CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
1/22/2024
1 SUBJECT:
Annual Comprehensive Financial Report (ACFR) for the fiscal year ended June 30, 2023 RECOMMENDED ACTION:
Accept the City of Pacifica Annual Comprehensive Financial Report (ACFR), Independent Auditor’s Report, and other related documentation for the fiscal year ended June 30, 2023.
STAFF CONTACT:
Yulia Carter, Assistant City Manager
(650) 501-6004
[email protected]
Lucy Xie, Deputy Finance Director
(650) 738-7395
[email protected]
BACKGROUND:
The City of Pacifica annually conducts an independent audit of financial transactions and issues the Annual Comprehensive Financial Report (ACFR), previously known as the Comprehensive Annual Financial Report (CAFR), prepared by the City’s independent auditing firm and the Finance staff. The attached ACFR report reflects the City's financial position as of June 30, 2023, and is presented as an informational item for the Council’s acceptance.
The ACFR Report has been prepared in conformity with the Governmental Accounting and Financial Reporting Standards and with the Governmental Accounting Standards Board Statement 34, which requires dual perspective financial statements. The ACFR report provides two views of the financial statements: 1) an entity-wide view of the City’s financial transactions that distinguishes between governmental activities and business activities, which is prepared on a full accrual basis of accounting, and 2) a governmental fund view of the results of operations and financial position of each of the City’s major funds, which is prepared on a modified accrual basis of accounting.
The independent auditing firm of Maze and Associates (Maze) has completed the City’s Fiscal Year 2022-23 audit in conformity with generally accepted auditing standards. Those standards require that an independent Certified Public Accounting firm (the auditors) is tasked to plan and perform the audit, examine evidence to support the amounts and disclosure in the financial statements, and express an opinion on the fairness of the presentation of the financial position and the results of operations of the basic financial statements of the City, in conformity with Generally Accepted Accounting Principles (GAAP) as applicable to local governments.
Section 12410.6 (b) of the Government Code requires the auditor rotation of public accounting firms providing audit services or lead audit partners responsible for performing or reviewing the audit of local agencies every six years to maintain audit independence. Pursuant to this requirement, Maze changed the engagement partner and assigned a new audit team to conduct this year’s audit.
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The ACFR report has been prepared by Maze & Associates and Finance Department staff. The FY2023 ACFR received an unqualified opinion from the auditing firm, which means that it is the opinion of the auditors that the ACFR report represents fairly, in all material respects, the financial position of the City as of June 30, 2023, and that the financial statements were prepared in conformity with generally accepted accounting principles. The auditors noted no material weaknesses or deficiencies. In performing an audit of the financial statements, the auditors also considered the City’s internal controls over financial reporting to determine the appropriate audit procedures for expressing opinions on the financial statements. The auditors did not find any internal control deficiencies and issued a clean opinion.
The City’s Annual Comprehensive Financial Report (ACFR) presents an easily readable and organized report of the City’s financial transactions and provides the users of government financial statements with a wide variety of information needed to help them evaluate the City's financial condition. The final step in the formal process of preparing these statements is to present them to the City Council for its acceptance.
The ACFR presents financial information on the status of the City’s financial affairs, first on a city-wide basis (Government-wide Financial Statements) in which all City activities are reported as governmental or business-type activities. The second set of statements (Governmental Funds Financial Statements) report separately the activities of the City’s various funds:
Major Funds
General Fund
Disaster Accounting Fund
General Capital Improvement Fund
Debt Service Fund
Proprietary Funds
Sewer Utility Enterprise Fund
Beach Parking Fund
Internal Service Funds
The ACFR report is composed of the following parts:
• Introductory Section, including the letter of transmittal • Financial Section
a. Independent Auditors’ Report
b. Management Discussion and Analysis (MD&A)
c. Basic City-wide and fund-level financial statements
d. Explanatory notes to financial statements, supplemental schedules e. Supplementary information
• Statistical Section
The transmittal letter provides management’s representation of the City’s finances and describes all component units, funds, and activities of the City. The letter also provides information regarding the City’s demographics and discussion on the City’s budget process, as well as factors affecting the City’s financial conditions, including State budget and local economy, long-term financial planning, risk management, and employee benefit cost.
