the projected contributions of all participating employers, actuarially determined. The Fund’s proportionate share of the net pension liability as of the June 30, 2019 measurement date (June 30, 2020 reporting date) and 2020 measurement date (June 30, 2021 reporting date) was as follows:
Fund's Proportion
to City's Share
M easurement date Pool
Proportion - June 30, 2019 0.00678%
Proportion - June 30, 2020 0.00717%
Change - Increase/(Decrease) 0.00039%
Sensitivity of the Proportionate Share of the Net Pension Liability to Changes in the Discount Rate
The following presents the Fund’s proportionate share of the net position liability for the Plan, calculated using the discount rate, as well as what the Fund’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower or 1-percentage point higher than the current rate:
Discount Rate - 1% Current Discount Discount Rate + 1%
(6.15%) Rate (7.15%) (8.15%)
Miscellaneous 1,245,305$ 779,817 $ 395,200 $ Plan's Net Pension L iability
Pension Plan Fiduciary Net Position
Detailed information about the pension plan’s fiduciary net position is available in the separately issued CalPERS financial reports.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
26 Note 7 – Public Employee Retirement System (Continued)
D. Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pension
For the year ended June 30, 2021, the Fund recognized pension expense of $167,719. At June 30, 2021, the Fund reported deferred outflows of resources and deferred infl ows of resources related to pensions from the following sources:
Deferred Outflows Deferred Inflows
of Resources of Resources
Contribution made after the measurement date 30,105$ - $ Changes of assumptions - (1,101) Net difference between projected and actual
earnings on pension plan investments 31,283 - Difference between expected and actual
experience 54,270 -
Employer contributions in excess/(under)
proportionate share of contributions - (1,918) Adjustments due to difference in proportions 64,450 (3,328) Total 180,108 $ (6,347) $
Miscellaneous Plan
$30,105 was reported as deferred outflows of resources related to pensions resulting from Fund’s contributions subsequent to the measurement date and will be recognized as a reduction of the net pension liability in the year ended June 30, 2021. Other amounts reported as deferred outfl ows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows:
M easurement Period
Ended June 30 Miscellaneous Plan
2021 20,322 $
2022 71,713
2023 31,417
2024 20,204
2025 -
Thereafter -
Total 143,656 $
E. Payable to the CalPERS Pension Plans
At June 30, 2021, the Fund had no outstanding amounts owed to the CalPERS pension plans for contributions for the year ended June 30, 2021.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
27 Note 8 – Other Postemployment Benefits (“OPEB”)
A. Retiree Healthcare Plan (PEHMCA)
Plan Description and Administration
The City Retiree Healthcare Plan (Plan) is a single-employer benefit healthcare plan administered by the City. The Plan provides healthcare benefits to eligible retirees and their dependents. The Plan does not issue a financial report.
The City has prefunded a portion of its OPEB benefits in a Public Agency Retirement Services (PARS) trust. The PARS Trust is a tax qualified irrevocable trusts, orga nized under Internal Revenue Code (IRC) Section 115, established to pre -fund OPEB as described in GASB Statement 75. PARS issues annual audited financial statements for each participating agency of the Trust. PARS is considered an agency agent multiple -employer plan, required to provide financial statements and required supplementary information (Schedule of Changes in Fiduciary Net Position by Plan) that are prepared in conformance with GASB statement 75.
These reports may be obtained by writing the plan at the following address: PARS 4350 Von Karman Ave., Suite 100, Newport Beach, CA 92660-2043.
Employees become eligible to retire and receive City-paid healthcare benefits upon attainment of age 50 and 5 years of service. The City contribution towards retiree health benefits is determined under the "Equal Contribution Method" under PEHMCA under which the City's nominal contribution to PEMHCA is the same for active employees and retirees ($139/month for 2020 and $143/month for 2021).
Proportionate share of the City’s postemployment benefits liabilities and related deferred outflows and inflows have been allocated to the Fund.
Contributions
The contributions are based on pay-go for premiums an d contributions to the PARS OPEB trust. The pay-go amount is the actual amount of retiree premiums. Total contributions (pay-go and trust contributions) for the year ended June 30, 2021 were $11,571.
