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CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 12 Section Name: {{section.name}} Account Number: 10-2011 File ID: {{item.tracking_number}} TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: March 18, 2024
SUBJECT:
Fiscal Year 2022-23 Annual Comprehensive Financial Report - Acceptance RECOMMENDATION:
Accept the Annual Comprehensive Financial Report for the fiscal year ended June 30, 2023.
BACKGROUND:
The City’s Charter, Section 5.26 requires that the City’s external auditor conduct an annual audit and the City issue a complete set of financial statements within a reasonable time. The Annual Comprehensive Financial Report (ACFR) for the fiscal year ended June 30, 2023, included as attachments to this administrative report, was presented to the Mayor and the Deputy Mayor in their capacities as members of the City Council Audit Committee. The Audit Committee recommended that the City Council formally accept the ACFR at its regular meeting.
The City's independent auditor, The Pun Group, a firm of licensed certified public accountants, conducts its audits in accordance with generally accepted auditing standards (GAAS). The standards require that the auditors plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of a material misstatement. On a sample basis, they examine evidence supporting the amounts and disclosures in the financial statements. The audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall basic financial statement presentation.
The auditor has rendered an unmodified (“clean”) opinion on the City's basic financial statements as of and for the fiscal year ended June 30, 2023.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Governmental Accounting Standards require a Management’s Discussion and Analysis (referred to as MD&A) to be included with the audited financial statements, with the intent of giving readers an objective and easily readable analysis of the City’s financial performance for the year. The MD&A includes a discussion of the basic financial statements, some condensed financial information, an analysis of the City’s financial position, and results of operations on both a City-wide and Fund basis. The Management’s Discussion and Analysis begins on page 5 of the ACFR.
FINANCIAL RESULTS BY FUND
The Fund Financial Statements section, which can be found on pages 35 through 54 of the financial report, presents financial data for the City's major funds, most notably the General Fund.
General Fund
The General Fund is the primary operating fund of the City. The General Fund experienced a surplus of $6.4 million for the fiscal year as revenues exceeded expenditures and net transfers out. General Fund revenues for the fiscal year 2022-23
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totaled $163.6 million, marking a $3.9 million (2.5%) increase from the prior year. The growth is primarily attributed to higher property tax and charges for services.
Property tax, the City's largest revenue source, increased by $8.2 million (11.4%). The increase was largely due to the receipt of $5.7 million of the fiscal year 2020-21 VLF shortfall backfilled by the State. Additionally, secured property tax reached $46.6 million, a $3.6 million (8.3%) growth compared to the prior year. The growth is consistent with the assessed value growth for the fiscal year and underscores the high value of land and property on the San Francisco Peninsula.
Sales tax, the General Fund's second-highest revenue source, experienced modest growth of $0.5 million (1.6%). It is anticipated that sales tax revenue will remain a stable revenue source with a modest growth rate, following its strong recovery from the pandemic.
Other taxes, which include business tax, transient occupancy tax (TOT), real property transfer tax and franchise fees, decreased by $2.1 million (7.6%) compared to the prior year. Despite the growth in business tax and TOT revenue, it was insufficient to offset the decrease in real property transfer tax revenue. The slowdown in the housing market, attributed to high interest rates, resulted in a significant decrease of $6.9 million (48.3%) in real property transfer tax revenue. At the close of the fiscal year 2022-23, real property transfer tax recorded only $7.4 million.
The General Fund total expenditures for the fiscal year 2022-23 amounted to $149.9 million, and $3.6 million under budget. The favorable budget variance was largely due to staff vacancy savings, which were partially offset by increases in contract services, negotiated labor contracts, increasing costs of pension and healthcare. General Fund transfers out amounted to $15.5 million, which comprise of $10.9 million to the General Capital Projects Fund, $2.7 million to the Debt Service Fund, $1.5 million to the 2% Hotel Tax Capital Project Funds, and $410,000 to the Vehicle and Equipment Replacement Internal Service Fund.