The Financial Section includes the Management’s Discussion and Analysis (MD&A) that summarizes the financial results for the fiscal year ending June 30, 2023, and provides a brief and easily readable analysis of the City’s fiscal activities, overview of the financial highlights, and a discussion of significant financial changes from the prior year.
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The financial statements and notes to the financial statements are presented next. Following the financial statements is the statistical section of the report, which includes tables that contain ten years of data that illustrate financial trends and a section with demographic and other data that is useful in analyzing the financial condition and performance of the City.
The comprehensive format of the annual financial report is designed to provide detailed information for all city government activities in one document. Rather than reviewing cover to cover, it is suggested that readers initially concentrate on the summary schedules in the MD&A before moving to the full statements, budget comparison statements, and the combined statements presented in the report's financial section.
DISCUSSION
The FY2023 ACFR report delivers positive news, which is highlighted in the MD&A section of the document. The overall Citywide net assets exceeded its liabilities on June 30, 2023, by $104.9 million, which is a $20.5 million increase from the prior year’s net position of $84.4 million. This increase is primarily due to an increase in the citywide revenue base, including the 2nd payment from the American Rescue Plan Act (ARPA) and Vehicle License Fee backfill, and an increase in capital assets as further described below.
At the same time, the unrestricted net position improved from negative $34.3 million in the prior year to negative $28.7 million in the current year. This is a favorable change of $5.6 million. The negative net position exists when liabilities exceed assets. As further described in the Annual Comprehensive Financial Report, the City’s negative net position figure is a direct result of the City’s recognition of net pension and OPEB liability as required by GASB 68 and 75, respectively, but these obligations do not represent a liability due and payable immediately.
The City’s current actuarially determined long-term net pension liability of $69.7 million showed a significant increase from the prior fiscal year’s $35.3 million, based on the most recent actuarial valuation and CalPERS Actuarial assumptions and is amortized over a combination of 30 and 20-year schedules. This increase is primarily due to CalPERS lowering their actuarial discount rate from 7.15% in the previous year’s actuarial valuation to 6.9% for the measurement date as of June 30, 2022 (used in this ACFR report). The discount rate plays a significant role in determining the present value of future pension obligations and directly influences the calculation of net pension liabilities. There is an inverse relationship between the discount rate and the present value of future pension obligations. As the discount rate decreases, the present value of future obligations increases, and vice versa.
This year, the City’s actuarially determined long-term net OPEB liability (Other Post Employment Benefits) decreased by $4.6 million from $9.0 to $4.4 million. Although the OPEB benefit plan is closed to new members (employees), the outstanding liability was significant per previous actuarial valuations as reflected in past annual financial reports. This prompted staff to set up an irrevocable OPEB trust with the Public Agency Retirement Services (PARS) and to bring forward a prefunding policy for the Council’s consideration and approval during the budget process two years ago. The policy of funding the Actuarially Determined Contribution (ADC) each year through the trust has now been in place for two budget cycles and is showing measurable results by a significant reduction of this liability that will continue going down over time.
The implementation of this prudent funding policy is now reflected in the most recent actuarial valuation, significantly reducing the unfunded OPEB liability by applying a favorable increase in a discount rate from 2.16% of the “pay-as-you-go” rate before prefunding to the current discount rate of 6.5%, which is more in line with the actual returns and CalPERS discount rate for Pacifica City Council 4
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Pension. As mentioned before, the inverse relationship between the discount rate and future OPEB liabilities will mean that the City will continue seeing a positive impact of the prefunding policy as this outstanding liability will continue to decrease gradually in the future years.
Altogether, the City’s long-term net pension liability of $69.7 million and Other Post Employment Benefits (OPEB) obligations of $4.4 million in the FY 2022-23 Statement of Net Position result in the City’s negative unrestricted net position of $28.7 million ($27.6 million for governmental, and $1.1 million for business-type activities, as illustrated in Table 1 below). This is an improvement from the prior year but may still be somewhat limiting the City’s overall financial position and will need to be monitored closely with the annual review of a funding policy during each budget cycle.