Actuarial Assumptions
The net OPEB liability of the Plan was determined using an actuarial valuation as of July 1, 2020 using the following actuarial assumptions:
Actuarial Assumptions:
Discount Rate 5.15%
Inflation 2.50%
Aggregate payroll increases 2.75%
Expected long-term investment rate of return n/a
M ortality, Termination, and Disability CalPERS 1997-2014 M ortality Improvement Scale
Healthcare Trend Rate 4%
RP-2014 Employee and Healthy
Annuitant Mortality Tables for males
and females.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
28 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)
A. Retiree Healthcare Plan (PEHMCA) (Continued)
Actuarial Assumptions (Continued)
Mortality rates were based on the RP-2014 Employee and Healthy Annuitant Mortality Tables for Males or Females, as appropriate, projected using a generational projection based on 100% of scale MP-2016 for years 2014 through 2029, 50% of MP-2016 for years 2030 through 2049, and 20% of MP-2016 for 2050 and thereafter.
Discount Rate
The discount rate used to measure the total Plan’s OPEB liability was 5.4%. The projection of cash flows used to determine the discount rate assumed that City contributions will be made at rates equal to the actuarially determined contribution rates. Based on those assumptions, the City plan's fiduciary net position was projected to be available to make all projected OPEB payments for current active and inactive employees. Therefore, the long- term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability.
The expected long-term rate of return on OPEB plan investments of 5.4%, gross of expenses, was determined by Highmark Capital Management using a building-block met hod in which best-estimate ranges of expected future real rates of return, net of inflation, are developed for each major asset class. These ranges are combined to produce the term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:
Asset Class
New Strategic
Allocation
Long-Term
Expected
Real Rate of
Return
All Domestic Equities 30.00% 7.25%
All Fixed Income 65.00% 4.25%
Short-Term Gov't Fixed 5.00% 3.00%
100.00%
Proportionate Share of Net OPEB Liability and OPEB Expense
The following table shows the plan’s proportionate share of the risk pool collective net pension liability (asset) over the measurement period:
Total OPEB Plan Fiduciary Net OPEB
L iability Net Position L iability (Asset)
Balance at: 6/30/19 (Valuation date) (169,423) $ (181,141) $ (11,718) $ Balance at: 6/30/20 (Measurement date) (142,774) (170,826) (28,052) Net changes during 2019-2020 (26,649) $ (10,315) $ 16,334 $
The Fund’s proportionate share of the City’s net OPEB lia bility (asset) for the OPEB plan is measured as the proportionate share of the net OPEB liability (asset). The net OPEB liability (asset) of the OPEB plans is measured as of June 30, 2020, and the total OPEB liability (asset) used to calculate the net OPEB liability (asset) was determined by an actuarial valuation as of June 30, 2019 rolled forward to June 30, 2020 using standard update procedures.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
29 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)
A. Retiree Healthcare Plan (PEHMCA) (Continued)
Proportionate Share of Net OPEB Liability and OPEB Expense (Continued)
The Fund’s proportion of the net OPEB liability (asset) was based on a projection of the Fund’s long-term share of contributions to the OPEB plans relative to the projected contributions of all participating employers, actuarially determined. The Fund’s proportionate share of the net OPEB liability as of the June 30, 2019 measurement date (June 30, 2020 reporting date) and 2020 measurement date (June 30, 2021 reporting date) was as follows:
Fund's Proportion
to City's Share
Pool
Proportion - June 30, 2020 -6.79809%
Proportion - June 30, 2021 -5.87750%
Change - Increase/(Decrease) 0.92059%
Sensitivity of the Net OPEB Liability (Asset) to Changes in the Discount Rate
The following presents the net OPEB liability (asset) of the Plan, as well as what the City’s net OPEB liability (asset) would be if it were calculated using a discount rate 1% lower or 1% higher than the current discount rate:
Discount Rate - 1% Current Discount Discount Rate + 1 % (3.4%) Rate (5.4%) (5.4%)
(10,992)$ (28,052) $ (42,445) $ Net OPEB Liability (Asset)
Sensitivity of the Net OPEB Liability (Asset) to Changes in the Healthcare Trend Rate
The following presents the net OPEB liability (asset) of the Plan, as well as what the Plan’s net OPEB liability (asset) would be if it were calculated using healthcare cost trend rates that 1% lower or 1% higher than the current healthcare cost trend rate:
Healthcare Cost Healthcare Cost Healthcare Cost
Trend Rates Trend Rates Trend Rates
