TO: ADAM PIRRIE, CITY MANAGER
FROM: JEREMY STARKEY, FINANCE DIRECTOR
DATE: APRIL 9, 2024
Reviewed by:
City Manager: AP
SUBJECT:
Title
CITY OF CLAREMONT ANNUAL AUDITED FINANCIAL REPORTS FOR THE YEAR ENDED JUNE 30, 2023
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SUMMARY
Each year an independent auditor conducts a financial audit for the City of Claremont. The audit firm of Rogers, Anderson, Malody & Scott, LLP conducted the audit and prepared the financial statements contained in the Annual Comprehensive Financial Report (ACFR) and other related financial reports for 2022-23.
Rogers, Anderson, Malody & Scott, LLP has issued an unmodified ("clean") opinion, the highest opinion given for financial statements, to the City for the year ended June 30, 2023. This opinion indicates that the financial statements represent fairly, in all material aspects, the financial position of the City.
RECOMMENDATION
Recommended Action
Staff recommends the City Council receive and file the following letters and financial reports for the year ended June 30, 2023:
A. Annual Comprehensive Financial Report (ACFR);
B. Transportation Fund Financial Statements;
C. Housing Successor Agency Fund Statements;
D. Area Agency on Aging (Senior Nutrition Program) Financial Statements; and
E. Letters: GANN Limit Calculation, Statement on Auditing Standards (SAS) 114 Letter, and Internal Controls Letter.
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ALTERNATIVE TO RECOMMENDATION
In addition to the recommendation, there is the following alternative:
• Request additional information from staff.
FINANCIAL REVIEW
The Annual Comprehensive Financial Report (ACFR) represents the City of Claremont's financial position on June 30, 2023, and includes financial statements for all its component units. Financial highlights for the fiscal year are noted in the Financial Section of the ACFR and include the following:
As of June 30, 2023, the City’s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by 89.92 million (net position). Of this net position, the negative amount of $17.27 million represents the City’s unrestricted net position. This negative unrestricted negative net position is the result of the implementation of Government Accounting Standards Board (GASB) Statement No. 68, which requires the City to record the long-term net pension obligation of its CalPERS retirement plans as a liability.
The City's total net position increased by approximately $15.32 million during the current fiscal year, primarily due to increases in current assets driven by increases in the City’s general revenues and offset by an increase in total liabilities.
The City’s total liabilities increased by $26.98 million during the current fiscal year, primarily due to increases in the City’s net pension liability.
As of June 30, 2023, the City’s governmental funds reported combined fund balances of $52.79 million, an increase of $6.86 million from the prior fiscal year. This is partially due to an increase in unassigned fund balance of $5.66 million and all other fund balances of $1.20 million collectively.
As of June 30, 2023, the City’s proprietary funds reported a net position of $13.09 million, an increase of approximately $0.6 million from the prior fiscal year. Approximately 37.8 percent of this amount, or $4.95 million, represents the unrestricted portion of net position.
Operationally, General Fund revenues and transfers in exceeded expenditures and transfers out by approximately $6.88 million. This includes expenditures and assignments made from the 2021-22 General Fund Operating Surplus towards the City’s Operating and Environmental Reserve and additional funding to reduce City’s pension liability to CalPERS in 2022-23. Fund balance in the General Fund amounted to $21.24 million, an increase of approximately $6.88 million over the prior year. This is primarily due to better than anticipated revenues.
The General Fund’s Operating and Environmental Emergency (O&EE) committed fund balance stood at $7.53 million as of June 30, 2023 - slightly less than the 25 percent of budgeted General Fund operating expenditures outlined in the City’s Reserve Policy. Additional funds were committed to the O&EE reserve from the 2022-23 General Fund surplus after the close of the fiscal year. The unassigned General Fund balance increased by $5.75 million in 2022-23.
The staff cost to prepare this report and to complete this project is estimated at $2,014 and is included in the operating budget of the Financial Services Department.
ANALYSIS
Annual Comprehensive Financial Report (ACFR)
The ACFR (Attachment A) incorporates the City's financial activities of all funds, including those of the Successor Agency to the former Claremont Redevelopment Agency. Legal or contractual obligations require that separate financial reports be prepared for certain specific funds or programs. To meet such requirements, the City prepares separate financial statements for the Transportation Fund, as well as for the Senior Nutrition Program. Although separate financial statements are prepared, the activities of these two programs are also included in the ACFR.