Again, it is important to emphasize that these long-term obligations are based on actuarial estimates and do not represent a liability due and payable immediately. Staff will continue evaluating and recommending any necessary adjustments to the City’s funding policy related to these obligations as part of future budget discussions.
FY23 FY22 FY23 FY22 FY23 FY22
Cash and investments $ 46,165,784 $ 46,020,926 $ 30,830,925 $ 11,340,719 $ 76,996,709 $ 57,361,645 Other assets 10,222,528 5,763,615 781,585 1,035,799 11,004,113 6,799,414 Capital assets 96,327,789 88,559,682 63,951,769 62,561,864 160,279,558 151,121,546 Total assets 152,716,101 140,344,223 95,564,279 74,938,382 248,280,380 215,282,605 Deferred Outflows of Resources 29,766,978 13,402,634 2,159,041 958,795 31,926,019 14,361,429 Current liabilities 8,018,561 7,383,161 5,628,799 4,052,775 13,647,360 11,435,936 Non-current liabilities 93,744,603 65,243,747 57,776,469 40,554,466 151,521,072 105,798,213 Total liabilities 101,763,164 72,626,908 63,405,268 44,607,241 165,168,432 117,234,149 Deferred Inflows of Resources 9,092,357 27,832,512 1,091,358 207,076 10,183,715 28,039,588 Net Position
Net Investment in
Capital Assets 78,197,042 69,492,549 34,304,949 26,098,298 112,501,991 95,590,847 Restricted 21,039,910 23,043,731 21,039,910 23,043,731
Unrestricted (27,609,394) (39,248,843) (1,078,255) 4,984,562 (28,687,649) (34,264,281) Total net position $ 71,627,558 $ 53,287,437 $ 33,226,694 $ 31,082,860 $ 104,854,252 $ 84,370,297 Business-Type
Activities Totals
Table 1
Comparative Statement of Net Position
Activities
Governmental
Total citywide revenues were $83.3 million; this is an increase of $11.6 million (or 16.3%) from the prior year of $71.6 million with Governmental and Business-Type activities increasing by $10.3 million and $1.3 million, respectively.
A significant portion of this increase is attributable to the second (and last) allocation of ARPA grant funding in the amount of $4.6 million that the City received in FY2022-23. Program revenue for both Governmental and Business-type activities increased by $3.1 million from $36.8 million to $39.9 million, with an increase of $1 million in charges for services in Governmental activities and $1.1 million in Business-Type activities, respectively, due to the increased activity level (post-COVID), and annual review and update of the master fee schedule.
Revenues from all taxes increased by $6.2 million from $29.7 million to $35.9 million, which includes increases of $1.5 million in property tax, $0.7 million in sales tax (including approximately $0.5 million of Measure Y), $1.7 million in transient occupancy tax, $1.0 million increase in utility user taxes. Other revenues showed an increase of $2 million, which included Pacifica City Council 5
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$1.5 million increase in Motor Vehicle in Lieu revenue due to the State-paid VLF backfill of these obligations this year. It is also worth noting that the interest allocation revenue increase by $0.8 million from $387,048 in FY2022 to $1,218,988 in FY2023 due to the Finance Department’s efforts to renegotiate new banking contracts to include higher interest rates.
The City’s total program expenses were $62.8 million, an increase of $1.3 million or 2.2% over the prior fiscal year’s $61.5 million. With the high inflation and rising CPI index across the nation, this nominal expense demonstrates the City’s efforts to manage its spending in a fiscally prudent mannor. The Governmental activities expenses decreased by $0.3 million. The Business-Type activities expenses increased by $1.6 million, mainly due to a reimbursement of $1.6 million from the insurance settlement related to Anza Pump station claim traced back to March 16, 2020. Sewer operation also included a noticeable $0.6 million increase from interest charges from the debt bonds, a $0.3 increase in utilities, and other projects related increase from Anza Pump Station Repairs, Ultraviolet Disinfection, and Linda Mar Pump station repairs that were capitalized this year, meaning that these investments were added as capital assets and not considered expenses. Other categories stayed consistent with the prior year (Table 2).