Other Major Funds
The Construction Service Fund is a special revenue fund accounting for revenues and expenditures of activities related to building permits. This fund experienced a deficit of $3.7 million, bringing its fund balance down to $32.6 million. This reduction reflects the City’s efforts to align the cost of services with its corresponding fees. Over time, these efforts will gradually reduce reserves down to policy levels, which is set at 12 months of budgeted operating expenditures.
The General Capital Projects Fund reported $24.8 million in capital project expenditures, reflecting the City’s investments in City facilities and infrastructure. They included $11.7 million for citywide street rehabilitation and reconstruction, $2.8 million in streetlights improvement projects, $1.4 million in parks projects, $3.0 million in City facilities and technology upgrades, and $4.8 million for storm improvement projects. The citywide street rehabilitation will repair streets that were identified as failed in 2013 and ensure that the City will be able to maintain its Pavement Condition Index score of 70.
Proprietary Funds
Proprietary Funds are used to account for activities that are fueled by charges for the services provided by each fund.
Enterprise Funds account for external activities (largely utilities), while Internal Service Funds (ISFs) account for internal (interdepartmental) activities.
The Sewer Fund is the City’s main enterprise fund and should be self-supporting; the service charges to sewer customers generate the revenues needed to support the enterprise’s operations, debt service, and capital needs.
The Sewer Fund’s total net position increased from $278.6 million to $335.9 million, an increase of $57.3 million or 20.6%, largely driven by the approved rate increase of 12% for fiscal year 2022-23, and the strategic use of the available low- interest-rate loan and bond proceeds to fund the cost of the Clean Water Program. Cash and investments increased from $103.1 million to $138.4 million as a result of the rate increase. Restricted cash and investments decreased from $252.6 million to $92.2 million, reflecting loan and bond drawdown to pay for the Clean Water Program and other critical sewer capital projects. Total capital assets increased from $552.0 million to $699.4 million, a $147.4 million (26.7%) increase, representing the addition of new capital assets from the Clean Water Program.
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GOVERNMENT-WIDE FINANCIAL STATEMENTS
The government-wide financial statements, which provide a broad overview of the City’s finances, including financial data from Governmental and Business-Type activities. The latter reflects the City's Sewer Enterprise, and the former accounts for the remainder; most notably, the General Fund.
Statement of Net Position
The Statement of Net Position primarily presents the City's balance sheet-type accounts: assets and deferred outflows of resources (expenditures that apply to a future period), liabilities and deferred inflows of resources (revenues that apply to a future period), and the net of the former and latter categories, reported as net position.
As of June 30, 2023, the City's entity-wide net position was $787.3 million. The net position decreased by $59.4 million (8.2%) compared to the prior fiscal year. This was largely due to increase in the City’s net pension liability, which rose from $177.2 million to $278.8 million. The $101.6 million (57.3%) increase in net pension liability is primarily attributable to the
7.5% investment loss by the California Public Employees Retirement System (CalPERS) for the fiscal year ended June 30, 2022.
Statement of Activities
The Statement of Activities, which reports government-wide revenues and expenses, accounted for $245.8 million in total expenses, which had a significant increase of $41.4 million (20.3%) compared to the prior fiscal year. The primary driver behind the increase was the increase in net pension liability due to the unfavorable deviation of CalPERS’ investment returns, as noted above.
BUDGET IMPACT:
The recommended action has no budget impact.
ENVIRONMENTAL DETERMINATION:
This report is not a project subject to CEQA, because it is an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. (CEQA Guidelines Section 15378(b)(5).) In addition, this report is not a project subject to CEQA, in that it consists of a government fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. (CEQA Guidelines Section 15378(b)(4).)
NOTICE PROVIDED
All meeting noticing requirements were met.
ATTACHMENTS
Att 1 - Annual Comprehensive Financial Report for the year ended June 30, 2023
STAFF CONTACT
Karen Huang, Finance Director
[email protected]
(650) 522-7110