3% 4% 5%
(46,019)$ (28,052) $ (5,861) $ Net OPE B L iability (A sset)
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
30 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)
A. Retiree Healthcare Plan (PEHMCA) (Continued)
OPEB Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Relate to OPEB
For the year ended June 30, 2021, the Fund recognized OPEB expense of $5,521 for the Plan. OPEB expense represents the change in the net OPEB liability during the measurement period, adjusted for actual contributions and the deferred recognition of changes in investment gain/loss, and actuarial assumptions or method. At June 30, 2021, the Fund reported deferred outflows of resources and deferred inflows of resources related to OPEB from the following sources:
Deferred Outflows Deferred Inflows
of Resources of Resources
Difference between expected and actual experience 1,227 $ (68,059) $ Changes of assumptions 13,213 (12,917) Net difference between projected and actual earning on
OPEB plan investments 1,141 (9,385)
Total 15,581 $ (90,361) $
Amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in OPEB expense as follows:
Measurement
Period Deferred Outflows/
Ending June 30 (Inflows) of Resources
2022 (6,522) $
2023 (6,540)
2024 (7,075)
2025 (10,444)
2026 (8,404)
Thereafter (35,795)
Total (74,780) $
B. Retiree Cash Benefit Plan (SOMAR Plan)
Plan Description
The City provide an optional monetary allowance with an annual three (3%) adjustment each year to Public Safety and Executive employees who retire as regulated by the Public Employee’s Retirement System. To be eligible for the optional monies, an employee must retire as follows:
1. Service Retirement: Employees who have served the City for at least ten (10) consecutive years immediately prior to retirement and are at least fifty (50) years old when they separate service from the City.
2. Disability Retirement: Employees who retire with a disability retirement are not required to be a certain age, but must have at least twenty (20) years of service with the City.
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
31 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)
B. Retiree Cash Benefit Plan (SOMAR Plan) (Continued)
Plan Description (Continued)
Employees must have the minimum amount of sick leave on the books, as outlined in the chart below. If an employee has below the amount of sick leave required for their years of service, then they will only be eligible for the percentage paid equivalent to the amount of sick leave they do have on the books.
Years of
Ser v ic e
Sic k L eav e
Balance
% of Optional
Money
Av ailable
10 480 50
11 528 55
12 576 60
13 624 65
14 672 70
15 720 75
16 768 80
17 846 85
18 864 90
19 912 95
20-24 960 100
25 No M inimum
amount required 100
Employees must retire within one hundred twenty (120) days. In addition, employees who separate service but do not retire as a PERS annuitant, shall not be eligible under for SOMAR benefits.
The City will pay a portion of the optional money to a retiree until the retiree reaches age sixty-five (65), upon which they are required to enroll in Medicare. At that time, the optional money will drop to an amount equivalent to the Kaiser Supplemental to Medicare rate through PERS.
The SOMAR benefit is expected to last into perpetuity. Payments are made on a bi-annual basis.
Benefits Provided
The SOMAR plan’s provisions and benefits in effect at June 30, 2021, are summarized below:
Exe cuti ve s
Duration of benefits Lifetime
Required service 50% at 10 years
grading t o 100% at
20 years
M inimum age Retirement
Amount $263 per month pre-
65; based on Kaiser
premium post-65
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
32 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)
B. Retiree Cash Benefit Plan (SOMAR Plan) (Continued)
Contributions
For the year ended June 30, 2021, the Fund contributions recognized as part of OPEB expense for the SOMAR plan were $9,791.
Actuarial Assumptions
The net pension liability of the SOMAR Plan was determined using an actuarial valuation as of July 1, 2020 using the following actuarial assumptions:
Cost method Entry age normal
Discount Rate 2.20%
Inflation 2.75%
Aggregate payroll increases 2.75%
Mortality, retirement, and turnover 2017 CalPERS tables Mortality Improvement Scale RP-2014 Employee and Healthy Annuitant Mortality Tables for males
and females.
Discount Rate
The discount rate used to measure the total OPEB liability for the SOMAR plan was 2.2%. This discount rate estimates investment earnings for assets earmarked to cover retiree cash benefit liabilities. Since the SOMAR plan is an unfunded plan, the discount rate is based on an index of 20-year General Obligation municipal bonds.
