CITY OF SIGNAL HILL
STAFF REPORT
2175 Cherry Avenue • Signal
Hill, California 90755-3799
12/12/2023
AGENDA ITEM
TO:
HONORABLE MAYOR
AND MEMBERS OF THE CITY COUNCIL
FROM:
SHARON DEL ROSARIO
ADMINISTRATIVE SERVICES OFFICER/FINANCE DIRECTOR
SUBJECT:
ANNUAL COMPREHENSIVE FINANCIAL REPORT FOR FISCAL YEAR 2022-23 Summary:
The Annual Comprehensive Financial Report (ACFR) is an independently audited summary report of the financial transactions of the City for Fiscal Year (FY) 2022-23, providing relevant financial information to the City Council, residents, current and future employees, grant entities, creditors, bond investors, rating agencies, and other interested parties. This audit is performed in compliance with City Charter requirements with the results presented to the City Council for review.
The audit was completed by the City's independent auditor, RAMS, Rogers, Anderson, Malody & Scott, LLP, Certified Public Accountants, which issued an unqualified opinion audit report, otherwise known as a “clean opinion” finding nothing of material concern in the City’s internal controls, financial, and bookkeeping practices. The independent auditor’s unmodified report provides assurance the ACFR, and the audited information within, present fairly the City’s financial position for the fiscal year ending June 30, 2023.
As part of this report, staff normally provides detailed information and allocation recommendations regarding any General Fund Operating Surplus or Deficit. The FY 2022-23 General Fund surplus is $8.0 million as reported in the ACFR. Staff will return to the City Council on January 23, 2024, to provide recommendations regarding the proposed surplus appropriations. This proposed time extension will allow staff to conduct a detailed analysis of the surplus that will identify ongoing revenue updates, requests to re-appropriate unutilized budget appropriations, one-time expenditure requests for department operations, programs or special projects, and reserve allocations resulting in budget adjustments for the current fiscal year.
Strategic Plan Goal(s):
Goal 1 Financial Stability: Ensure the City’s long-term financial stability and resilience.
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Recommendations:
1. Receive and file the City’s ACFR for FY 2022-23.
2. Direct staff to return in January with proposed appropriations for the FY 2022-23 General Fund operating surplus.
3. Direct staff to distribute copies of the ACFR for FY 2022-23 as required, as well as to the Office of the City Clerk to be placed on file for the general public and posted on the City’s website.
Fiscal Impact:
FY 2022-23 closed with General Fund revenues exceeding expenditures, including net transfers, in the amount of $7,996,701.
Background:
The City’s Charter requires that an annual audit be performed relating to the City's financial transactions, records, inventories, and reports. Accordingly, the City retains an independent external auditor. The auditor’s responsibility is to express opinions on the financial statements, and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The results of these efforts are incorporated in the ACFR (Attachment A), which is a set of financial statements that present the City’s financial results at the end of the fiscal year.
The ACFR was prepared in accordance with Generally Accepted Accounting Principles as set forth in the pronouncements of the Governmental Accounting Standards Board (GASB), an organization that regulates governmental accounting as the source of generally accepted accounting principles. In addition to standards of reporting, GASB issues statements, interpretations, bulletins, and other guidelines for financial reporting.
Local Economy and Financial Landscape
California cities are making a strong and sustainable fiscal recovery from the pandemic recession of 2020 with a return to normalcy in most business sectors, however, there are still signs of stress in the overall economic outlook. Global economies continue to grapple with higher inflation affecting consumer spending trends; rising interest rates are putting pressure on the housing market along with car sales and other parts of the economy; COVID variants continue to be a health concern; renewed student loan debt repayments and work stoppages from major labor strikes may also impact domestic budget spending; and the intense geo-political conflicts in Ukraine and Israel may also upset current growth patterns. Even with all these factors, many economic forecasts believe the US economy remains resilient with renewed consumer confidence and spending and low unemployment that has shielded the economy from recession. However, caution is advised; if the Federal Reserve keeps its benchmark interest rate elevated for a prolonged period, this may cause undue pressure on consumer spending, increase job losses, and weaken the overall economy.
