City Council
Report
City Council Meeting: April 8, 2025
Agenda Item: 4.A
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To: Mayor and City Council
From: Oscar Santiago, Director, Finance Department
Subject: Annual Comprehensive Financial Report (ACFR) for Year Ended June 30, 2024
Recommended Action
Staff recommends that the City Council:
1. Adopt a finding that the Annual Comprehensive Financial Report is not a “project” subject to the California Environmental Quality Act (CEQA), and
2. Receive and file the City’s Annual Comprehensive Financial Report (ACFR), the Auditors’ Letter to Council, and the Independent Auditors’ 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 for the City’s financial statements for the fiscal year ended June 30, 2024.
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Summary
In compliance with accounting and financial reporting standards established by the Governmental Accounting Standards Board (GASB), the Annual Comprehensive Financial Report (ACFR) communicates the City’s financial condition and activity in a transparent and organized manner. The ACFR, included as Attachment A, presents historical and comparative information that can be useful to City staff and elected officials, external users such as debt rating agencies, businesses, other public agencies, bondholders, and City residents. A hard copy of the ACFR for the fiscal year ended June 30, 2024 (FY 2023-24) is available at the City Clerk’s office and is also available, along with ACFRs dating back to 2005, on the City’s website at:
https://finance.smgov.net/budgets-reports/annual#/
The ACFR is prepared annually by Finance staff and audited by the City’s independent audit firm, Lance, Soll & Lunghard (LSL), CPAs, and presented to the Audit Subcommittee before it is submitted to the full City Council for receipt and filing. The audit was performed in compliance with City Charter requirements. The independent auditors’ unmodified report, included within the ACFR, communicates that the ACFR, and audited information within, fairly present the City’s financial position for FY 2023-24.
The City of Santa Monica has received an unqualified/unmodified audit report for four decades and has been awarded the Certificate of Achievement for Excellence in Financial Reporting by the Government Finance Officers Association of the United States and Canada (GFOA) for its ACFR for 40 consecutive years, since it began participating in the program. To make the ACFR more transparent, staff has provided an explanation for key financial performance indicators shown in the report.
LSL’s report on the City’s internal control over financial reporting and compliance (Attachment B) noted no instances of non-compliance. An additional submittal letter from LSL (Attachment C) stated that the City’s independent auditors encountered no difficulties and had no disagreements with management during the audit. If the auditors identified any adjustments that management elected not to adjust in the financial statements, they would be noted on the report under Corrected and Uncorrected Misstatements. There were none noted for FY 2023-24.
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While the long-term economic outlook is positive, resources remain constrained. • General Fund revenues have slowed or flattened, and they remain below the levels they would have been had the economy not been disrupted by the pandemic.
• The City is experiencing significant cost increases coming from the highest level of inflation in forty years and other market disruptions as a result of global conflicts and a challenging labor market.
• The City continues to operate at 92% of previous staffing levels. • Since March 2020, the City entered into settlement agreements totaling approximately $230 million with claimants in suits filed against the City arising out of allegations of sexual abuse by a former City employee and volunteer.
The Statement of Net Position, like a balance sheet, reported total assets and total deferred outflows of resources plus total liabilities and total deferred inflows of resources of the City. The total net position of the City for all activities was $1,496.1 million at June 30, 2024, compared to $1,453.8 million at June 30, 2023 as restated, which is an increase of $42.3 million or 2.9%. The net position for business-type activities, such as water, wastewater, stormwater, airport and transit services, decreased $4.2 million and the net position for governmental activities, such as public safety, general government, library, community development and community services, increased $46.5 million.
The General Fund fund balance increased by $22.6 million, to $174.6 million over the prior year, primarily due to several settlements with the City’s insurance carriers and collection of back Business License Taxes.
The City’s three pension plans were approximately 78% funded with a combined unfunded long-term actuarial liability of approximately $504.3 million. All pension figures presented in the ACFR were based on California Public Employees’ Retirement System (CalPERS) GASB 68 valuations that had a measurement date of June 30, 2023. These 4 of 15
valuations are used for financial reporting purposes only and are separate from the CalPERS funding valuations that are used to calculate the City’s annual contributions.
