Grand Jury Response Packets - City of Capitola 1 message

RISK ASSESSMENT: As the Auditor’s Office is an authoritative source of studies and assessments for the State Legislature, we find that the risk assessment methodology used by the Auditor’s Office is a valid and valuable approach to assessing financial risk for all SCC city jurisdictions and communicating that risk to stakeholders. AGREE X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): The City of Capitola agrees that the assessment methodology used by the Auditor’s Office is a valid and valuable data point in assessing financial risk but does not find it to be authoritative or all inclusive. It contains a set of useful data points and a way to compare across jurisdictions, but each jurisdiction has unique profiles, revenue and expenditure characteristics, and ability to change or modify those characteristics. That is not captured by this methodology. Furthermore, we find the tool to be heavily focused on pension obligations and risks. It also heavily focuses on factors that are often beyond the control of the jurisdiction, like pension assets or liabilities. It also does not include other forms of “risk” that each city faces and needs to balance, like maintenance of facilities or capital improvements, revenue mix, service needs of the community. These types of risks/ liabilities are less easily quantifiable but are known by the professionals working in their communities,

RISK ASSESSMENT: All SCC Cities did not fully consider the calculated high risk indicators from the Auditor’s Office and their potential impacts on city operations, services, and capital assets/infrastructure. AGREE PARTIALLY DISAGREE – explain the disputed portion X DISAGREE – explain why Response explanation (required for a response other than Agree): The City of Capitola’s high-risk indicators from the SCC Grand Jury Report are Revenue Trends, Pension Obligations, Future Pension Funding, and Other Post Employment Benefits (OPEB) Funding. The City has made deliberate and concerted efforts over the past few years to stabilize Future pension contribution increases including adopting an official Financial Management policy as well as establishing both a Pension Trust as well as an OPEB Trust. Future pension obligations are always at the forefront of financial planning conversations and modeling. We again have made concerted efforts to pay down our obligation in a way that has the biggest impact during recent years, and CalPERS is always discussed in the City’s budget and 5-year plan. Managing our CalPERS future obligation is also a stated strategic goal of the city council as identified in the City’s annual budget. To say we do not consider the risk of this is untrue. Finally, we disagree with the auditors’ assignment of a high risk to Capitola’s funding of our OPEB obligations. As can be seen by the OPEB obligations indicator we have a very low OPEB obligation and annual contribution, therefore, our lack of a funding plan for this is not an indication of risk in this area. The SCCGJ report incorrectly listed Capitola as being high risk in the areas of revenue trends and pension funding. Those areas are listed by the state controller as areas of moderate risk.

RISK ASSESSMENT: The state of risk determined for all SCC Cities by the Auditor’s Office in 2017 remained largely unchanged through 2019. X AGREE PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree):

RISK ASSESSMENT: Pension costs contribute a higher level of financial risk to all SCC Cities than is accounted for by city documents. AGREE PARTIALLY DISAGREE – explain the disputed portion X DISAGREE – explain why Response explanation (required for a response other than Agree): City documents report pension contributions and liabilities as required by the Governmental Accounting Standards Board (GASB). In some ways the delayed impact of losses or market shocks to City costs allow for planning time and are therefore a comparatively reduced risk, as compared to risks from natural disasters and economic recessions.

RISK ASSESSMENT: Financial Risk Indicators alone are not adequate to effectively understand the risks facing all SCC Cities. X AGREE PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree):

RISK ASSESSMENT: All SCC Cities do not fully identify, assess, track, and report key risk indicators that reflect the state of strategic, financial, operational, or hazard risk. X AGREE PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree):

RISK ASSESSMENT: All SCC Cities do not adequately evaluate the possible interactions between risks that may inhibit or enhance the objectives of each city. AGREE X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): Adequately is a subjective term. Could the City of Capitola do better, perhaps, but the City believes we are properly evaluating interactions between risks. Each year in the City’s budget there is a discussion of long-term risk to the City where various factors that could affect the City are highlighted for public review and discussion. In addition, the annually required Comprehensive Annual Financial Report (CAFR) includes a mandated section that evaluates risk management as well as providing detailed information on defined benefit pension plans and other post-employment benefits.

