1996-97 COMPREHENSIVE ANNUAL FINANCIAL REPORT

(Including Report from Independent Auditor),

1996-97 Single Audit Report

Recommendation:

It is recommended that the City Council receive and file the 1996-97 Comprehensive Annual Financial Report (CAFR), which includes the report from Caporicci and Larson, our independent auditors, and the 1996-97 Single Audit Report.

Background:

Annually the City has a financial audit performed by an independent certified public accounting firm. The auditor's report is found behind the second divider labeled "Financial Section". The City again received an unqualified opinion, which indicates that the auditor believes the financial statements present a fair picture of the financial position of the City, as opposed to a qualified opinion, in which the auditor "qualifies" or limits his opinion for specific reasons, such as lack of fixed asset accounting or significant internal control deficiencies.

The report is a comprehensive report (as opposed to just financial statements) prepared in accordance with guidelines provided by the Government Finance Officers Association (GFOA) and all applicable accounting standards. The City has received the Certificate of Achievement for Excellence in Financial Reporting from the GFOA for the last six years and the Certificate of Award for Outstanding Financial Reporting from the California Society of Municipal Finance Officers (CSMFO) for seven years. The award programs require a high level of compliance with governmental standards, inclusion of information well beyond the general purpose financial statements and an unqualified audit opinion. The 1996-97 CAFR has been submitted to both of the associations for consideration in the award programs since the certificates are valid for one year only.

A separate audit of federal funds is required if the City receives $300,000 or more. The City received $300,604 in 1996-97.

Analysis:

The following analysis deals with the General Fund, which is the main operating fund of the City. Additional analysis of all governmental funds is included in the Transmittal Letter which begins on page i at the front of the CAFR.

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General Fund Revenue

General Fund revenue increased 7.75% over 1995-96. Adjusting total revenue for non-recurring and one-time revenues results in an overall increase of 7%.

		Revenue	Increase	% Of
REVENUE SOURCE		FY 96-97	(Decrease)	Inc.	Percent
		Amount	over FY 95-96	(Dec.)	of Total
Property Taxes		$ 3,145,507	$ (108,340)	(3.33)%	27.76%
Sales Tax		1,699,718	147,794	9.52	14.99
Utility User Tax		1,907,319	109,552	6.09	16.84
Other Taxes		1,513,615	(62,089)	(3.94)	13.36
Licenses & Permits		275,424	91,891	50.07	2.43
Fines & Forfeitures		129,589	19,579	17.80	1.14
Use of Money and Property		285,408	(30,596)	(9.68)	2.52
Intergovernmental Revenue		877,826	96,428	12.34	7.75
Charges for Services		658,681	122,636	22.88	5.81
Miscellaneous		642,000	395,005	159.92	5.67
Interest		196,041	33,468	20.59	1.73
Total		$ 11,331,128	$ 815,328	7.75%	100.00%

The three categories of Tax revenue are discussed under a separate heading on the next page.

Growth in Licenses and Permits is primarily related to building permit activity. Revenue from building, plumbing and electric permits increased 59%. The number of residential building permits issued grew by 15%.

Use of Money and Property shows a decrease of 9.68% due to loss of revenue during renovation of the Clark Community Building. Also, one of the leased rooms at the Community Center was converted to an emergency operations center.

The increase in Charges for Services is primarily attributable to plan check fees, planning fees resulting from increased building activity, and more revenue from ambulance transport fees.

Miscellaneous revenue increased due to non-recurring reimbursement received from the Beach Cities Health District and one-time retirement surplus funds.

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Taxes

Revenue from taxes generates 73% of General Fund revenue. The graph below tracks the three largest revenue sources over the past ten years. The slight decline in property tax is due to assessment appeal refunds. With home prices increasing and an improved economy in general, appeals should not be a continuing factor.

General Fund - Largest Revenue Sources

Sales tax receipts grew by 10% to a total of 1.7 million, which equates to the level of sales tax receipts in 1990-91.

The table below displays information for the top ten classes of business (representing 74% of sales tax) and the changes from the previous year.

1996-97 SALES TAX BY CLASSTOP TEN CATEGORIES

RANK/BUSINESS CLASS	Sales Tax 1996-97	Inc./(Dec)	% Of Change Prev. Yr.	% Of Total	Rank Previous Year
1. Eating/Drinking Places	$ 381,116	$48,476	14.57	29.84	1
2. Auto Dealers	341,958	92,117	36.87	22.41	2
3. Grocery Stores	172,781	(13,493)	7.24	16.71	3
4. Building Materials	80,603	(250)	-0.31	7.25	4
5. Sporting Goods /Bicycles	65,120	350	0.54	5.81	5
6. Specialty Stores	56,087	3,258	6.17	4.74	7
7. Service Stations	54,726	2,038	3.87	4.73	6
8. Auto Repair Shops/Garages	41,826	6,047	16.90	3.21	8
9. Wholesale Textiles/ Furnishings	36,189	410	1.15	3.21	9
10. Household/Home Furnishings	33,555	10,271	44.11	2.09	N/A

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General Fund Expenditures

General Fund expenditures increased almost 7% from 1995-96, largely due to the implementation of equipment replacement charges to provide planned replacement of assets. Without these charges, expenditures would have grown by only 2%.

	Expenditures FY 96-97	Increase (Decrease)	% Of Inc.	Percent of Total
GENERAL FUND	Amount	over FY 95-96	(Dec.)
Legislative & Legal	$ 572,443	$ 30,888	5.70%	5.37
General Government	888,347	63,536	7.70	8.34
Public Safety	6,724,578	439,461	6.99	63.14
Community Development	699,250	208,577	42.51	6.57
Culture & Recreation	497,993	22,259	4.68	4.68
Public Works	1,253,261	(115,132)	(8.41)	1.77
Debt Service:
Principal	9,722	9,722	-0-	.09
Interest	1,430	1,430	-0-	.01
Capital Outlay	3,507	( 3,201)	(47.72)	.03
Total	$ 10,650,531	$ 657,540	6.58%	100.00%

The Legislative/Legal category increase of 5.7% reflects higher legal and insurance costs.

General Government includes a one-time payment to the Hermosa Beach School District of $50,000 from cable television franchise funds. Excluding those one-time funds and equipment charges, the increase would be 1%.

Public Safety also increased 1% and Culture and Recreation rose 3%, after excluding equipment charges.

Community Development expenditures rose 12.4%, excluding equipment charges, as a result of increased building and business activity. Building inspection, plan checking and noticing costs increase as activity increases and are offset by higher revenue.

The decrease in the Public Works category reflects reduction of one janitor position, relocation of Equipment Services to the Equipment Replacement Fund and reallocation of insurance charges.

General Fund Balance

Fund balance as a percent of expenditures is a measure of the City's cushion against economic uncertainties or revenue shortfalls. Bond rating agencies have historically considered at least a 5% reserve "prudent", however, level of reserves should be decided based on individual circumstances and the economic climate. The General Fund contingency balance is 15% of expenditures.

An additional $548,549 is shown as unreserved at year end. Those funds will be used for the continuing City offices remodel, the Downtown project and various reappropriations to the 1997-98 budget.

Midyear Budget Review, conducted in February, will provide the next opportunity to review our financial picture.

Gary Caporicci, one of the partners in charge of our audit, will be present at the meeting.

The reports are available for review in the library and the Finance Department .

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