Staff presented the ACFR to the Audit Subcommittee of the City Council on February 27, 2025, for a detailed review before presenting the report to the Council as a Consent Calendar item. The Subcommittee has received the annual ACFR report which included details of the audit process and the financial reports, a presentation by staff and the independent auditors, and an opportunity for Subcommittee members to ask questions of the auditors and staff.
Background
As required by the City Charter, financial statements were prepared by the City and audited by independent auditors. The City selected, LSL, its independent auditor through a competitive procurement process, which was conducted last summer.
Members of the Audit Subcommittee were included as proposal reviewers. The City has used the same outside auditors for the previous eight years.
The quality of the City’s financial reporting and the ACFR are measured in two ways:
1) an unmodified audit report by the independent auditors; and 2) the Certificate of Achievement for Excellence in Financial Reporting, awarded by GFOA, the highest form of recognition in governmental accounting and financial reporting.
Auditors follow audit industry standards established by the American Institute of Certified Public Accountants (AICPA). These standards require auditors to provide an opinion on specific areas of the City’s financial statements based on observations, inquiries, testing of transactions, and analysis.
Discussion
The ACFR for FY 2023-24 received an unmodified opinion by LSL. An unmodified opinion communicates that the financial statements are fairly presented in all material aspects and that the information used in the report is reliable. In their written 5 of 15
communications to Council, the auditors noted that they encountered no significant difficulties with management in performing or completing the audit.
The Statement on Auditing Standards (SAS) 114 established standards for the auditors’ communication with those charged with governance. SAS 115 provides guidance on communicating matters related to the City’s internal controls over financial reporting that have been identified in an audit of the financial statements. These statements require the auditors to consider and report on internal controls, significant audit findings, and other matters as prescribed in the standards as they relate to the audit of the financial statements.
The City of Santa Monica has received an unqualified/unmodified audit report and the GFOA Award for 40 years since it first participated in the GFOA program in FY 1983-84.
City staff met with Audit Subcommittee Chair Marc Verville and Audit Subcommittee Member Jeff Bush on February 12, 2025, to discuss the results of the audit and answered questions on the audited financial statements.
The ACFR was presented to the Audit Subcommittee of the Council on February 27, 2025, by staff and Ryan Domino, the engagement partner from LSL. Audit Subcommittee members were given the opportunity to review the report and ask questions of the external auditor and staff.
Topics discussed included:
• Overall financial results of the City
• Auditors’, both internal and external, evaluation of the City’s financial reporting and related systems of internal control
• Pension reporting and liability, particularly the amortization of the unfunded liability
• Contingent liabilities possibly arising from existing claims against the City • Bond ratings
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• Analysis of capital projects reporting system
• City rainy day reserves and components of assigned fund balance The City’s ACFR includes the following major sections and information:
Introductory Section
• Letter of Transmittal – prepared by management and used to communicate information on areas that may have an impact on the City’s finances now and in the future. This included economic factors as well as budget and management factors.
Financial Section (the main body of the ACFR for current year information) • Independent Auditors’ Report – the City’s report card on the content of the ACFR • Management’s Discussion and Analysis (MD&A) – provided an analytical overview of the City’s financial status and results for the year • Basic Financial Statements – reported finances at a point in time (assets - liabilities) and throughout the year (revenues - expenditures), and cash flows o City-Wide Statements – overview of financial information including all the City’s operations by financial activity
o Fund Financial Statements – a detailed look at funds, reporting on the Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance
o Notes to the Financial Statements (Notes) – a narrative explanation that accompanied the Basic Financial Statements
Required Supplementary and Supplementary Information Sections • Budget to Actual Comparisons – for all governmental funds with a legally adopted budget
• Pension Information – schedule of changes in the net pension liability and related ratios; schedule of contributions by plan
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• OPEB Information – schedule of changes in the net Other Post-Employment Benefits (OPEB) liability and related ratios; schedule of contributions • A breakout of individual non-major funds – for funds that were presented in a cumulative manner in the Financial Section
Statistical Section (current and historical information – up to 10 years) • Financial Trends
• Tax Revenue Information
• Debt Capacity Information
• Demographic and Economic Information
• Operating Information
The following is an explanation of some key indicators reported in the ACFR. Overall, the City’s ACFR showed that City finances were stable.