Inflation continues to be one of the most challenging obstacles global economies have attempted to overcome. The Federal Reserve has taken an aggressive stance in combating inflation by raising the federal funds target rate from 0.25% in March 2022 to 5.5% in October 2023, its highest level in CITY OF SIGNAL HILL Page 2 of 12 Printed on 12/7/2023
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the federal funds target rate from 0.25% in March 2022 to 5.5% in October 2023, its highest level in 22 years. The inflation rate met a 40-year high of 9.1% in 2022 but has tapered off to 3.7% in September 2023 and is still higher in comparison to the Federal Reserve’s target of 2% inflation rate for the US economy. Furthermore, these actions have also impacted the housing market, which experienced a continued high growth rate (10%) through early 2022 tapering off as mortgage interest rates increased reaching 7.79% in October 2023, a two-decade high. With the number of home sales declining and the median home price increasing, many economists are mixed about the housing market outlook and continue to watch this closely. Even despite these headwinds, the US Gross Domestic Product (GDP) rose to a robust 4.9% annualized pace for the third quarter ending September 30, 2023, buoyed by low unemployment and solid consumer spending, however, this report could give the Federal Reserve some impetus to keep interest rates high which may begin to negatively impact consumer and business spending habits bringing the economy to a precipice slowdown. UCLA Anderson Forecast foresees a weak US Economy in 2024, followed by a return to trend growth rates, albeit below trend GDP levels, in 2025.
California’s economy remains stable despite the pressure from more than two years of higher than usual inflation and the jump in interest rates. Between January 2020 (just before COVID) and June 2023, prices increased by approximately 17% with food, beverages and energy and gasoline prices rising well above this level. California’s severe housing shortage coupled with high interest rates are driving home prices higher as well. As of September 2023, the State’s unemployment rate is currently 4.7%, the second highest of any state. Job growth within California also appears to be slowing, partly due to the State’s labor shortage, negative population growth, and high housing costs.
If these conditions continue to persist, this may further impede the State’s long-term economic growth by causing consumers to make tradeoffs in household spending budgets. Also, the State of California continues to grapple with State budget deficits leaving uncertainty regarding how the State Legislature plans to balance its budget and the possible impacts to local municipalities. Although there are many variables driving the local economy, most economic forecasts predict limited growth in the following years ahead, mainly due to inflation and higher interest rates.
During the COVID-19 pandemic, it was evident that local governments, particularly general fund revenue portfolio (i.e., property tax, sales tax, transient occupancy tax, franchise fees, etc.) and the elasticity of these sources, determined a city’s fiscal exposure during the economic shifts that occurred since the pandemic. As a “low property” tax city, the City’s most significant revenue source for General Fund operating revenues is sales tax. Signal Hill’s revenue mix has proven to be resilient, with overall sales tax revenue remaining strong, with a total point-of-sale tax revenues increasing by 8% from the previous year. The County Pool allocations experienced a decline starting in FY 2021- 22 because of sales tax law allocations related to in-state fulfillment centers and are still down as compared to prior results. The City’s new transaction and use tax Measure SHR generated 27.4% of the Bradley Burns amount, with general consumer goods continuing to produce the most sales tax revenue. However, according to City’s industry expert, HdL, overall sales trends are forecasted to experience a slight decrease in FY 2023-24 with limited expansion anticipated in the following year.
The City’s major sales tax industry groups continue to include Business and Industry, Autos and Transportation, General Consumer Goods, and Building and Construction. Two of the City’s larger business groups that experienced year-over-year gains include Business and Industry (2%) and Autos and Transportation (21%). The gain in the Autos and Transportation sector was mostly attributed to the dealership changes with the overall business sector experiencing new challenges related to higher auto loan rates. The Business and Industry sector benefited from agencies with fulfillment centers where there is a shift from county-wide pools to directly to City’s sales tax base for CITY OF SIGNAL HILL Page 3 of 12 Printed on 12/7/2023
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fulfillment centers where there is a shift from county-wide pools to directly to City’s sales tax base for online purchases and HdL predicts modest overall growth going forward.
