Honorable Mayor and Members of the Hermosa Beach City Council
Regular Meeting of February 27, 2024
Title
2022-23 ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR)
(INCLUDING REPORT FROM INDEPENDENT AUDITOR)
(Finance Director Viki Copeland)
Body
Recommended Action:
Recommendation
Staff recommends City Council receive and file the 2022-23 Annual Comprehensive Financial Report (ACFR) (Attachment 1), which includes the report from Gruber and Lopez, Inc., the City’s independent auditors.
Body
Executive Summary:
For the 2022-23 fiscal year, the City again received an unmodified opinion, which indicates that the auditor believes the financial statements present a fair picture of the City’s financial position. The unmodified opinion is the highest-level opinion the City can receive. The opinion asserts that the City is in compliance with all Generally Accepted Accounting Principles (GAAP) and Government Accounting Standards Board (GASB) requirements.
Since comparative information for the General Fund for 2021-22 and 2022-23 is not included in the Annual Report (Attachment 1), staff presents the information in the analysis section of this report. Some of the comments from the Transmittal Letter and Management’s Discussion and Analysis (MD&A), located in the Financial Section of the Annual Comprehensive Financial Report (ACFR), are repeated herein for the purpose of having this staff report stand alone.
The City received American Rescue Plan Act (ARPA) funds of $2,310,876 in 2022-23, of which $1,313,107 was transferred to the General Fund for the provision of public safety to the extent of the reduction in revenue due to the COVID-19 public health emergency. The remaining balance of $997,769 was appropriated in the 2023-24 Budget for the same purpose.
Overall, General Fund Revenue increased by 4.8 percent and expenditures increased by 6.8 percent. Excluding transfers in and out, revenue was just under budget by one percent and expenditures were under budget by nine percent. This resulted in a balance of unspent funds of $2,700,989 at year end. The year-end transfer of unspent funds in the General Fund was deferred to the 2023-24 Midyear Budget Review. As part of the Midyear Budget Review on tonight’s agenda, staff recommends the following:
• Transfer $6,374 Lighting/Landscaping Fund to clear the estimated deficit balance at 6/30/2024;
• Transfer $1,419,308 to the Insurance Fund to increase the estimated fund balance at 6/30/2024 to the funding goal of $3 million;
• Transfer $198,866 to the Equipment Replacement Find to bring up to the funding goal; and
• Transfer the remaining balance of $1,076,441 to the Capital Projects Fund for future Capital Improvement Program (CIP) funding needs.
Background:
Annually, the City has a financial audit performed by an independent, Certified Public Accounting (CPA) firm. The auditor’s report is located on pages 1-3 in the Financial Section of the attached Annual Report. The City entered into an agreement with a new audit firm, Gruber and Associates, now Gruber and Lopez, Inc., on May 28, 2019 after selection through the Request for Proposals (RFP) process. The original contract was a three-year contract, with options to extend an additional two years. The City extended the agreement for two years for the 2021-22 and 2022-23 audits.
The report was submitted to qualify for the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting. The City has received the award since 1990. The 2021-22 Annual Report is still under review by the GFOA. The certificate, when received, will be added to the electronic version of the report.
The award program requires a high level of compliance with governmental standards, inclusion of information well beyond the general-purpose financial statements and an unmodified audit opinion.
The City implemented Governmental Accounting Standards Board (GASB) statement 96, Subscription-Based Information Technology Arrangements (SBITA), in Fiscal Year 2022-23. Under this statement, the City is required to recognize a right-to-use subscription asset (an intangible asset) and a corresponding subscription liability at the commencement of the subscription term, if the contract conveys the right to use IT software for a specified period of time beyond a single year. The subscription liability is initially measured at the present value of subscription payments expected to be made during the subscription term. Future subscription payments are discounted using the interest rate the SBITA vendor charges the government, which may be implicit, or the City’s incremental borrowing rate if the interest rate is not readily determinable. The City will recognize amortization of the discount on the subscription liability as an outflow of resources (for example, interest expense) in subsequent financial reporting periods. Additional information regarding the City’s SBITA may be found in Note 1, Section R of the ACFR (Attachment 1). There were several additional new GASB statements effective for fiscal year 2022-23, but none of them significantly impacted the City’s financial statements.
Historical Note: In 2014-15, the City implemented GASB 68 Accounting and Financial Reporting for Pension and GASB 71, Pension Transition for Contributions Made Subsequent to the Measurement Date- an amendment of GASB Statement No 68 and in 2017-18, the City implemented GASB 75 Accounting and Financial Reporting for Postemployment Benefits Other than Pensions. The main impact to the financial statements is the recording of the net pension and Other Post-Employment Benefits (OPEB) liabilities in the government-wide financial statements. There is no impact to the individual fund financial statements such as the General Fund. While GASB 68 and 75 implemented changes to the accounting and reporting of net pension and OPEB liabilities, neither impact the way pension and OPEB liabilities are funded. Since the net pension and OPEB liabilities are payable over an extended time horizon, they do not represent a claim on current financial resources.