ACFR Format
The format of the ACFR follows guidelines recommended by the California Society of Municipal Finance Officers' Association (CSMFO) and conforms to the high standards of public financial reporting established by the Governmental Finance Officers' Association (GFOA) of the United States and Canada. The ACFR is presented in three sections: (1) Introductory, (2) Financial, and (3) Statistical. A brief overview of the report format is described below.
Introductory Section
The Introductory Section includes the letter of transmittal prepared by staff, the City's fiscal policies, the GFOA Certificate of Achievement for Excellence in Financial Reporting, the City's organizational chart, a list of City Council members and department directors, and a chart of General Fund revenues and expenditures.
Financial Section
The Financial Section begins with Rogers, Anderson, Malady & Scott, LLP's Independent Auditors' Report, which gives an unmodified opinion, the highest opinion given, of the City's financial statements. It states that the City's financial statements "present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Claremont, California, as of June 30, 2023."
The second part of the Financial Section is the Management's Discussion & Analysis (MD&A). This requirement provides an overview of the City's financial performance for the fiscal year ended June 30, 2023. Staff has included additional charts and graphs depicting revenues and expenditures, capital assets, and long-term debt in the MD&A to comply with GFOA recommendations.
Following the MD&A are the Basic Financial Statements. These include the government-wide financial statements, as well as those of the major governmental funds, of which the General Fund is the most important.
The Notes to the Financial Statements follow the Basic Financial Statements and include the required footnote disclosures that provide background and support to the figures presented in the Financial Section.
The last part of the Financial Section are the Supplemental Statements. These statements provide detailed financial information on the individual non-major funds.
Statistical Section
GASB Statement No. 44 requires an extensive set of schedules for the Statistical Section to better reflect the economic condition of the City. The ACFR provides numerous financial and other schedules relevant to the economic conditions of the City. Many of the schedules show data for the last ten years.
General Fund Financial Performance
General Fund revenues, transfers in from other funds, and one-time land sale proceeds totaled $39.04 million for 2022-23. Expenditures and transfers out to other funds totaled $32.15 million, resulting in an increase in fund balance of $6.88 million. The primary reasons for the increase in fund balance were better than expected tax revenues along with the one-time land sale proceeds.
The General Fund balance at June 30, 2023 totals $21.24 million. Of this amount, $40,656 is non-spendable, meaning that it is not in a spendable form. A further $7.53 million represents committed fund balance that has been set aside in the Operating and Environmental Emergency Reserve. The Operating and Environmental Emergency Reserve balance at June 30, 2023 represented approximately 24 percent of General Fund expenditures and transfers out, slightly less than the 25 percent required by the City's Reserve Policy. On October 10, 2023, the City Council approved the allocation of $1,810,698 of unaudited General Fund surplus for 2022-23 towards the Operating and Environmental Emergency Reserve, bringing its balance to 30 percent of 2023-24 budgeted General Fund expenditures and transfers out.
Special Revenue and Capital Projects Funds
The ACFR reports on results of operations for twenty-five special revenue and capital projects funds. Special revenue and capital projects funds are restricted in their use to expenditures for specific purposes. Examples include grant funds, such as CDBG and the Nutrition Grant; transportation- related funds such as Prop A and C; and others such as the State Gas Tax and Landscape and Lighting District Funds. Results of the special revenue and capital projects funds for the year ended June 30, 2023, are reported in both the Basic Financial Statements and the Supplemental Statements. There were no unexpected changes in fund balance for these funds for the year ended June 30, 2023.
Enterprise Funds
The City operates four proprietary or enterprise funds, namely the Sewer, Sanitation, Cemetery, and Transportation Funds. The Net position for each of these funds at June 30, 2023 was:
• Sewer Fund: $8.60 million; a decrease of $0.33 million from the prior year.
• Sanitation Fund: $2.38 million; an increase of $1.07 million from the prior year.
• Transportation Fund: $0.27 million; a decrease of $0.43 million from the prior year.
• Cemetery Fund: $1.84 million; an increase of $0.31 million from the prior year.