Building and Construction has seen only modest gains largely due to the slowdown in homeimprovements with conditions predicted to persist with mild growth through FY 2023-24 followed by improvements in FY 2024-25, hopefully driven by more favorable mortgage rates. General Consumer Goods’ year over year gain slightly contracted from the previous year mainly due to pronounced sales pullback as household finances tightened due to inflation. While consumer spending remains supportive of the economy, the outlook suggests a continued mild decline through the end of 2023 with limited growth in 2024.
The Fuel and Service Stations and Restaurants and Hotel sectors’ year over year change was significantly different from the previous year, -13% and 7%, respectively. Fuel and Service Stations are facing upward price pressure and slowing demand and is predicted to have near zero growth rates going forward. The Restaurant and Hotel sector remains strong but may see pressure from shrinking household budgets with a flat growth rate trend going forward.
Signal Hill Measure SHR transaction and sales tax revenue continues to be the biggest contributor to an increase in overall sales tax revenue with a 5% increase over the prior year. Overall, as reported by HdL, California sales tax performance for FY 2022-23 grew modestly and lags far behind the double-digit growth seen during the pandemic recovery. Looking ahead, households face tight budgets, and various industries grapple with challenges such as labor costs, inventory issues, and competition. All eyes are on the Federal Reserve Board’s upcoming decisions on interest rates which will be the main driver to shape future consumer spending and overall economic growth.
Property taxes account for the next largest revenue source for the General Fund. Local property tax revenues are driven by the value of residential and commercial property and since property tax revenue typically reflects the value of a property anywhere from 18 months to many years prior, these are less immediately responsive to economic changes than other types of taxes. Persistently high mortgage rates continue to test California’s housing market as home sales fell for the fourth consecutive month in September, while the median price rose from the last year’s level for the third straight month to record its largest year-over-year gain in more than a year. In comparison, September’s statewide median home price was down 1.9% from the prior month but up 3.2% from a year ago, with Los Angeles experiencing a decrease of 1.6% from the prior month but up 4% from a year ago based on HdL’ s property tax division. Signal Hill’s home sales have slowed in the past 4 quarters, most likely due to rising interest rates and inflation, and this trend is expected to continue.
The City’s overall net taxable property value changed by 6.7%. It is important to point out that a large portion of Signal Hill properties are highly affected by the oil and gas assets within the City. As oil prices change the related property values also fluctuate in the same direction and a portion of the property value changes are likely related to the current price of oil. Property tax rolls are set prior to the commencement of the fiscal year, and therefore property tax revenue was conservatively projected for FY 2023-24.
The City’s annual obligated costs, such as contract costs, insurance, pension obligations, and unfunded mandates, continue to rise over time and compete against other budget priorities. The largest obligated costs include pensions costs related to the CalPERS Unfunded Accrued Liability (UAL). The UAL mainly fluctuates because of investment returns and changes in the discount rate.
CalPERS recently announced a gain of 5.8% for FY 2022-23, which is balanced by the prior year’s loss of 7%. When factoring in CalPERS’ discount rate of 6.8% and the 2022-23 preliminary return of CITY OF SIGNAL HILL Page 4 of 12 Printed on 12/7/2023
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loss of 7%. When factoring in CalPERS’ discount rate of 6.8% and the 2022-23 preliminary return of
5.8%, the estimated funded status now stands at 72%. The recent gain and loss, change in the discount rate, and assumption changes have led to a variable funding status, which directly impacts the City’s pension costs and overall budget strategies; the City will continue to monitor this issue closely.
The City has also embarked on several key studies that may affect future budgetary planning. The City is currently conducting a comprehensive fee study to review the City’s overall user and regulatory fee structure, basis of fees, and cost recovery. Part of the study will also include a detailed review and in-depth analysis of the City’s current development impact fees, which provide the proportionate share of the funding for the City’s capital facilities needs that can be reasonably attributed to new growth in the City. The study is expected to be completed by early 2024 in time for the next biennial budget cycle and any approved changes will be incorporated in the next budget. In addition, the City is planning to conduct a water rate study and prepare a Water Master Plan to review the Water Utility fund and ensure overall fiscal sustainability, prioritize water infrastructure needs, and provide for future capital improvement planning.