Historical Note: GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions, GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions, implemented in 2012-13, established fund classifications based upon constraints imposed on the use of resources in governmental funds. The primary initial impact of this classification change is that funds previously held separately, the Contingency Fund, Compensated Absences Fund, and the Retirement Stabilization Fund are now shown in the General Fund in the “Committed” or “Assigned” categories on page 25, the Balance Sheet for Governmental Funds. The City’s policy for these funds appears on pages 50-51 in Note 1 of the Annual Report and the detailed amounts appear in Note 11 on page 76 (Attachment 1).
Also, as a helpful reminder in reading the ACFR, the GASB 34 reporting model that was implemented in 2002 dictates the following:
• Requires presentation of financial information in specific formats, namely, the Government Wide Financial Statements, beginning on page 19. These statements are designed to show net assets and equity of the City as a whole and to provide information on the cost of services and show how programs are financed;
• Requires Management’s Discussion and Analysis (MD&A) to present financial highlights and assess performance for the year;
• Requires reporting on “major” funds rather than aggregate fund types; and
• Requires accrual accounting (in the Government Wide Statements) for all governmental funds, meaning that long term assets and liabilities (such as capital assets, including infrastructure) are included in addition to short term assets and liabilities. All revenues and all costs of providing services are also reported, not just those received or paid in the fiscal year or soon after year-end.
Analysis:
Since comparative information for the General Fund for 2021-22 and 2022-23 is not included in the ACFR, it is presented in the following sections. Some of the comments from the MD&A and Transmittal letter, as mentioned above, are repeated herein for the purpose of having this staff report stand alone. Additional information and analysis can be found in the Transmittal Letter starting on page v and in the MD&A starting on page 4 of the ACFR (Attachment 1).
General Fund Revenue
General Fund revenue increased 5 percent over 2021-22, as depicted in the chart that follows.
Taxes
Revenue from taxes generates 76 percent of General Fund revenue. The graph below tracks significant tax revenue sources over the past 10 years.
Property Tax
Total property tax revenue increased 6 percent. The graph above shows secured tax, which increased 6 percent and unsecured tax, which increased 2 percent. Hermosa Beach’s assessed valuation for secured and unsecured property increased 6.2 percent overall. The 6.2 percent growth was the 28th highest of 88 cities in Los Angeles County. Median home prices in Hermosa Beach for June 2023 were $3,498,444 as compared to Los Angeles County’s median price of $864,000. The average median home price for Hermosa Beach for fiscal year 2022-23 was $2,110,516 compared to $2,052,069 for the prior year.
Sales Tax
Sales tax revenue decreased 6 percent from 2021-22 primarily due to a decrease in the County and State Pools. The lower pool receipts represent 64 percent of the total decrease due to in-state fulfillment from large warehouses and existing retail outlets rather than online. The Eating/Drinking Places category produces the highest sales tax at 33 percent of the total and increased 5 percent. Sales tax revenue is still at a very high level, even with the decrease.
Sales Tax by Class
Sales Tax by Geographic Area
Transient Occupancy Tax (TOT)
Transient occupancy tax increased 9 percent over 2021-22. In November 2019, residents voted to increase the TOT rate from 12 percent to 14 percent, effective January 1, 2020, however due to the pandemic, TOT revenue declined despite the increase in tax rate. Hotel occupancy is back up and TOT revenue is higher than 2018-19 pre-Covid revenue by 58 percent. Average occupancy for 10 hotels was 77 percent in 2022-23; occupancy was 75 percent in 2021-22. A new eight room hotel opened in April 2023 and seven permitted short-term vacation rentals with eight rooms/units operate in the commercial area.
Utility User Tax (UUT)
The City transfers $700,000 in Utility User Tax revenue annually to the Storm Drain Fund for operations and maintenance. Consistent with prior year, the $700,000 transfer from the General Fund was recorded as UUT revenue instead of a transfer in the Storm Drain Fund for financial statement reporting purposes. UUT was up overall by 17 percent in 2022-23. The largest increase was in natural gas service at 180 percent and electric was second at 103 percent.
Licenses and Permits
The License and Permit category increased by 21 percent primarily due to an increase in building permits.