Proportionate Share of Net OPEB Liability and OPEB Expense
The Fund proportionate share of the net OPEB liability as of June 30, 2021, measurement date, is as follows:
Plan's Proportion
to Total Plan at
June 30, 2021
Proportionate
Share of Net
OPEB Liability
5.357% 86,665$
Sensitivity of the Net OPEB Liability to Changes in the Discount Rate
The following presents the net pension liability of the SOMAR Plan, as well as what the SOMAR Plan’s net pension liability (asset) would be if it were calculated using a discount rate 1% lower or 1% higher than the current discount rate:
Discount Rate - 1% Current Discount Discount Rate + 1 % (1.2%) Rate (2.2%) (3.2%)
118,691$ 86,665 $ 84,165 $
SOMAR Plan's Total OPE B L iability
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021
33 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)
B. Retiree Cash Benefit Plan (SOMAR Plan) (Continued)
OPEB Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Relate to Pension
For the year ended June 30, 2021, the City recognized pension expense of $9,739 for the SOMAR plan. OPEB expense represents the change in the net pension liability during the measurement period, adjusted for actual contributions and the deferred recognition of changes in investment gain/loss, and actuarial assumptions or method. At June 30, 2021, the City reported deferred out flows of resources and deferred inflows of resources related to pension from the following sources for the SOMAR plan:
Deferred Outflows Deferred Inflows
of Resources of Resources
Difference between expected and actual experience - $ (19,465)$ Changes of assumptions 16,614 -
Total 16,614 $ (19,465) $
S OMAR Plan
Amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in pension expense as follows:
Measurement SOMAR Plan
Period Deferred Outflows/
Ending June 30 (Inflows) of Resources
2022 (69) $
2023 (69)
2024 (69)
2025 (69)
2026 (69)
Thereafter (2,506)
Total (2,851) $
Payable to the OPEB Plan
At June 30, 2021, the Fund had no outstanding amounts owed to the SOMAR OPEB plan for contributions for the year ended June 30, 2021.
Note 9 – Contingencies
A. Lawsuits
The Fund is not involved in any matters of litigation that have arisen in the normal course of conducting business.
Additionally, management believes that the City’s insurance programs are sufficient to cover any potential losses should an unfavorable outcome materialize.
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REQUIRED SUPPLEMENTARY INFORMATION
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36 Measurement Date: June 30, 20201 June 30, 20191 June 30, 20181 June 30, 20171 June 30, 20161 June 30, 20151 June 30, 20141 Proportion of the Net Pension
Liability 0.0072% 0.0068% 0.0066% 0.0067% 0.0065% 0.0070% 0.0057% Proportionate Share of the Net
Pension Liability 779,817$ 694,727 $ 637,000 $ 659,623 $ 562,902 $ 481,238 $ 462,583 $ Covered Payroll 335,827 $ 331,260 $ 321,063 $ 301,916 $ 251,715 $ 265,380 $ 319,046 $ Proportionate Share of the Net
Pension Liability as a Percentage of
Covered Payroll 232.21% 209.72% 198.40% 218.48% 223.63% 181.34% 144.99% Fiduciary Net Position as a
Percentage of the Plan's Total
Pension Liability 73.63% 75.07% 77.69% 75.39% 75.87% 78.32% 78.10% 1 Historical information is presented only for measurement periods for which GASB No. 68 is applicable.
California Public Employees' Retirement System (CalPERS) Miscellaneous Plans
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of the Proportionate Share of the Plan's Net Pension Liability For the Year Ended June 30, 2021
Last Ten Fiscal Years 1
37 Fiscal Year: 2020-211 2019-201 2018-191 2017-181 2016-171 2015-161 2014-151 Actuarially Determined Contribution2
102,423$ 95,532 $ 91,514 $ 63,159 $ 52,105 $ 52,884 $ 34,760 $ Contribution in Relation to the
Actuarially Determined
Contribution2
(102,423) (95,532) (91,514) (63,159) (52,105) (52,884) (34,760) Contribution Deficiency (Excess) - $ - $ - $ - $ - $ - $ - $ Covered Payroll3
345,902$ 335,827 $ 331,260 $ 321,063 $ 301,916 $ 251,715 $ 265,380 $ Contributions as a Percentage of
Covered Payroll 29.61% 28.45% 27.63% 19.67% 17.26% 21.01% 13.10% Notes to the Schedule:
Change in Benefit Terms: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 20 13 as they have minimal cost impact. This applies for voluntary benefit changes as well as any offers of the Two Years Additional Service Credit (a.k.a. Golden Handshakes).