Earlier in 2023, the City Council authorized staff to issue a Notice of Funding Availability for up to $10 million in affordable housing funding to develop the Orange and Walnut Bluff affordable housing sites.
The City initiated a competitive process and selected National Community Renaissance (National CORE) as the City’s preferred development partner. National CORE proposed a 380-unit affordable housing project that includes a 5,000 square foot Boys and Girls Club which would represent a $200 million investment in the community. Additionally, National CORE will seek up to $30 million in grant funding for related public improvements that will build out City infrastructure in that area of the community. The developer and the City will negotiate the terms of an Exclusive Negotiation Agreement that will specify the terms, conditions, and timing of the City’s $10 million funding contribution. Once constructed, the Orange and Walnut Bluff sites would be the largest affordable housing project in the City’s history and create enhanced property tax value for those sites.
The City also initiated the master planning process for the Civic Center site, which is comprised of Signal Hill Park, the Signal Hill Library, the Community Center, and City Hall. Recently, the City contracted with an architectural firm to develop three conceptual master plans based on community feedback. Given its scope and expected cost, buildout of the Civic Center Master Plan is expected to take approximately 10 years and cost up to $130 million depending on various construction factors.
The first phase of development will include a new amphitheater that will host community events, concerts, and performances; this project will be partially funded through a $5 million grant from the California Arts Council. The City Council recently provided direction to staff regarding its preferred funding and financing options, which include utilizing existing fund balance and evaluating the City’s capacity to issue debt to construct the project over its lifetime.
Analysis:
ACFR Components
The ACFR includes three main sections: 1) Introductory; 2) Financial; and 3) Statistical.
Introductory Section (pages i thru xii)
This section includes the guide to the report and one of two key narratives, the Transmittal Letter, CITY OF SIGNAL HILL Page 5 of 12 Printed on 12/7/2023 powered by Legistar™
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This section includes the guide to the report and one of two key narratives, the Transmittal Letter, which provides a broad financial outlook of the City and legal requirements for financial reporting.
Financial Section (pages 1 thru 130)
This section includes the second key narrative, the Management’s Discussion and Analysis (MD&A) section. The MD&A is audited information and is similar to financial reports in the private sector. The MD&A section of the ACFR provides a narrative overview of the City’s previous year’s activity and financial performance. This information should be read in conjunction with the basic financial statements and the extended footnotes to get an accurate overall representation of the City’s financial health. The Notes to the Basic Financial Statements provide narrative information about the City’s significant accounting policies and detailed disclosures on key financial matters. In addition, the MD&A includes a discussion of factors affecting the current year’s budget.
Also included in this section is the Independent Auditor’s Report, the Basic Financial Statements, the Fund Financials, Notes to the Basic Financial Statements, and other required supplementary information (RSI). The Government-Wide Financial Statements report information on all activities of the City, with the exception of where the City acts as a trustee for another agency, such as the Successor Agency; in addition, transfers of funds between City entities and reserves have been removed from these statements, and the statements only reflect events that resulted from activities between the City and non-City associations. Governmental activities, which normally are supported by taxes and grant revenues, are reported separately from business-type activities, such as the Water Department, which instead rely on user fees and charges that come from receiving a service.
The reporting includes the auditing standards of GASB Statement No. 68 (GASB 68), which requires that a governmental entity recognize its net pension liability (UAL) in the statement of net position (balance sheet). Under GASB Statement No. 75 (GASB 75), the City’s net Other Post-Employment Benefits Liability (OPEB) is recorded and extended discussions and disclosures are provided as part of the supplementary information in the footnotes. Under the reporting standards of GASB 68 and 75, City-wide financial statements present the net pension and OPEB liabilities.