Fines and Forfeitures
Fines and Forfeitures decreased by 13 percent in 2022-23. Community Services Officers (CSO) were utilized for multiple quality of life issues such as animal control (dogs on the beach and dogs off leash at city parks), which have impacted time spent on their other duties. One full time position was held vacant while a CSO attended the police academy. Upon graduation from the police academy and promotion to Police Officer, the CSO position was filled. The unfilled position and duties other than parking contributed to the decrease.
Use of Money and Property
Use of Money and Property increased by 7 percent in 2022-23, primarily due to an increase in rental income, including the Community Center and Theater rentals, as activities continued to return to normal from the pandemic closures.
Service Charges
Service Charges show an increase of 3 percent. Revenue was up primarily due to reinstatement of encroachment fees for permanent encroachments and the implementation of fees for temporary outdoor dining decks in March 2022. On March 24, 2020, the City Council approved the temporary suspension of fees for restaurant encroachments and the fees remained suspended for the remainder of the fiscal year. The encroachment fees continued to be suspended for 2020-21 and the first three quarters of 2022-23. Parking meter revenue continued to increase due to higher meter usage, but annual parking permit revenue was down due to changes in the residential parking permit program.
Interest
Interest increased by 77 percent primarily due to the increase in interest rates and recording of a smaller unrealized loss on investments of $441,828, down from $617,597 in 2021-22. Unrealized losses and gains are on paper only since the City holds investments to maturity.
General Fund Expenditures
Expenditures excluding transfers were 9 percent under budget and show an increase of 7 percent from the prior year due to the following:
• The Legislative and Legal increase of 15.7 percent is primarily due to increased staffing costs in the City Clerk’s Office. The Deputy City Clerk’s position was filled for the full fiscal year and the Senior Office Assistant was hired. Contract services also increased due to consulting work related to updating the City’s records retention schedule and services to assist with City records organization. City Attorney costs were also up over 2021-22.
• The General Government increase of 14.3 percent is primarily due salary and benefit costs related to filling vacant roles in the City Manager’s office and Finance Department, a recruitment and retention bonus program to attract and retain new staff, and the change in allocation of the Human Resources Analyst to be fully funded by the General Fund.
• The Public Safety increase of 1.9 percent is primarily due to an increase in the legacy fire department PERS plans and the contractual increase to the Fire Services payment with Los Angeles County.
• The Public Works increase of 19.9 percent is due to increased staffing costs to fill vacant positions, including the hiring of the Public Works Management Analyst Position, Public Works Inspector, Engineering Technician, Senior and Assistant Engineers, and Maintenance I workers. The department also used several interns. There were contractual increases for the citywide landscaping services.
• Capital Outlay increased by 943 percent, primarily due to expenditures related to CIP 669 City Park Restrooms and Renovation. As noted in the General Fund Unspent Funds section below, the City has a policy to transfer unspent funds at the end of the fiscal year to several funds, including the Capital Improvement Fund, therefore capital outlay expenditures are generally not funded directly from the General Fund.
• Debt Service was added as a result of the recording of existing subscription-based information technology arrangements in accordance with GASB 96. The Finance Department has an agreement with OpenGov for the online budget and reporting software.
General Fund Unspent Funds
The policy of transferring unspent funds in the General Fund to the Insurance Fund, Equipment Replacement Fund (ERF) and Compensated Absences Fund was implemented in 1995-96 to build equity and provide funds for amounts owed to employees for accumulated leave. The policy was changed in 1998-99 to discontinue allocating funds to the Compensated Absences Fund (since the target amount was reached), to create a Capital Improvement Fund for street and other capital improvements and to include a goal for Contingency funds in the policy. The Contingency Policy was changed from 15 percent of appropriations for operating funds to 16 percent in 2013-14 and from 16 percent to 20 percent in 2023-24 in keeping with best practices.
The City Council amends the policy, as necessary, when goals or targets are met and depending on where funds are needed. For several years, funds available at year-end were transferred to the Insurance Fund to cover estimated insurance claims liabilities and the oil settlement agreement. From 2013-14 to 2015-16, funds available at year-end were transferred to the Capital Improvement Fund. The 2016-17 and 2017-18 transfers were to the Insurance Fund to help cover the 2016-17 oil settlement agreement and 2017-18 liability claims settlements. In 2018-19, the Insurance Fund was at the funding goal of $3,000,000 so the year-end transfer was made to the Capital Improvement Fund and half was assigned for the newly created Capital Facilities Reserve.
Due to the sudden uncertainty from the COVID-19 pandemic, 2019-20 unspent funds were temporarily held in the General Fund. The 2021-22 Adopted Budget transferred unspent funds from prior years to the Capital Improvement Fund to provide funding for future Capital Improvement Projects, increase the Capital Facilities Reserve, and establish a reserve for the remaining Fire Facility payments to Los Angeles County for the renovated fire station.