Revenues FY23 FY22 FY23 FY22 FY23 FY22
Program revenues
Charges for service $ 7,382,633 $ 6,349,592 $20,613,951 $19,524,439 $ 27,996,584 $25,874,031 Operating contributions & grants 9,802,306 8,598,184 9,802,306 8,598,184 Capital grants 2,179,965 2,374,222 2,179,965 2,374,222
Total program revenues 19,364,904 17,321,998 20,613,951 19,524,439 39,978,855 36,846,437 General revenues
Taxes:
Property 15,983,214 14,445,541 15,983,214 14,445,541
Sales and use 3,877,828 3,136,433 3,877,828 3,136,433
Franchise 1,197,067 1,754,500 1,197,067 1,754,500
Other taxes 14,868,245 10,385,735 14,868,245 10,385,735 Motor Vehicle In Lieu 5,870,043 4,355,327 5,870,043 4,355,327 Investment Earnings 659,790 100,562 559,198 286,486 1,218,988 387,048 Gain on Sale of Capital Assets 9,310 9,310 -
Miscellaneous 279,988 324,910 279,988 324,910
Total general revenues 42,745,485 34,503,008 559,198 286,486 43,304,683 34,789,494 Total revenues 62,110,389 51,825,006 21,173,149 19,810,925 83,283,538 71,635,931 Expenses
Governmental Activities
General government 8,606,518 7,481,370 8,606,518 7,481,370 Public Safety 17,048,970 18,632,393 17,048,970 18,632,393 Community Development 3,184,443 3,243,238 3,184,443 3,243,238 Public Works 9,052,066 9,326,203 9,052,066 9,326,203
PBR 5,418,584 4,928,418 5,418,584 4,928,418
Interest on long-term debt 959,687 969,550 959,687 969,550 Business-Type Activities - -
Sewer 17,983,716 16,258,603 17,983,716 16,258,603
Beach Parking 545,599 620,511 545,599 620,511
Total expenses 44,270,268 44,581,172 18,529,315 16,879,114 62,799,583 61,460,286 Change in net position before transfers 17,840,121 7,243,834 2,643,834 2,931,811 20,483,955 10,175,645 Transfers 500,000 499,600 (500,000) (499,600) - -
Change in net position 18,340,121 7,743,434 2,143,834 2,432,211 20,483,955 10,175,645 53,287,437 45,544,003 31,082,860 28,650,649 84,370,297 74,194,652 Table 2
Statement of Activities
Governmental
Activities
Net position - beginning, as restated
(Note 11D)
Business-Type
Activities Total
The Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances presented in the ACFR report is a useful snapshot of the City’s fiscal indicator for the year. Governmental funds include all funds except for proprietary (Sewer) and internal service funds. The Net Change in Fund Balances, reflecting all revenues, expenditures, and transfers, was an increase of $1.8 million from $45.1 million to $46.9 million or by 3.9% in 2022-23.
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Fund Balance Fund Balance Net change in
FY23 FY22 Fund Balance
General Fund $ 20,547,470 $ 16,292,224 $ 4,255,246
Disaster Accounting Fund 7,472,999 6,088,414 1,384,585
General Capital Improvement Fund 5,316,581 6,722,964 (1,406,383) Debt Service Fund 2,699,165 5,317,384 (2,618,219)
Other Governmental Funds 10,833,411 10,675,637 157,774
Total Governmental Funds $ 46,869,626 $ 45,096,623 $ 1,773,003 Total Governmental Funds
The General Fund is the City’s primary operating fund. It receives unrestricted revenues and provides general administrative services, law enforcement, and animal control services, and land development-related activities such as planning, building, and engineering.