The report also includes the recently implemented GASB 87 and 96, the new requirement for governments to improve accounting and financial reporting for leases and subscriptions. The report now includes the right-to-use lease and subscription assets and related liabilities. More information can be found in the Notes 3, 5, 6b&c.
Statistical Section (pages 131 thru 152)
This section consists of information pertaining to the City, including financial trends, revenue and debt capacity, demographics and economic information, and other operating information.
General Fund Analysis
The General Fund is the City’s primary operating fund, comprised of local tax revenues and fees for services to fund core municipal services such as public works, police, planning, and recreation. The General Fund ended FY 2022-23 with revenues exceeding expenditures (including transfers) by $7,996,701.
The independent auditor reported that the FY 2022-23 General Fund Operating and Non-Operating CITY OF SIGNAL HILL Page 6 of 12 Printed on 12/7/2023 powered by Legistar™
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The independent auditor reported that the FY 2022-23 General Fund Operating and Non-Operating Revenues were $36.7 million, which is $7.0 million above the FY 2022-23 final budget of $29.7 million and $4.2 million over the prior year’s FY 2021-22 actuals of $32.5 million. As the year progressed and during the budget preparation for Year 2, the City increased the current year revenue projections to reflect $33.1 million. The increase over the FY 2021-22 Operating results was due to an overall increase in most revenue line items with the largest increases in sales tax revenues of $1.7 million and investment income of $1.4 million. The sales tax increase reflects the second fullyear collection of Measure SHR, the City’s add-on sales tax. Even with rising interest rates, the investment portfolio and net investment income remained positive and provided overall interest income was higher compared to the prior year.
The General Fund’s Operating and Non-Operating Expenditures (net of subscription acquisition sources) were $28.5 million, which is $5.2 million below the FY 2022-23 Current Operating Budget of $33.7 million and $3.6 million above the prior year FY 2021-22 actuals of $24.9 million. All departments ended the year with expenditures below budget, primarily due to vacant positions across multiple departments, delayed projects, and lower use of planned contract services.
Net transfers-out were $0.2 million, which is $0.02 million lower than the FY 2022-23 Current Operating Budget. The net transfers are mainly made up of transfers-in to fund operating activities of $615K, transfers-out to fund capital improvements of $470K, and the annual transfer out to the Housing Authority for approximately $348K representing 20% of the annual loan repayment between the City and the Successor Agency.
The General Fund Operating Results are summarized in Table 1 and 2. Revenues and transfers-in less operating expenditures and transfers-out resulted in a year-end surplus of $7,996,701. The Beginning Fund Balance in the FY 2022-23 Operating Budget was $56.6 million. After reflecting revenues, expenditures, and net transfers, the actual Ending Fund Balance is $64.6 million.
OPERATING RESULTS (millions)
2022-23
FINAL
BUDGET
2022-23
FINAL
RESULTS
DIFF
BUD vs
RES
Beginning Fund Balance $ 56.58 $ 56.58 $ -
Revenues $ 29.69 $ 36.75 $ 7.06
Expenditures (net of subscription acquisition sources) $ 33.79 $ 28.55 $ 5.24 Excess Revenues over Expenditures $ (4.10) $ 8.20 $ 12.30 Net Transfers In/(Out)-Other Financing Sources (Uses) $ (0.22) $ (0.20) $ 0.02 Net Change in Fund Balance $ (4.32) $ 8.00 $ 12.32
Ending Fund Balance at June 30, 2022 $ 52.26 $ 64.58 $ 12.32 Table 1. General Fund Operating Results compared to Budget OPERATING RESULTS (millions)
2022-23
PROJECTIONS
2022-23
FINAL
RESULTS
DIFF
PRO vs
RES
Beginning Fund Balance $ 56.58 $ 56.58 $ -
Revenues $ 33.07 $ 36.75 $ 3.68
