TO: Mayor and City Council
FROM: Philippe Eskandar, City Manager
BY: Hillary Guirola-Leon, Finance Director
Mark Siegfried, Accounting Manager/Controller
DATE: November 13, 2024
SUBJECT: RECEIVE AND FILE ANNUAL COMPREHENSIVE
FINANCIAL REPORT (ANNUAL AUDIT) FOR THE FISCAL
YEAR ENDED JUNE 30, 2024
STRATEGIC PLAN CRITICAL SUCCESS FACTORS
Engaged and Connected Residents
Efficient, Responsive, and Effective City Services
Fiscally Responsible and Transparent City Government
BACKGROUND
The Annual Comprehensive Financial Report (ACFR) is used to communicate the City’s financial condition and activity in a transparent and organized manner. The ACFR presents historical and comparative information that can be useful to City Staff, elected officials, and external users, such as businesses, other public agencies and the City’s residents. As required by the Citywide Financial Policies, the ACFR is prepared by the City and audited by independent auditors who are contracted through a competitive procurement process.
On March 10, 2021, the City entered a new five-year contract with Lance, Soll & Lunghard, LLP (LSL) to provide auditing services of the City’s financial records and assist in preparing the City’s audited ACFR. LSL conducted the audit in accordance with the Generally Accepted Auditing Standards, whereby an audit plan was prepared and followed to obtain reasonable assurance that the City’s financial statements were free from material misstatements. The audit included a review, on a test basis, of documents supporting the amounts and disclosures in the financial statements. The audit also assessed the Steven W. Huang, DDS, Mayor
Gretchen Shepherd Romey, Vice Mayor
Tony Chou, Council Member
Calvin Lo, Council Member
Steve Talt, Council Member
accounting principles used and significant estimates made by management, as well as evaluated the overall general-purpose financial statement presentation.
Fiscal Year 2023-24 represents the fourth year that the City has created an ACFR in accordance with standards prescribed by the Government Finance Officers Association (GFOA). This was an objective that the Finance Department previously disclosed as one of its goals during the FY 2021-22 budget process and continues to be one of the Department’s core goals moving forward. In addition to the financial statements and required supplementary information which were provided in the past, the ACFR also provides a letter of transmittal and a statistical section detailing information about the City that external users can use to see ten-year trends of the City.
The FY 2022-23 ACFR received the City’s second Certificate of Achievement for Excellence in Financial Reporting. This year’s ACFR will be submitted once again to the GFOA as part of their Certificate of Achievement for Excellence in Financial Reporting awards programs.
DISCUSSION
The attached ACFR (Attachment 1) for the fiscal year ended June 30, 2024, received an unqualified/unmodified “clean” audit opinion letter. A clean opinion communicates to users that the financial statements are fairly presented and that the information used in the statements is reliable.
The recent history of findings is displayed below.
Fiscal Year Number of Material
Weaknesses
Number of Significant
Deficiencies
Fiscal Year 2015 6 1
Fiscal Year 2016 2 1
Fiscal Year 2017 0 1
Fiscal Year 2018 1 1
Fiscal Year 2019 0 0
Fiscal Year 2020 0 0
Fiscal Year 2021 0 0
Fiscal Year 2022 0 0
Fiscal Year 2023 0 0
Fiscal Year 2024 0 0
In the Statement of Auditing Standards Statement (SAS) 114 letter (Attachment 2), the letter details the scope of audit procedures performed, significant findings, and other information, such as disagreements with management, audit adjustments and significant estimates, that are not communicated in the audited financial statements.
In the past, the City had a history of material weaknesses and significant deficiencies that suggested fundamental operational problems that were reported by the auditors. In the Statement of Auditing Standards Statement (SAS) 115 letter (Attachment 3), LSL did not identify any deficiencies in internal controls that they consider as material weaknesses or significant deficiencies that require corrective action by the City.