General Fund
The most prominent measure of a City’s financial health is the General Fund balance.
As presented in the Basic Financial Statements, the City’s General Fund assets exceeded liabilities by $174.6 million as of June 30, 2024. This balance is comprised of categories, as follows:
• $7.4 million Nonspendable fund balance included amounts that are not in spendable form, such as prepaid items and advances to other funds; • $9.5 million Restricted fund balance is required for specific purposes as stipulated by either external resource providers or enabling legislation, including $7.4 million for bond funded projects;
• There is no balance in committed fund balance, which usually represents amounts designated for a specific purpose by formal action from City Council; • $106.3 million Assigned fund balance is set aside to cover continuing capital improvement projects approved in a prior year; prior year reappropriations for projects not fully completed as of the end of the prior year; compensated absences, which is unused vacation time accumulated by employees that can be 8 of 15
paid out 100% when employment is terminated for any reason; funds to respond to contingent liabilities and other costs that were unanticipated, but have emerged since budget adoption, such as rising workers’ compensation and general liability insurance costs; and funds for working capital to support capital projects, essential services, partial service restorations, contractual labor obligations while revenues continued to recover over the next five years; and • $51.4 million in Unassigned fund balance as follows:
o $57.1 million rainy day fund contingency reserve. Historically this has been 15% of the annual expenditure budget; however, the amount was reduced to 12.5% in FY 2019-20 and increased to 13% in FY 2022-23.
The reserve is currently at 13.5% at June 30, 2024, with the plan to increase it by 0.5% each fiscal year until it reaches 15.0% at June 30, 2027;
($5.7) million unrealized loss on investments. GASB 31 requires public agencies to report all investments, with certain exceptions, at the current fair market value rather than at the original purchase price. The current fair market value and unrealized gain/loss of a security do not affect its redemption value or yield if held to maturity. The City’s practice is to purchase most securities with the intent to hold them to maturity.
The General Fund’s rainy day and economic uncertainty reserves have long been an important safeguard for Santa Monica in the event of an emergency or a devastating downturn. Strong reserves contributed to a AAA general obligation bond rating, allowing the City to pursue lower cost financing structures. Since March 2020, these reserves and contingency funds have allowed the City to continue essential operations despite the severe revenue dip because of the economic crisis caused by the global pandemic and have also provided funding for legal settlements. The City of Santa Monica maintains a “AAA” rating from both Standard and Poor’s and Fitch, and a “Aaa” rating from Moody’s, which were reaffirmed in June 2023. In 2021, Fitch noted “the City’s debt burden remains moderate, and its resilience to economic stress is exceptional due to very high reserves and a strong expenditure framework.” Subsequent to year end, the City’s S&P Public Financing Authority Lease Revenue 9 of 15
Bond rating was reduced from AA+ to AA citing “the expected potential impact of contingent liabilities and reflects our expectation that the City will take sufficient steps to address any future lawsuit settlements to avoid materially draining its available general fund reserves.”
Citywide Net Position
The Statement of Net Position, like a balance sheet, reported total assets and liabilities of the City as of June 30, 2024. The total net position of the City for all activities was $1.5 billion. Net position was broken out into three categories: capital, restricted, and unrestricted.
Net Investment in Capital Assets - $1,137.4 million
Net Investment in Capital Assets included land, buildings, improvements, intangibles, infrastructure and utility systems, and construction in progress net of accumulated depreciation/amortization and related debt. Intangible assets represented rights of use for items such as software, water rights and payments for Santa Monica’s cost of improvements to the City of Los Angeles sewage treatment system. Some notable capital projects that were underway as of June 30, 2024, included City Yards Modernization and numerous Sustainable Water Master plan infrastructure projects to help the City achieve water self-sufficiency.
Restricted Net Position - $304.5 million
These assets were subject to agreements with creditors, developers, grantors, or laws or regulations of other governments. Approximately $182 million or 60% is restricted for community development, which included affordable housing and commitments to various other projects. Approximately $48 million or 15% is restricted for transportation, which included federal, state and other grant funds. The remaining amount was restricted for the Cemetery’s trust fund, debt service, development agreement terms, and other grant and legislative constraints.