Expenditures (net of subscription acquisition sources) $ 29.74 $ 28.55 $ 1.19 Excess Revenues over Expenditures $ 3.33 $ 8.20 $ 4.87
Net Transfers In/(Out)-Other Financing Sources (Uses)$ (0.57) $ (0.20) $ 0.37 Net Change in Fund Balance $ 2.76 $ 8.00 $ 5.24
Ending Fund Balance at June 30, 2022 $ 59.34 $ 64.58 $ 5.24 Table 2. General Fund Operating Results compared to Projections CITY OF SIGNAL HILL Page 7 of 12 Printed on 12/7/2023
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OPERATING RESULTS (millions)
2022-23
PROJECTIONS
2022-23
FINAL
RESULTS
DIFF
PRO vs
RES
Beginning Fund Balance $ 56.58 $ 56.58 $ -
Revenues $ 33.07 $ 36.75 $ 3.68
Expenditures (net of subscription acquisition sources) $ 29.74 $ 28.55 $ 1.19 Excess Revenues over Expenditures $ 3.33 $ 8.20 $ 4.87
Net Transfers In/(Out)-Other Financing Sources (Uses)$ (0.57) $ (0.20) $ 0.37 Net Change in Fund Balance $ 2.76 $ 8.00 $ 5.24
Ending Fund Balance at June 30, 2022 $ 59.34 $ 64.58 $ 5.24 Table 2. General Fund Operating Results compared to Projections General Fund Reserves
The auditor reported that the General Fund Unassigned Reserve is $27.1 million, and the Economic Uncertainties Reserve is $5.2 million, for a total of $32.3 million as of June 30, 2023. Based on the original FY 2022-23 General Fund budgeted expenditures, not including net transfers of $32.3 million, the General Fund Unassigned Reserve and Economic Uncertainties Reserve together represent a reserve level of 100%, meeting and exceeding the City’s target of maintaining 50% in reserves.
The grand total of the General Fund Committed Reserves and the Unassigned General Fund Balance was $54.1 million on June 30, 2023. The Committed Reserves are classified fund balances that can only be used for the specific purposes determined by the City Council through the adoption of a resolution prior to the end of the fiscal year. The FY 2022-23 ACFR split the fund balance presentation of the Successor Agency (SA) loan receivable balance to the non-spendable classification and committed reserve portion now represents the cumulative surplus balance between SA loan repayments over the debt payments related to the 2018 Library Lease Revenue Bond issuance. The cumulative surplus balance is designated to redeem the callable Lease Revenue Bonds in 2028 prior to the original maturity date in 2033.
Committed Reserves balances and changes are summarized in Table 2.
General Fund Balance Classifications FY 2021-22 FY 2022- 23 Change Debt Service* $8.24 $1.58 -6.66
Economic Uncertainties Reserve 4.45 5.17 $0.72
Library Reserve Fund 3.67 2.63 -1.04
PERS Reserve 3.24 3.24 0.00
OPEB future costs 1.52 1.52 0.00
Building and Land Acquisition 2.13 2.96 0.83
Capital Improvements Reserves 2.29 4.53 2.24
Economic Development 1.21 1.21 0.00
Equipment & Furniture Reserve 0.52 0.04 -0.48
Insurance Premium Increases 0.83 0.83 0.00
Police Radio/System Reserve 1.02 1.31 0.29
General Plan 0.34 0.34 0.00
100th Anniversary 0.09 0.10 0.01
Park Expansion 0.74 0.74 0.00
Workforce Innovation 0.00 0.68 0.68
NPDES issues 0.001 0.001 0.000
General Fund Capital Outlay (incl Police-General Reserve) 0.06 0.06 0.00 Total Committed $30.35 $26.95 (3.41)
Unassigned Fund balance** 23.10 27.17 4.07
Total Committed and Unassigned Fund Balance $53.45 $54.12 $0.66 Ttl NSdbl* 313 1046 733
Table 2. Changes to Committed Reserves
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General Fund Balance Classifications FY 2021-22 FY 2022- 23 Change Debt Service* $8.24 $1.58 -6.66
Economic Uncertainties Reserve 4.45 5.17 $0.72
Library Reserve Fund 3.67 2.63 -1.04
PERS Reserve 3.24 3.24 0.00
OPEB future costs 1.52 1.52 0.00
Building and Land Acquisition 2.13 2.96 0.83
Capital Improvements Reserves 2.29 4.53 2.24
Economic Development 1.21 1.21 0.00
Equipment & Furniture Reserve 0.52 0.04 -0.48
Insurance Premium Increases 0.83 0.83 0.00
Police Radio/System Reserve 1.02 1.31 0.29
General Plan 0.34 0.34 0.00
100th Anniversary 0.09 0.10 0.01
Park Expansion 0.74 0.74 0.00