The increase in the Sanitation Fund net position was due to continued strong revenues resulting from an increase in City Council-approved sanitation utility fees in 2021-22, while the increase in the Cemetery Fund net position was due to improved revenues from sales and service charges, while maintaining costs related to operating expenses.
Internal Service Funds
The City operates two Internal Service funds, the Motor Fleet and Technology Funds. The funds account for activities involving the provision of motor vehicle repairs and maintenance, as well as computer network and technology support to City departments. The Net Position for each of these funds at June 30, 2023 was:
• Motor Fleet: $0.42 million; a decrease of $0.17 million from the prior year.
• Technology Fund: ($0.59) million; an increase of $0.07 million from the prior year.
The Motor Fleet Fund's net position decreased primarily because of the expenses related to replacement and depreciation of vehicles. The Technology Fund's net position increased, largely due to reduced equipment, services and supplies costs.
GASB Implementations
For the year ended June 30, 2023, the financial statements include the adoption of GASB Statement No. 96, Subscription-Based Information Technology Arrangements, which reports the subscription-based information technology arrangements (SBITAs) for government end users. Under this Statement, a lessee is required to recognize a SBITA liability and an intangible right-to-use asset.
The financial statements also include the continued implementation of GASB Statement No. 68. This implementation changed the way the City accounted for the liabilities associated with its employee pension plans. The pronouncement required the City to include the value of the City's net pension liability in the Government-wide Financial Statements and in the Proprietary Fund Financial Statements. Prior to GASB 68, unfunded pension liabilities were described in the Notes to the Financial Statements only. The inclusion of the net pension liability in the financial statements is intended to provide users of the financial statements with a more accurate picture of the City's true financial condition, considering the significant long-term liabilities associated with employee pension plans. The City's net pension liability at June 30, 2023 is $59.36 million. This is an increase of approximately $20.96 million from prior year. This change is primarily due to the changes in assumptions in the actuarial valuation dated June 30, 2021 (2022 measurement date) which reduced the discount rate from 7.15% to 6.9% and net investment losses for the plan year.
The Notes to the Financial Statements also provides additional information regarding the City's participation in the California Public Employees' Retirement System (CalPERS). In addition to identifying the total net pension liability, the notes also show the liability broken down by benefit plan.
For the City's miscellaneous plan, the net pension liability disclosed in the notes totals $32.09 million as of June 30, 2023. During 2022-23, the City made payments of $4.84 million towards the employer contribution. Payments by employees of the employee contribution of up to 8 percent totaled $0.62 million. The net pension liability of the City's safety plans as of June 30, 2023 is $27.26 million.
The City Council authorized additional discretionary payments to CalPERS to reduce the City's unfunded liability. On October 11, 2022, the City Council authorized an additional discretionary payment of $1.5 million to CalPERS to pay down the unfunded liability and fund the Section 115 Pension Trust for $1.5 million. Additionally, on October 10, 2023, the City Council authorized an additional discretionary payment of $1.0 million to CalPERS to pay down the unfunded liability and pay $1.0 million to the Section 115 Pension Trust using surplus funds from the 2022-23 fiscal year. This is in addition to the $250,000 budgeted in 2022-23 for additional discretionary payments to CalPERS.
In addition to the City's efforts to reduce the unfunded liability by making additional payments, the City Council has also taken action to reduce pension costs by negotiating for employees to pay the full amount of their required contributions of up to 8 percent for miscellaneous employees and 9 percent for safety employees. The City Council also took action to implement lower benefit tiers for new employees, and the State legislature has taken this a step further in the implementation of the Public Employees' Pension Reform Act (PEPRA), which establishes even lower benefit formulas for new employees hired after January 1, 2013.
In addition to the required contributions to CalPERS, the City made debt service principal and interest payments in the amount of $0.62 million on Pension Obligation Bonds issued in 2006 to pay off the side fund that was established when the safety plan was pooled. The outstanding balance on these bonds at June 30, 2023 was $2.03 million.
City Debt
The ACFR also summarizes the City's outstanding long-term debt in the Notes to the Financial Statements. At June 30, 2023, the total outstanding long-term debt of the City of Claremont, not including the net pension liability, was $22.34 million. This long-term debt amount includes loans payable, General Obligation and Pension Obligation Bonds, compensated absences, insurance deposits payable, as well as the settlement agreement with the Golden State Water Company for legal expenses in the City's eminent domain case to acquire the local water system.