The City’s General Fund balance on June 30, 2023, was $20.5 million, which is an increase of $4.3 million from the prior year’s $16.3 million. Out of this balance, $3.5 million is non-spendable related to RDA loans, and $0.2 million is restricted for use by outside agencies that cannot be liquidated. The General Fund Assigned Fund balance of $5.8 million includes budget shortfall reserve of $4.8 million or 10% of current year general fund operating expenditures as per previously adopted Council policy, $0.2 million for facilities and maintenance reserve, $0.2 million for Compensated absences, $0.5 million for Child Care reserve, and $0.1 million as a legal reserve per previously approved Council policy. The remaining unassigned fund balance totaled $11.1 million, which is an increase from the prior year’s unrestricted balance of $7.4 million.
General Fund revenues totaled $49.0 million in the current fiscal year compared to $42.5 million in the prior fiscal year. This is an increase of $6.5 million or 15.3% as a result of these factors:
an increase of $1.6 million in property tax, $0.7 million increase in sales tax, a substantial increase in the transient occupancy tax (TOT) and utility user tax of $1.6 million and $1.0 million respectively, an increase of $1.5 million from VLF backfill payment, as well as a decrease in charges for services of $0.6 million, and a reduction of $0.9 million in franchise taxes, due to recording of the portion of franchise fee in the streets improvement fund per the supreme court’s ruling based on Zolly versus City of Oakland.
Expenditures totaled $42.9 million, a $4.8 million or 12.6% increase from the $38.1 million in the prior year. General government expenditures increased by $1.9 million from $7.2 million in FY2021-22, mainly from non-departmental expenses such as $0.5 million increase in the retirement health, $0.5 million increase in insurance premium cost for MPA and PLAN JPA workers’ compensation and general liability insurance pools, $0.1 million increase in election cost, and $0.1 million investment in the economic development program. The police department incurred an increase of $0.9 million primarily due to the overtime cost and additional limited-term records technician positions added this year. The fire department’s expenditures increased by $0.4 million also due to overtime. Planning department expenditures stayed flat. The Public Works department’s expenditure saw an increase of $0.7 million from FY2022-23 compared to the prior fiscal year due to filling vacancies and the overtime cost in the street and traffic maintenance and engineering divisions because of the time and efforts spent on the 2022 winter storm. Parks, Beaches, and Recreation department saw an increase of $0.9 million in department expenditures, mainly due to the increased activities in the state-run childcare and preschool programs that are partially grant-funded and the expanded recreational swimming programs returning to the pre-COVID activity level.
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FY2023 FY2022 Variance % Variance $
Revenues
Taxes $ 28,561,337 $ 24,284,444 17.6% $ 4,276,893
Licenses and permits 1,092,091 1,026,381 6.4% 65,710
Fines and forfeitures 197,653 167,612 17.9% 30,041
Use of money and property 513,330 222,511 130.7% 290,819 Intergovernmental 12,332,582 10,875,321 13.4% 1,457,261 Charges for current services 3,040,003 3,649,015 -16.7% (609,012) Recreational programs 688,195 456,080 50.9% 232,115
Other 2,582,901 1,840,182 40.4% 742,719
Total 49,008,092 42,521,546 15.3% 6,486,546
Expenditures -
General government 9,130,395 7,242,859 26.1% 1,887,536
Public safety 19,920,279 18,582,989 7.2% 1,337,290
Community development 3,080,138 3,056,701 0.8% 23,437
Public works 5,009,407 4,371,543 14.6% 637,864
Parks, beaches and recreation 5,674,609 4,785,683 18.6% 888,926 Capital outlay 108,537 60,620 79.0% 47,917
Total 42,923,365 38,100,395 12.7% 4,822,970
Net Transfers (1,829,481) (3,974,956) -54.0% 2,145,475
Net Change in Fund Balance 4,255,246 446,195 853.7% 3,809,051 Fund balance at beginning of year 16,292,224 15,846,029 2.8% 446,195 Fund Balance at end of year 16,292,224 16,292,224 0.0% - Non-spendable 3,528,523 3,768,557 -6.4% (240,034)
Restricted 185,519 342,510 -45.8% (156,991)
Assigned 5,777,214 4,803,631 20.3% 973,583
Unassigned 11,056,214 7,377,526 49.9% 3,678,688
Total Fund Balance $ 20,547,470 $ 16,292,224 26.1% $ 4,255,246 General Fund Revenues, Expenditures and Fund Balance
Additional information on other operating and capital funds can be found in the attached financial report, MD&A section, and notes to the financial statements.