Workforce Innovation 0.00 0.68 0.68
NPDES issues 0.001 0.001 0.000
General Fund Capital Outlay (incl Police-General Reserve) 0.06 0.06 0.00 Total Committed $30.35 $26.95 (3.41)
Unassigned Fund balance** 23.10 27.17 4.07
Total Committed and Unassigned Fund Balance $53.45 $54.12 $0.66 Total Non-Spendable * 3.13 10.46 7.33
Total Committed, Unassigned & Non-spendable $56.58 $64.58 $7.99 * - FY 22-23 only includes surplus of Successor Agency (SA) repayments vs Library Lease bond payments as committed, remaining receivable SA loan balance reclassified to non-spendable ** - reduced by capital outlay that is included in committed fund balance Table 2. Changes to Committed Reserves
GASB 68 and GASB 75
The City’s net pension liability is $36.9 million and the OPEB liability is $9.0 million. Net pension liability is the present value of projected benefit payments to current employees and retirees, less pension assets that are invested and maintained by CalPERS. Net pension liability associated with pensions for safety personnel is $20.7 million and for non-safety personnel is $16.2 million. The liability will fluctuate because of investment returns and changes in the discount rate. The weighted average funding status of the City’s two pension plans is approximately 76.7% based on the most recent GASB 68 actuarial valuation, which is above the average funded status of approximately 72%.
The City has established committed reserve funds to address future CalPERS rate increases and OPEB costs.
Beginning in 2009, the City and its employees recognized the need to take proactive measures to address the rising costs of the pension and OPEB plans. All employees began contributing a portion of their compensation toward their pension plan costs, reducing the City’s employer-paid costs. In 2010, the City established new pension plans for employees hired after June 2010 (Tier II) that offered reduced retirement benefits in order to lower long-term pension liability. In 2013, the State passed the Public Employees’ Pension Reform Act (PEPRA) that affects employees hired on or after January 1, 2013. PEPRA capped the annual pension benefit that can be received, established a lower-cost pension formula for safety and non-safety employees with requirements to work longer in order to reach full retirement age, and capped the amount used to calculate a pension.
FY 2022-23 contribution rates for Classic Tier I, Classic Tier II, and Public Employees’ Pension CITY OF SIGNAL HILL Page 9 of 12 Printed on 12/7/2023
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FY 2022-23 contribution rates for Classic Tier I, Classic Tier II, and Public Employees’ Pension Reform Act (PEPRA) employees are as follows:
· Classic Safety employees contribute 12%
· Classic Safety management contribute 9%
· PEPRA Safety employees contribute 13.75%
· Classic Tier I/Tier II miscellaneous and management employees contribute 7% · PEPRA miscellaneous and management employees contribute 6.75%.
Additionally, non-safety employees contribute 1% of their compensation, and safety employees contribute $625 annually to offset the cost of OPEB obligations.
GASB 87 and GASB 96
In FY 2021-22, the City implemented GASB Statement No. 87, the new lease accounting standard for US government entities. Under GASB 87, lessees must recognize a lease liability and a right to use asset for all qualified leases. The lease liability is generally calculated as the present value of payments the lessee expects to make during the lease term, including any contract renewal options the lessee is reasonably certain to exercise. As a lessor, a lease receivable must be recognized as a deferred inflow of resources on the financial statements. At the start of the contract, the lease receivable is generally calculated as the present value of lease payments the lessor expects to receive over the term of the lease, minus any provision for estimated uncollectible amounts. See Notes 1k, 5c, 6 and 6b for more information.
