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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: 8 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: February 18, 2025
SUBJECT:
Annual Comprehensive Financial Report for the Fiscal Year Ended June 30, 2024 — Approval RECOMMENDATION:
Accept the Annual Comprehensive Financial Report (ACFR) for the fiscal year ended June 30, 2024 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, 2024, included as attachments to this administrative report, was presented to the Mayor and the Deputy Mayor in their capacity as a member of the City Council Audit Committee on January 21, 2025. 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 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, 2024.
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
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The General Fund serves as the City’s primary operating fund. In FY 2023-24, it recorded $170.0 million in revenues, $157.6 million in expenditures, and $12.3 million in other financing uses, resulting in a small surplus of $78,000 - essentially a break-even year for the City. As a result, the General Fund balance remained the same at $118.0 million.
Key Financial Highlights:
General Fund revenues totaled $170.0 million, reflecting a $6.4 million increase (3.9 percent percent) from the prior year.
Growth was primarily attributed to increases in investment earnings and charges for services, partially offset by decreases in tax revenues.
•Investment income, up by $8.1 million - from $0.4 million to $8.5 million – was due to higher yields and mark-to- market unrealized gain as of June 30, 2024.
•Charges for services increased by $1.8 million (13.0 percent) to $15.6 million, primarily due to stronger revenues from encroachment permits and golf operations.
•Tax revenues totaled $132.1 million, a $3.2 million decrease (2.4 percent):
Property tax remains the City’s largest revenue source, generating $78.6 million, down $2.0 million from the prior fiscal year. Although secured property tax continued to grow, the decline was due to the shortfalls in Vehicle License Fee (VLF) in-lieu property tax revenue. Sales tax, the City’s second largest revenue, decreased by $1.8 million (6.1 percent) to $27.8 million. The decrease was primarily due to reduced sales tax revenue from general goods and autos, and reduced allocation from the County pool.
Other taxes, primarily consisting of real property transfer tax (RPTT), Transient Occupancy Tax (TOT), business tax and franchise fees, totaled $25.9 million, a slight decrease of $0.2 million. TOT generated $5.3 million, RPTT $8.7 million, business tax $8.5 million, and franchise and other taxes $3.4 million. TOT revenue declined due to the Marriot Hotel closure. RPTT increased by $1.2 million (16 percent) primarily due to receipts of Measure CC tax revenue.
General Fund expenditures totaled $157.6 million, up $7.7 million (5.1 percent) compared to the previous year. The increase was primarily due to negotiated labor cost increases and rising operating expenses linked to inflation. The Police Department’s expenditures were slightly over the budget by $0.6 million, largely due to overtime costs necessary to maintain required staffing levels. Staff will review the Police Department’s overtime budget and adjust future year budgets as needed to align with operational needs and historical trends. Overall, General Fund spending was $2.9 million under budget for FY 2023-24. The favorable budget variance was largely due to vacancy savings. These savings were partially offset by higher costs for contract services, increases in pension and healthcare expenses and salary adjustments due to labor negotiations
General Fund balance remained at $118.0 million, unchanged from last year. From an accounting perspective, the City ended FY 2023-24 in a breakeven position. Revenues totaled $170.0 million, exceeding expenditure ($157.6 million) and other financing uses ($12.3 million), resulting in a small surplus of $78,000. However, while the audited financial statements reflect a balanced year, our budgetary outlook tells a different story. While assessing available resources for spending, the City is facing a $5 million shortfall due to the following factors:
•$3.0 million in mark-to-market unrealized gains were recorded as investment earnings but represent non-cash accounting adjustments to meet the Accounting Standards. They are not spendable funds. •$2.0 million in unspent Measure S fund (Measure S is a General Fund sub-fund) was budgeted for CIP but not yet transferred out from Measure S fund to the CIP fund. These funds are not available for general operating needs.
This distinction between accounting results and budgetary resources is critical for financial planning. While the audit confirms the City financial statements are accurate and presented fairly, our budgeting decisions must reflect the actual resources available for operations. As we continue to manage the current fiscal year budget and prepare for the next
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budget cycle, we will need to address the budget deficit strategically.
Other Major Funds
At the close of FY 2023-24, the General Capital Projects Fund reported a fund balance of $58.8 million, up by $4.6 million (8.5 percent) from the prior year. The fund incurred $26.8 million in capital project expenditures, underscoring the City’s continued investments in our facilities and infrastructure. Project investments included $11.8 million for the citywide street rehabilitation and reconstruction program, $1.7 million for storm and flood control improvements, $2.6 million for parks projects, and $7.9 million for city facilities and technology upgrades.
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 $335.9 million to $390.6 million, an increase of $54.7 million or
16.3 percent, largely driven by the approved rate increase of 3 percent for fiscal year 2023-24, 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 decreased from $138.4 million to $133.4 million, and restricted cash and investments decreased from $92.2 million to $51.9 million, reflecting loan drawdown to pay for the Clean Water Program and other critical sewer capital projects.
•Total capital assets increased from $699.4 million to $784.2 million, a $84.8 million increase, representing the addition of new capital assets from the Clean Water Program.
For the Sewer Fund, another notable change this year was the Water Infrastructure Finance and Innovation Act (WIFIA) loan amendments. On February 9, 2024, the EPA approved the loan amendments to allow for early draws on the WIFIA loans. Subsequently, San Mateo and Foster City/EMID submitted draw requisitions for the full amount of the WIFIA loans, including $295.5 million for the City. As part of the Clean Water Program’s financing plan, the City used the WIFIA loan proceeds to defease the 2021 Wastewater Revenue Notes, Series B, of $271.6 million. The WIFIA loans bear an interest rate of 1.31 percent, and early draws from this low-interest loan helped the City save on interest costs while providing an additional $15.6 million in working capital for the Clean Water Program.
GOVERNMENT-WIDE FINANCIAL STATEMENTS
The government-wide financial statements provide a comprehensive, long-term overview of a government entity’s overall financial position and operations. They focus on the economic resources of the entity as a whole. These financial statements report not only the City’s current assets and current liabilities, but also its long-term assets and liabilities, such as unfunded pension liabilities. The government-wide financial statements can be found on pages 29 through 33 of the financial report.
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, 2024, the City's entity-wide net position totaled $860.8 million, reflecting an increase of $73.5 million from the prior year. This is due to total revenues of $322.10 million exceeding total expenditures $248.60 million.
The City’s net pension liability increased by $8.7 million (3.1 percent), from $278.80 million to $287.5 million. This modest increase was primarily due to CalPERS’ improved investment performance. The City’s FY 2023-24 net pension liability was
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based on the CalPERS Actuarial Valuation as of June 30, 2023, rolled forward to June 30, 2024. CalPERS reported a 5.8 percent investment return for FY 2022-23, only slightly below the expected rate of return of 6.8 percent. Despite missing the target, the smaller-than-expected gap helped stabilize the City's pension obligations.
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).)
NOTICE PROVIDED
All meeting noticing requirements were met.
ATTACHMENTS
Att 1 – Annual Comprehensive Financial Report for the year ended June 30, 2024
STAFF CONTACT
Karen Huang, Finance Director
[email protected]
(650) 522-7110