Maze's auditor report, which appears on page 1 of the City of Pacifica’s Annual Comprehensive Financial Report (Attachment 1), is “unmodified,” which means that the financial statements present fairly, in all material respects, the financial position of the City at June 30, 2023. This is the highest level of auditor assurance that the City can achieve in an audit.
The auditors also issue the Management Letter to help identify areas that could help improve the City's organization and controls over financial activities. The auditors will prepare and issue this letter by the end of January. However, we are pleased to report that the auditors did not note any significant deficiencies or new matters that merit attention for improving internal controls during this year’s audit fieldwork. Staff will share this year’s Memorandum on Internal Control and Required Communication with the Council as soon as it is issued by the auditors.
In addition to ACFR, the auditors have prepared and issued an Audit Report on Measure W Funds, as summarized below and included in Attachment 2.
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The annual audit report on Measure A funds will be issued in the next few weeks, as staff is working with San Mateo County Transit Authority to seek additional guidance on whether debt payments associated with the issuance of 2008 COP from Measure A Funds could be allowed, which may impact the calculation of the available balance of these funds and corresponding restatements. These reports include additional financial statements and supplemental data that together with ACFR summarize the results of the operations of all funds and give a comprehensive overview of the City’s financial position for the fiscal year that ended on June 30, 2023
Audit Report on Measure W Funds.
The agreement between the City and San Mateo County Transportation Authority for the distribution of San Mateo County Measure W funds for local transportation purposes in accordance with the San Mateo County Congestion Relief Plan requires the City to submit a compliance audit report on the funds received. The audit report found that the City has complied, in all material respects, with the aforementioned requirements for the year ended June 30, 2023. Additional information is available in Attachment 2.
We would like to take the opportunity to acknowledge the hard work of the Finance Department staff in bringing this report forward. We also appreciate the competence and diligence displayed by the auditors’ team in assisting the City staff with the preparation and timely completion of this ACFR document. As mentioned earlier, this is the City’s first year of transitioning to the new audit team, which can be challenging, as it requires adjustments and coordination of procedural changes and communication styles. We want to acknowledge the extraordinary efforts of the auditors’ team and the City staff to overcome these challenges. Despite encountering delays in completing the final audit process this year, both the auditors and City staff worked tirelessly, including late nights, holidays, and weekends, to get back on track to ensure the timely completion of this report to bring the ACFR forward for the Council’s acceptance tonight as scheduled.
Finally, we would like to thank the entire City Council for their unfailing support of maintaining the highest standards in managing the City’s finances, emphasizing transparency, ethics, and fiscal responsibility.
The City has been a proud recipient of the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA) for two consecutive years, and we are confident that the attached document will continue to meet these high standards. We included GFOA recommendations to further improve the quality of this document and plan to submit this ACFR report for the award’s consideration again this year.
RELATION TO CITY COUNCIL GOALS AND WORK PLAN:
The City's annual audit is a critical check on the City’s financial practices, impacting all City Council Goals.
FISCAL IMPACT:
There is no fiscal impact associated with the Council’s acceptance of the ACFR report. The attached reports present the City's financial results for the last fiscal year 2022-23.
ALTERNATIVES:
There is no reasonable alternative to the staff recommendation to accept the report, as not accepting the Annual Comprehensive Financial Report will not change the City’s audited financial position as of June 30, 2023.
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ORIGINATED BY:
City Manager's Office
ATTACHMENT LIST:
Attachment 1 - Pacifica ACFR FY2022-23 (PDF)
Attachment 2 - FY 2022-23 Pacifica Measure W (PDF)