The City’s General Fund had a net change of $2,091,779 for the year ended June 30, 2024, which includes the City Council approving a transfer of $2.0 million to the Capital Projects Fund to fund future projects.
The General Fund’s unassigned fund balance as of June 30, 2024, is $17.7 million. This represents a reserve ratio of 49% measured against annual General Fund revenues. The City’s Financial Policies specify that the General Fund unassigned fund balance shall be approximately 40% of General Fund revenues.
Overall, the City’s Annual Financial Statements reflect the City’s strong financial condition with a healthy General Fund balance.
The format and content of the ACFR are largely prescribed in order to meet governmental accounting standards. The City’s ACFR includes the following major sections and information:
Introductory Section
● Letter of Transmittal
● Organizational Chart
● List of Elected and Administrative Officials
● Certificate of Achievement for Excellence in Financial Reporting for Fiscal Year Ended June 30, 2023
Financial Section
● Independent Auditors’ Report: the City’s report card on the content of the Financial Statements
● Management’s Discussion and Analysis (MD&A): provides an analytical overview of the City’s financial status
● Governmental-Wide Financial Statements: show finances at a point in time (assets – liabilities) and throughout the year (revenues – expenditures), budget to actual revenues and expenditures, and cash flows ● Fund Financial Statements: a detailed look at funds, showing Balance Sheet and Statement of Revenues, Expenditures, Changes in Fund Balance, and Net Position
● Notes to the Financial Statements: a narrative explanation that accompanies the Basic Financial Statements
● Budget to Actual Comparisons: General Fund and other select major funds ● Pension Information: 10 years of pension funding information ● Other Post-Employment Benefits (OPEB) Information: 7 years of OPEB funding information
● Breakout of Individual Funds: presented in a cumulative manner in the Financial Section
Statistical Section
● Financial Trends
● Revenue Capacity
● Debt Capacity
● Demographic and Economic Information
● Operating Information
In an effort to make this complicated and large document more user-friendly, staff has provided a summary explanation of the ACFR in this staff report.
GENERAL FUND BALANCE (Pages 16 & 18)
The most notable measure of a City’s financial health is the General Fund balance. As presented in the Basic Financial Statements, as of June 30, 2024, the total fund balance of General Fund is $19.7 million, an increase of $2.1 million for the year.
General Fund revenues increased by $3.3 million, or 10.1%, compared to FY 2022-23. The overall increase in General Fund revenues was driven by an increase in property taxes due to a strong real estate market. Charges for Services have also rebounded as the City has operated at full capacity after being shut down during the pandemic. The City also recognized $1.9 million of one-time revenues related to the American Rescue Plan Act.
Expenditures increased by $2.7 million, or 9.4%. The primary reason for the increase was the salary related expense increases that are part of the Memorandum of Understandings with the various City employee associations that was effective July 1, 2022. The City has also felt inflationary pressures as expenditures related to materials and supplies continue to increase.
CITYWIDE NET POSITION (Pages 8-9 and Pages 13-15)
The Statement of Net Position on page 13, similar to a balance sheet, shows total assets and liabilities of the City as of June 30, 2024. The total net position of the City for all activities was $205.0 million. The net position increased by $1.2 million, or 0.6% during the year.
Net position is broken out into three categories: capital, restricted, and unrestricted.
Investment in Capital Assets ($204.7 million)
Capital assets include land, construction in progress, structures & improvements, furniture & equipment, and infrastructure.
Restricted Net Position ($8.2 million)
These assets are subject to agreements with creditors, developers, grantors, or laws or regulations of other governments.
Unrestricted Net Position (-$7.9 million)
This represents the balance of net position that is neither part of capital assets nor restricted. The negative $7.9 million unrestricted net position deficit is primarily caused by the reporting of the net pension liability and other postemployment benefits (OPEB) liability as required under GASB Statements No. 68 and No. 75, respectively. Of the negative $7.9 million, $6.9 million is OPEB lability which was required by GASB 75. Additional information regarding the OPEB liability is available on pages 44-48 (Note 10) of the ACFR.