Unrestricted Net Position – $54.2 million
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This represented the balance of net position that is neither part of capital assets nor restricted. Capital and operating reserves of $106.9 million in the business-type activities demonstrated increased revenues as the City recovers from the COVID-19 pandemic and rate increases are implemented. Governmental activities reported a negative unrestricted net position of $52.7 million, primarily due to the cumulative shortfalls from the pandemic and settlement payments made in the past few years plus an increase in the pension liability. The City already managed its financial challenges by reducing its workforce, focusing on essential services, scaling back or eliminating capital projects, and increasing employees’ cost sharing of benefits. These strategies, recovering revenues, one-time state and Federal government subsidies and lowered expenses continued to rebuild the City’s unrestricted net position balance.
The Citywide Net Position utilized the full accrual basis of accounting, requiring the City to report the full amount of long-term liabilities, such as pension and bond payments, which will be paid over many fiscal years with future revenues. Governmental fund statements utilized the modified accrual basis of accounting, which recognized the current portion of long-term debt to be paid by revenues as they are measurable and available. This difference in accounting method can result in a negative net position on the Citywide financial statements, while individual fund statements, such as the General Fund, did not have a negative fund balance.
Long-Term Debt
The primary source of long-term debt is in the form of bonds issued by the City. At the end of the current fiscal year, the City’s total long-term debt outstanding (excluding issuance premiums) was $319.0 million, a $7.6 million decrease from the prior year.
This decrease was primarily due to debt service payments for the year. More information on Long-Term Debt can be found in Note 10, page 60 of the ACFR.
Pension Liability
As noted in the Statement of Net Position on page 1 of the ACFR, the City’s largest liability is the unfunded actuarial pension liability, which was $504.3 million as of June 11 of 15
30, 2024, an increase of $7.6 million from the $496.7 million as of June 30, 2023, as a result of the less than expected return (5.8% vs 6.8%) on pension plan assets.
Total net pension liability, or unfunded liability, was based on projected future benefit payments attributed to the current and past employees’ service, less the assets accumulated to pay those liabilities. This was the difference between a total pension liability of approximately $2.3 billion and current plan assets of approximately $1.8 billion, making the City’s three pension plans approximately 78% funded overall. The City’s annual required contributions included a portion to fund currently earned benefits as well as an amount to pay down the unfunded liability.
CalPERS calculated the annual contributions to amortize the unfunded liability. In 2014, after a series of paydowns funded from year end savings, Council adopted the first of a set of policies to pay down a portion of the liability each year in addition to the actuarially determined contribution amount in order to reduce the amortization period thus lowering interest costs over time. In FY 2018-19, the City Manager convened a pension advisory committee consisting of residents and employees. An information item dated April 19, 2019, contained a discussion of the history of the unfunded liability and different methods of management such as utilizing a supplemental trust fund and issuing pension obligation bonds. Included was the advisory committee’s recommendation of making additional payments that would amortize the unfunded liability over 13 years as opposed to CalPERS standard 20-year period. The pension policy was updated in 2019 to include this 13-year payment schedule and the first additional payment of $9.3 million was made in October 2019, Due to the economic impact of the pandemic and legal settlements, the Council changed the schedule of the accelerated paydowns per the emergency provisions of the policy, to shift to a 15-year paydown schedule. At its April 11, 2023, meeting, the Council voted to suspend any further additional paydowns to restore an array of community services and programs.
The suspension of the paydown policy will be revisited in FY2027-28 and may be implemented based on an evaluation of the City’s financial position. 12 of 15
In the meantime, several initiatives have mitigated the pressure of this cost driver on the budget.
• 58% of current employees receive a reduced level of pension benefits up from • 52% in the previous year. Employees in all bargaining groups hired after January 1, 2013, receive lower benefits per the Public Employee Pension Reform Act (PEPRA). A lower Tier 2 benefit level was established by Council for non-sworn employees who entered the City between July 1, 2012, and December 31, 2012, or who continue to join the City from previous employment where they were under a non-PEPRA pension plan. All employee groups have eliminated the employer paid member contribution (EPMC) benefit and the employee-paid portion of the pension cost is deducted from employees’ paychecks and paid directly to PERS. In addition to paying the employee portion of the contribution, Public Safety employee bargaining groups reimburse the City for a portion of the employer cost.
