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 City of Hermosa Beach --- 01-26-991997 - 98 COMPREHENSIVE ANNUAL FINANCIAL REPORT (Including Report from Independent Auditor)
RECOMMENDATION It is recommended that the City Council:
BACKGROUND
CAFR Annually the City has a financial audit performed by an independent certified public accounting firm. The auditor's report is located behind the second divider that is 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 1997-98 CAFR has been submitted to both of the associations for consideration in the award programs since the certificates are valid for one year only.
SURPLUS
Currently, any General Fund surplus is divided equally between the ERF, Insurance Fund and Compensated Absences Fund.
ANALYSIS
CAFR 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. General Fund Revenue
General Fund revenue increased 6% over 1996-97.
Tax revenue is discussed under a separate heading below.
Growth in Licenses and Permits is related to construction activity. Revenue from building, plumbing and electric permits increased 84% over the previous year. The number of residential building permits issued grew by 69%.
Fines and Forfeitures increased 20% because the State changed the allocation to return funds that were taken during the recession to balance the State budget.
The increase in Charges for Services is primarily attributable to planning fees resulting from increased building activity, increased participation in recreation classes and Pier Plaza encroachments.
Miscellaneous Revenue shows a decrease because of one-time surplus retirement funds received in the prior year.
TAXES Revenue from taxes generates 75% of General Fund revenue. The graph below tracks the three largest revenue sources over the past ten years.
General Fund - Largest Revenue Sources
Property taxes overall increased 9%. Current year taxes increased 3% for secured taxes and 6% for unsecured.
Sales tax receipts grew by 15%. The tables below display sales tax information for the top ten classes of business (representing 74% of sales tax) and sales tax by geographic area for major accounts.
1997-98 SALES TAX BY CLASS TOP TEN CATEGORIES
Sales Tax by Geographic Area
Sorry, diagram not available at this time.
General Fund Expenditures
General Fund expenditures increased almost 7% from 1996-97. Negotiated salary increases affect all categories.
The Legislative/Legal category increased 8% due to a risk study of the oil drilling project, settlement of liability claims and an increase in the City Prosecutor contract.
General Government increased 8% because of higher costs for State mandated cost recovery and utility user tax and transient occupancy tax auditing, all of which result in higher revenue.
Public Safety increased 6% due, primarily to negotiated salary increases. Culture and Recreation rose 16% as a result of increased participation in recreation programs and classes, which are offset by increases in revenue.
Community Development expenditures show a decrease of 5% because of the 1st floor City Hall remodel in the previous year. Without remodel costs, the increase in expenditures would be 18% because of high development activity. The number of residential building permits issued increased 69% during this period, as mentioned earlier.
The increase of 12% in the Public Works category reflects absorption of parks landscaping costs from the Lighting and Landscaping Fund due to passage of Proposition 218. The assessment district may no longer fund these costs.
General Fund Surplus The policy of transferring any General Fund surplus to the ERF, Insurance Fund and the Accrued Compensation Fund was implemented in 1995-96 to build equity in the funds to cover liabilities. The Accrued Comp Fund and the ERF were new funds; the Insurance Fund had no equity, with a balance of ($143,739).
The policy has been successful, in that the balance in the Accrued Comp Fund is adequate to fund liabilities. The balance left at 6/30/98 is $229,442. Much progress has also been made in the ERF and the Insurance Fund, but full funding has not yet been achieved.
It is recommended that the policy be changed so that any General Fund surplus transfers to the ERF and Insurance Fund as before, with the other 1/3 going to the Capital Improvement Fund rather than the Accrued Comp Fund.
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 14% of expenditures.
An additional $119,666 is shown as unreserved at year-end. Those funds will be used for reappropriations to the 1998-99 budget, which were approved by the City Council in August.
Midyear Budget Review, conducted next month, 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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