In FY 2022-23, the City implemented GASB Statement No. 96, the new accounting standards for Subscription-Based Information Technology Arrangements (SBITAs) Under GASB 96, SBITAs must be accounted for as a right to use subscription asset and a corresponding liability and is very similar to the accounting standards of GASB 87. This new standard will improve the comparability, relevance, and reliability of financial statements for SBITAs that extend beyond one year and create a long-term financial liability for the City. See Notes 1l, 6 and 6c for more information.
Implementation of these standards have the biggest impact on the General Fund financials in the year of implementation and going forward, related transactions will be presented on the Governmentwide financials as a long-term asset and liability.
Water Fund
The City’s business-type activities consisted solely of the Water Utilities Enterprise Fund (Water Fund). The Water Fund is used to account for financial activity related to the purchase, production, storage, and distribution of water used by the community, as well as the maintenance, repair, and replacement of related equipment and pipelines. The intent of the Water Fund is to meet all operational costs through regular revenue from rate payers while also putting monies aside for future infrastructure replacement and repairs.
Water Fund revenues consist of charges for services and investment income which totaled $6.3 million. Operating revenues continue to grow year-over-year due to annual rate increases, in accordance with the approved Prop 218 rate schedule (the fourth of five rate increases). Nonoperating revenues include net investment income of $51,416. Operating expenses totaled $4.4 CITY OF SIGNAL HILL Page 10 of 12 Printed on 12/7/2023
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operating revenues include net investment income of $51,416. Operating expenses totaled $4.4 million, reflecting costs for repairs and maintenance. Interest expenses related to debt service totaled $82,847.
The Water Fund received net transfers of approximately $0.15 million, that include a transfer from the American Rescue Plan Act funds to support the 33rd Street Water Main improvements of $127,726, with the remaining transfer from the Capital Improvement Project (CIP) Reserve for project administration.
GASB 68 requires that the year-over-year change to unfunded pension liability be reflected within the Statement of Revenues, Expenses, and Changes in Net Position. A change in the pension allocation reduced pension expense reported in the personnel services line-item by $874K for FY 2022-23.
After non-operating results, transfers, and financial consolidation entries, the change in net position increased by $2,020,049. The Water Fund experienced a positive cash flow of $2,352,237, largely attributed to the new $1.9 million loan between the City and Water Fund related to the Gundry Reservoir improvement project with the beginning of project construction scheduled to start in late FY 2023-24.
The Water Fund’s operating results are summarized in Table 4.
OPERATING RESULTS AND NET
POSITION (in millions)
2022-23
FINAL
RESULTS
Beginning Net Position at July 1, 2022 $ 21.598
Operating Income (Loss) $ 1.903
Total Non-Operating Revenues (Expenses) $ (0.031)
Transfers $ 0.148
Net Change in Position $ 2.020
Ending Net Position at June 30, 2023 $ 23.618
Adjusted Change in Net Position $ (0.094)
Adjusted Ending Net Position at June 30, 2023 $ 23.524
Table 4. Net Position Water Fund
Reserve Appropriations and Reallocations of FY 2022-23 Surplus For FY 2022-23, the General Fund closed with revenues exceeding expenditures in the amount of $7,996,701 (including net transfers), as shown in Graph 1.
Graph 1. General Fund FY 2022-23 Operating Results
-
5.0 10.0
15.0 20.0
25.0 30.0
35.0 REVENUES (including
transfers in)
EXPENDITURES (including
transfers out)
37.4 29.4
General Fund Operating Results (millions)
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12/12/2023
Graph 1. General Fund FY 2022-23 Operating Results
-
5.0 10.0
15.0 20.0
25.0 30.0
35.0 REVENUES (including
transfers in)
EXPENDITURES (including
transfers out)
37.4 29.4
General Fund Operating Results (millions)
The annual surplus is available for a one-time allocation to projects, programs, or reserves as directed by the City Council. Staff proposes to return to the City Council by January 23, 2024, to allow sufficient time to conduct a detailed analysis and propose the recommended allocations.
Attachment:
FY 2022-23 Annual Comprehensive Financial Report
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