CASH AND INVESTMENTS (Pages 30-33, Note 3)
Capital Assets Include
Land $ 149,584,512 City Hall, Lacy Park, Stoneman School Construction in Progress 107,444
Structures & Improvements 20,501,032 Crowell Library
Furniture & Equipment 2,471,690 Fire Engine, Police Vehicles, Ambulance Infrastructure 32,079,616 Street Lights, Sidewalks, Pipes $ 204,744,294
Special Revenue Funds Affected
Community Development Projects $ 681,272 SCAQMD, Recycling Grant, PEG Public Safety 583,195 Asset Seizure, COPS Grant
Parks and recreation 1,183 TDA Article 3
Public Works 5,290,071 Gas Tax, Prop A, Prop C, , Measure M, W, & R Funds Debt Service 43,877 Funds Held With Wells Fargo for POB Payments Section 115 Trust 1,568,763 CalPERS CEPPT Trust for Future Pension Payments $ 8,168,361
The Financial Statement also includes detailed information on the City’s cash and investments. As of June 30, 2024, the City had $41.8 million in total cash and investments (an increase of $0.4 million). 93% of which is in the form of investments authorized by the California Government Code and the City’s investment policy. The remaining 7% of which are held in cash for ongoing operations.
NONCURRENT LIABILITIES (Page 36, Note 6)
The City’s one outstanding bond issue, the 2007 Pension Obligation Bonds (POBs), was paid off in FY 2023-24. The City transferred $574,888 ($545,000 in principal plus $29,888 in interest) to its Debt Service Fund to service the debt associated with the 2007 POBs.
PENSION LIABILITIES (Pages 38-44, Note 8)
Total net pension liability, or unfunded liability, is based on projected future benefit payments attributed to the current and past employees’ service, less the assets accumulated to pay those liabilities. The City’s annual payments include a portion to fund current benefits as well as an amount to pay down the unfunded liability. Annual actuarial valuations provide the City with the amount of the contribution that must be paid annually into the plan to ensure that the current unfunded liability is paid off over the following 30 years. The aggregate net pension liability reported in the Statement of Net Position is $44.8 million. The net pension liability increased by $3.2 million this year.
OPEB LIABILITIES (Pages 44-48, Note 10)
The aggregate net OPEB liability reported in the Statement of Net Position is $6.9 million which is an increase of $1.0 million from the prior year’s valuation of $5.9 million. The $1.0 million increase is due to a variety of factors including a change in the inflation rate used from 2.25% up to 2.50% and due to possible future retiree medical benefits increasing due to the latest MOU approved effective July 1, 2024.
GENERAL FUND BUDGETARY COMPARISON (Page 51)
General Fund revenues were over budget by $0.2 million primarily due to budgeted revenues from interest income being higher than expected. Expenditures were lower than the adopted budget by $2.0 million primarily due to budget savings due to personnel vacancies as well as the City not incurring many planned expenditures as certain projects continued into Fiscal Year 2024-25.
FISCAL IMPACT & PROCUREMENT REVIEW
The receiving and filing of the City’s financial statements possesses no fiscal impact and requires no procurement review.
LEGAL REVIEW
The City Attorney's office has reviewed and approved as to form.
RECOMMENDATION
Staff recommends that this annual financial statement be received and filed. If the City Council concurs with staff’s recommendation, an appropriate motion would be:
“I move to receive and file the audited financial statements for the fiscal year ended June 30, 2024.”
ATTACHMENTS
1. Certificate of Achievement for Excellence in Financial Reporting for the Fiscal Year Ended June 30, 2023
2. City of San Marino Annual Comprehensive Financial Report for the Fiscal Year Ended June 30, 2024
3. Auditor’s Communication Letter (SAS 114) for the Fiscal Year Ended June 30, 2024
4. Auditor’s Report on Internal Controls (SAS 115) for the Fiscal Year Ended June 30, 2024