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An independent auditing firm reviewed the City of Solana Beach's finances through the fall, ultimately assigning it the highest opinion available. File photo
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Solana Beach municipal finances looking good

SOLANA BEACH — The City of Solana Beach’s annual financial report and audit indicates an overall clean bill of health, including a relatively high level of pension funding, notwithstanding economic pressures due to COVID-19.

Lance, Soll and Lunghard, an independent auditing firm, reviewed the city’s books through the fall, ultimately rendering an “unmodified opinion.”

“This is the highest opinion that we can render,” auditor Ryan Domino told the Solana Beach City Council at its Dec. 9 meeting. This means “the numbers and amounts and disclosures [in the city’s financial statements] can be relied upon for making financial decisions and reporting to bond agencies, grantor agencies, whoever [else] would rely on these statements.”

The city government’s net position — it’s bottom line, including all its activities — increased from $81 million last fiscal year to $84 million this year. The city increased its net position every year except one over the last decade.

“Net position, the difference between assets and liabilities, is one way to measure the city’s financial health,” according to the report accompanying the audit. “Over time, increases or decreases in net position are an indicator of whether the financial health is improving or deteriorating.”

The positive balance of the city’s General Fund, its primary operating fund, also increased year on year, from nearly $14 million to more than $15 million.

This balance comprises the city’s reserves. Healthy reserves help a city weather unexpected expenses and downturns, as well as borrow money on more favorable terms.

The city has some $23 million of outstanding principal debt, plus an additional $17 million of interest due through 2050. This borrowing has funded, for example, streetscaping and wastewater-related capital improvement.

Graphic by Dan Brendel

Solana Beach’s total General Fund revenues grew nearly 11% year on year.

Property taxes, the city’s largest revenue source, continued to climb, up more than 4% year on year, with another 3% bump expected this fiscal year. Residential assessments rose nearly 6% over last year and 53% over ten years.

“Since the 2008 recession, the city’s median home value has steadily risen,” reaching $1.4 million this year, according to the report.
While Solana Beach’s pension plan is more adequately funded than many, councilmembers expressed some concern about keeping pacing with the city’s growing liability.

The California Public Employees’ Retirement System, or CalPERS, receives funding from CalPERS investment earnings, employee contributions and employer contributions. The city’s share is 75% funded this year, down from 78% in FY 2015, despite the city’s annual contribution.

The city has pension savings outside CalPERS, which, if included in the city’s accounting, would raise the funded ratio as high as 91%, said Rod Greek, the city’s finance director. Accounting standards currently don’t allow the city to include outside trusts in its financial reports.

On average as of 2019, CalPERS pension plans for police and fire were 72% funded and plans for all non-safety city employees were 76% funded.

A funding status less than 100% means estimated future obligations to retirees exceed assets set aside to pay those obligations, taking into account various assumptions — such as how long retirees will live, inflation and the rate of return on the pension fund’s invested assets.

In part because CalPERS has been lowering its assumed rate of return in recent years, the city’s share of the pension liability reported in its financial statements has increased, “even though we’re throwing money at it,” Greek said.

Changing the assumed rate of return in turn changes the expected future value of assets. This year, using a 7.15% assumed rate of return, the city’s pension liability weighs in at $15 million. Raising the assumed rate of return by one-percentage point would decrease the city’s liability to $9 million. Decreasing it one percentage point would raise the liability to $23 million.

This subjective valuation means, even “if we had the money to pay [the city’s pension liability] off right now, we could next year still be looking at a deficit,” said City Manager Greg Wade.

This year CalPERS will again reduce its assumed rate of return to 7%, “which some believe is still too high,” that is, underestimating liability, he said.

The city also puts money aside for retirees’ healthcare benefits. That plan is 24% funded this year, up from 5% in 2017, assuming a 6% rate of return.

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