California Public Employees' Retirement System (CalPERS) 1 Historical information is presented only for measurement periods for which GASB No. 68 is applicable. 2 Employers are assumed to make contributions equal to the actuarially determined contributions (which is the actuarially determined contribution) . However, some employers may choose to make additional contributions towards their side-fund or their unfunded liability. Employer contributions for such plan ex ceed the actuarial determined contributions. CalPERS has determined that employer obligations referred to as side-funds are not considered separately financed specific liabilities. 3 Covered-Employee Payroll represented above is based on pensionable earnings provided by the employer. However, GASB No. 68 defines covered-employ ee payroll as the total payroll of employees that are provided pensions through the pension plan. Accordingly, if pensionable earnings are different than total earnings for covered-employees, the employer should display in the disclosure footnotes the payroll based on total earnings for the covered group and recalculat e the required payroll-related ratios.
Last Ten Fiscal Years 1
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of Contributions to the Pension Plan
For the Year Ended June 30, 2021
38 Measurement Date: June 30, 20201 June 30, 20191 June 30, 20181 June 30, 20171 Proportion of the Net OPEB Liability
(Asset) -5.88% -6.80% 5.16% 5.19%
Proportionate Share of the Net OPEB
Liability (Asset) (28,052)$ (11,718) $ 66,474 $ 75,521 $ Covered Payroll 335,827 $ 331,260 $ 321,063 $ 301,916 $ Proportionate Share of the Net OPEB
Liability (Asset) as a Percentage of
Covered Payroll -8.35% -3.54% 20.70% 25.01%
Fiduciary Net Position as a Percentage
of the Plan's Total Pension Liability 119.65% 106.92% 65.60% 59.11% 1 Historical information is presented only for measurement periods for which GASB No. 75 is applicable.
Last Ten Fiscal Years 1
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) - PEHMCA For the Year Ended June 30, 2021
39 Fiscal Year: 2020-212 2019-202
2018-19 2017-18
Actuarially Determined Contribution 1,179 $ 11,571 $ 18,642 $ 10,641 $ Contribution in Relation to the
Actuarially Determined Contribution (1,179) (11,571) (18,642) (10,641) Contribution Deficiency (Excess) - $ - $ - $ - $ Covered Payroll 345,902 $ 335,827 $ 331,260 $ 321,063 $ Contributions as a Percentage of
Covered Payroll 0.34% 3.45% 5.63% 3.31%
1 Historical information is presented only for measurement periods for which GASB No. 75 is applicable. 2 Effective for the year ended June 30, 2020, PEHMCA Plan is valued separately.
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of Contributions to the OPEB Plan - PEHMCA
For the Year Ended June 30, 2021
Last Ten Fiscal Years 1
40 Measurement Date: June 30, 20211 2 June 30, 20201 2
Proportion of the Net OPEB Liability
(Asset) 5.36% 5.36%
Proportionate Share of the Net OPEB
Liability (Asset) 86,665$ 99,901 $
Covered Payroll 345,902$ 335,827 $
Proportionate Share of the Net OPEB
Liability (Asset) as a Percentage of
Covered Payroll 25.05% 29.75%
Fiduciary Net Position as a Percentage
of the Plan's Total Pension Liability 0.00% 0.00%
1 Historical information is presented only for periods for which GASB 73 is applicable. 2 SOMAR Plan is now valued separately from PEHMCA Plan effective June 30, 2020.
Last Ten Fiscal Years 1
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) - SOMAR For the Year Ended June 30, 2021
41 Fiscal Year: 2020-212 2019-202
Actuarially Determined Contribution 2,332$ 2,182 $ Contribution in Relation to the
Actuarially Determined Contribution (2,332) (2,182) Contribution Deficiency (Excess) -$ - $ Covered Payroll 345,902$ 335,827 $
Contributions as a Percentage of
Covered Payroll 0.67% 0.65%
1 Historical information is presented only for measurement periods for which GASB No. 73 is applicable. 2 Effective for the year ended June 30, 2020, SOMAR Plan is valued separately.
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of Contributions to the OPEB Plan - SOMAR
For the Year Ended June 30, 2021
Last Ten Fiscal Years 1
42