The 2022-23 Budget transferred unspent funds remaining from Fiscal Year 2020-21 to increase the assigned Compensated Absences balance to the funding goal of 25 percent of the accrued liability for employee vacation, sick, and compensatory time, increase the Insurance Fund’s net position, increase the Equipment Replacement Fund balance, increase the Capital Projects Fund to fund 2022-23 Capital Improvement Projects (CIPs) and future CIP funding needs. After all the transfers, the remaining $2,602,107 from FY2020-21 was used to fund City bargaining unit Memoranda of Understanding (MOU) increases in FY 2022-23 and $2,012,273 was transferred to the Capital Improvement Fund as a part of the 2022-23 Midyear Budget.
The 2023-24 Budget used unspent funds of $3,838,617 remaining from Fiscal Year 2021-22 to increase the contingency balance in the General Fund from 16 percent to 20 percent of the operating budget; create a reserve in the General Fund for Federal Emergency Management Agency (FEMA) claims; and transfer the remaining balance to the Capital Improvement Fund for future CIP funding needs.
The 2023-24 Midyear Budget recommends allocating the unspent funds of $2,700,989 remaining from Fiscal Year 2022-23 as follows:
• Transfer $6,374 Lighting/Landscaping Fund to clear the estimated deficit balance at 6/30/2024;
• Transfer $1,419,308 to the Insurance Fund to increase the estimated fund balance at 6/30/2024 to the funding goal of $3 million;
• Transfer $198,866 to the Equipment Replacement Find to bring up to the funding goal; and
• Transfer the remaining balance of $1,076,441 to the Capital Projects Fund for future Capital Improvement Project (CIP) funding needs.
Insurance Fund
The net position as of June 30, 2023 in the Insurance Fund was under the funding goal of $3,000,000 at year end. Claims expenses and adjustments for actuarially determined claims payable were higher than expected, resulting in the ending balance of $1,879,001.
Other primary expenses in the Insurance Fund are related to workers’ compensation claims, general liability claims and litigation. Claims payments for workers’ compensation were higher by $229,221 and liability cases were higher by $83,334 in 2022-23. Year-end liabilities are established annually through actuarial studies performed by the Independent Cities Risk Management Authority’s independent actuary. The total overall claims expense is higher by $279,879 as shown in the following table.
Changes to Claims Expense
General Plan Consistency:
PLAN Hermosa, the City’s long-range planning document, was adopted by the City Council in August 2017, and envisions a future where “Hermosa Beach is the small-town others aspire to be; a place where our beach culture, strong sense of community, and commitment to sustainability intersect.” One of the guiding principles to achieve the vision is to make decisions and take actions that help contribute to the City’s economic and fiscal stability.
A focus of the Governance chapter in the General Plan is to ensure that decision-making and leadership are conducted in an ethical, transparent, and innovative manner that reflects community values. Goal 1 of the Governance chapter speaks to maintaining a high degree of transparency and integrity in the decision-making process.
Other relevant General Plan policies are listed below:
Infrastructure Element
Goal 1. Infrastructure systems are functional, safe, and well maintained.
Policies:
• 1.2 Priority investments. Use City Council established priorities and the Capital Improvement Program (CIP) to identify and allocate funding for projects identified in the infrastructure plan.
• 1.9 Preventative street maintenance projects. Include street slurry projects and other preventive projects in the CIP each year, with sufficient funding.
Public Safety Element
Goal 5. High quality police and fire protection services provided to residents and visitors.
Policy:
• 5.2 High level of response. Achieve optimal utilization of allocated public safety resources and provide desired levels of response, staffing, and protection within the community.
Fiscal Impact:
General Fund revenue increased by 5 percent as the City continued to recover from the rapid downturn in 2020 due to the pandemic and was under budget by 1 percent. General Fund expenditures were up by 7 percent from 2021-22, however, expenditures were still under budget by 9 percent. The City also received the second payment of ARPA funds of $2,310,876 in 2022-23, of which $1,313,107 was transferred to the General Fund for the provision of public safety to the extent of the reduction in revenue due to the COVID-19 public health emergency. The remaining $997,769 in ARPA funds are included in the 2023-24 Budget for the same purpose. This resulted in a balance of $2,700,989 of unspent funds in the General Fund. Staff makes recommendations regarding the unspent funds as a part of the 2023-24 Midyear Budget Review, on tonight’s agenda.
Attachment:
2022-23 Annual Comprehensive Financial Report
Respectfully Submitted by: Viki Copeland, Finance Director
Approved: Suja Lowenthal, City Manager