Transportation Fund Financial Statements
The Transportation Fund financial statements (Attachment B) are included in the ACFR, although a separate set of financial statements are required to be presented as a requirement of the use of transit funding for the City's Dial-a-Ride program.
Housing Successor Agency Fund Statements
The Housing Successor Agency financial statements (Attachment C) are included in the ACFR. A separate set of financial statements are presented to note compliance with the types of compliance requirements described in the California Health and Safety Code sections applicable to California Housing Successor Agencies for the year ending June 30, 2023.
Area Agency on Aging (Senior Nutrition Program) Financial Statements
Funding received through Los Angeles County for the City's Senior Nutrition Program requires that separate financial statements be prepared for the program. The Senior Nutrition Program financial statements (Attachment D) are also included in the ACFR.
Auditor Letter on GANN Limit Calculation
The annual audit includes the review by the City's auditors of the annual appropriations limit calculation that is required by California Propositions 4 and 111. The appropriations limit imposed by these propositions restricts the amount of revenue a public agency can appropriate in any fiscal year. The limit is adjusted annually by population growth and cost of living factors. The auditors noted in the letter no exceptions to the calculation of the appropriations limit. The Auditor Letter on the GANN Limit Calculation is included as Attachment E.
SAS 114 Letter (Audit Communication and Management Letter)
The Audit Communication and Management Letters (part of Attachment E) provide certain information related to the audit of the City's financial records. The letter mentions presumptive audit risks and states that the auditors noted no matters of management override of controls or deviations from generally accepted accounting principles. It further communicates the following:
• Qualitative Aspects of Accounting Practices - The Audit Communication Letter notes that City management is responsible for the selection and use of appropriate accounting policies. It further indicates that a summary of the significant accounting policies adopted by the City is included in Note 1 to the financial statements. As described in Note 1 of the financial statements, during the year, the City adopted the provisions of Governmental Accounting Standards Board Statement No. 96, Subscription-Based Information Technology Arrangements. The letter further notes no matters have come to the auditor's attention that would require them, under professional standards, to inform about the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus.
• Difficulties Encountered in Performing the Audit - The auditors encountered no significant difficulties in dealing with City management.
• Corrected and Uncorrected Misstatements - The letter communicates the auditors' responsibility to note all known and likely misstatements identified during the audit. The letter notes that Management has corrected all identified misstatements identified as per the auditors' review of financial transactions for 2022-23.
• Disagreements with Management - The auditors are required to communicate any disagreements with management related to an accounting, reporting, or auditing matter, whether resolved or not, in the Audit Communication Letter. No such disagreements arose during the audit for 2022-23.
Auditor Letter on Internal Controls
The Auditor Letter on Internal Controls (part of Attachment E) notes auditor's consideration of internal control over financial reporting that could lead to material misstatements in the City financial statements. The auditors performed tests of compliance with which could have a direct and material effect on the financial statements (standard for most engagements). The results of their tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards
RELATIONSHIP TO CITY PLANNING DOCUMENTS
Staff has evaluated the agenda item in relationship to the City’s strategic and visioning documents and finds that it applies to the following City Planning Documents: Council Priorities, General Plan, and the 2022-24 Budget.
CEQA REVIEW
This item is not subject to environmental review under the California Environmental Quality Act (CEQA).
AUDIT COMMITTEE REVIEW
The City's ad hoc Audit Committee has reviewed the Annual Comprehensive Financial Report for the year ended June 30, 2023.
PUBLIC NOTICE PROCESS
The agenda and staff report for this item have been posted on the City website and distributed to interested parties. If you desire a copy, please contact the City Clerk’s Office.
Submitted by:
Jeremy Starkey
Finance Director
Attachments:
A - Annual Comprehensive Financial Report (ACFR)
B - Transportation Fund Financial Statements
C - Housing Successor Agency Fund Statements
D - Area Agency on Aging (Senior Nutrition Program) Financial Statements
E - Letters: GANN Limit Calculation, Statement on Auditing Standards (SAS) 114 Letter, and Internal Controls Letter