• Since FY 2010-11, the City has made $88.1 million in payments towards unfunded pension liability beyond the actuarially required contribution determined by CalPERS.
• The City had been prepaying its annual employer contributions to CalPERS since FY 2007-08 and receives a discount. The savings from the discount is used to offset paydowns of the net pension liability. Because of the Federal Reserve raising interest rates, the return on the City’s portfolio was more than what would have been earned prepaying the amortization of the unfunded liability, the City did not prepay in FY 2023-24.
A detailed explanation of the Employee Benefits Programs including detailed pension information by plan is included in Note 12 (pages 66 through 78) and the Required Supplementary Information (pages 112 through 117). Further information on the City’s efforts to control pension liability is included in the Letter of Transmittal (pages i through xii).
Other Postemployment Benefits (OPEB)
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Employees of the Executive Pay Plan group and management employees of the Rent Control Board are eligible for a City paid post-employment medical insurance benefit if their combined retirement age and years of public agency service equals or exceeds 70.
Under the terms of a MOU between the City and the Coalition, all non-sworn permanent retirees are allowed to continue participating in one of the City’s health plans at the same rate as active employees. As with other MOU’s, this benefit is subject to bargaining between the City and the Coalition. The City also maintains minimum benefits for public safety employees provided by the City’s contract with its healthcare provider CalPERS.
The annual contribution was based on an actuarially determined contribution (ADC).
Prior to FY 2019-20, the City annually prefunded its OPEB obligations into a 115 trust, CERBT, administered by CalPERS. In response to the global pandemic and the devastating effects on the economy, City Council authorized the suspension of the prefunding contributions to the trust and the City did not make contributions in FY 2019- 20 or FY 2020-21. ADC contributions to the trust resumed in FY 2021-22 and will continue.
A detailed explanation of OPEB is included in Note 12 (pages 78 through 83) and the Required Supplementary Information (pages 118 through 119).
Pending Litigation
The City was a party in numerous pending litigations and the outcome of these cases can have a significant impact on the General Fund.
Since March 2020, the City had entered into settlement agreements totaling $229.8 million with claimants in suits filed against the City. The City is evaluating additional claims pending based on similar allegations of abuse by the same former employee.
The City continues to work diligently to prevent these liabilities from impacting services and is actively seeking reimbursement from its excess insurance carriers. 14 of 15
In 2017, the Pico Neighborhood Association sued the City of Santa Monica alleging that the City’s at-large method of electing City Council members violates the California Voting Rights Act (CVRA). Plaintiffs’ requests for costs and attorneys’ fees remain pending in
the trial court. The trial court considered oral briefing on the scope of evidence to be taken at the next trial which is expected to occur in late fall of 2025. More information pertaining to pending litigation is included in Note 16, page 92 of the ACFR.
Cash and Investments
The ACFR also included detailed information on the City’s cash and investments. As of June 30, 2024, the City had $830.9 million in total cash and investments, all of which were in the form of investments authorized by the California Government Code and the City’s investment policy or in compliance with bond indenture agreements. More information on cash and investments is found in Note 2, page 29 of the ACFR.
Environmental Review
The ACFR is not a “project” subject to CEQA. The ACFR is informative and administrative in nature. Pursuant to CEQA Section 21065, the ACFR does not meet the definition of a “project” subject to CEQA as it will not “cause either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment.” Additionally, per Section 15378(b) of the CEQA Guidelines, a “project” does not include continuing administrative or maintenance activities, such as purchases for supplies, personnel-related actions, general policy and procedure making.
Therefore, the ACFR are not subject to CEQA.
Financial Impacts and Budget Actions
There is no immediate financial impact or budget action necessary as a result of the recommended action to receive and file this annual report. 15 of 15
Prepared By: Randy Chow, Financial Reporting Supervisor Approved Forwarded to Council
Attachments:
A. Annual Comprehensive Financial Report (Web Link)
B. Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance with Other Matters Bsed on an Audit of Financial Statements C. Auditors' Communication Letter to Council