RISK ASSESSMENT: All SCC Cities either do not maintain or do not publish a report card on the state of key infrastructure that can be used to set funding priorities and manage operational and hazard risk. AGREE PARTIALLY DISAGREE – explain the disputed portion X DISAGREE – explain why Response explanation (required for a response other than Agree): The City of Capitola has completed extensive assessments of its infrastructure over many years, and is constantly evaluating and preparing for replacement of key infrastructure, including long-term capital improvement planning, financial planning for emergencies, and hazard assessment. While the City may not present these findings through a specific “report card,” we spend a significant amount of effort to inform the community about the state of our infrastructure, the projects that are being planned, and the projects that are in construction. We have received significant positive feedback from the community about our outreach and education efforts in this arena. Local Hazard Mitigation Plan (LHMP). In addition, over the last year the City has completed a draft updated LHMP, including a very thorough risk assessment. This Risk Assessment includes (1) a description of the LHMP Planning Committee’s hazard selection process, (2) hazard descriptions of selected primary and secondary hazards, (3) hazard profiles for primary hazards, and (4) a vulnerability assessment that includes a summary of the risk primary hazards pose to the City’s built, social, and natural environment and a discussion of secondary hazards. These four sections address Element B requirements, which appear in the following Risk Assessment as headings B1–B3, described in the Federal Emergency Management (FEMA) LHMP Review Guide. The LHMP process included extensive public outreach and participation, and the community has been kept well-informed about both the types of risks that could happen in our community, and the steps needed to reduce the impacts of those risks. Climate Action Plan (CAP). The City Council adopted Capitola's first Climate Action Plan (CAP) on October 22, 2015. The CAP identifies strategies and actions to reduce greenhouse gas emissions (GHG) from City government operations and community activities to support the State of California’s efforts to mitigate the effects of climate change. The CAP fulfills several General Plan goals and bring the City into conformance with Assembly Bill 32, Senate Bill 375, and Executive Order S-3-05. The CAP includes an inventory of existing GHG emissions, a forecast of future GHG emissions, identification of GHG reduction targets, and a list of GHG reduction measures necessary to achieve identified reduction targets. The CAP includes actions and strategies to reduce GHG emissions generated by transportation and mobile sources, residential and non-residential energy consumption, water and wastewater treatment and conveyance, solid waste generation, and open space, parks, and agriculture. The proposed CAP establishes a 4.9% GHG reduction target from 2010 levels by 2020 and projects an 18% reduction through implementation of various reduction strategies. The CAP further sets a 42.9% reduction target from 2010 levels by 2035 and an 81% reduction by 2050. Transportation Infrastructure. The Department of Public Works inventories the quality of the roads each year and develops a Pavement Maintenance Index for each street. All streets are prioritized for improvements, and sealing, repair, or reconstruction projects are planned many years in advance, reducing the financial risk of having to suddenly fund major infrastructure projects. These projects reduce risk and increase safety of travelling in the community, and keep the community prepared for responding to natural disasters. Our residents are kept well-informed of these projects through newsletters and social media outreach. Our community is well-informed about the state of critical infrastructure, and the additional measures being suggested by this report seem both redundant, burdensome, and unnecessary.

RISK MANAGEMENT: Although all of the cities of SCC are preparing for increased pension costs due to current amortization schedules, they are not adequately preparing for risk associated with significant or sustained investment shortfalls in CALPERS due to economic shocks (e.g. caused by Coronavirus) or a recession. AGREE X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): The City of Capitola has spent several years deliberately building up reserves and making payments into the trust accounts for pension and OPEB Unfunded Actuarial Liabilities (UAL) to be better prepared for if / when we are impacted by CalPERS shock and / or other types of shocks. Our contingency reserve was established to provide a prudent level of financial resources to protect against temporary revenue shortfalls or unanticipated operating costs such as CalPERS, and/or to meet short-term cash flow needs. Furthermore, as stated above, the two-year delay in CalPERS returns and their impacts on City finances allows Cities time to plan and adjust in the case of a shock.

RISK MANAGEMENT: Except for the area of hazard (i.e. loss) risk management, in all SCC Cities, there is no formal method to define, track, manage, and communicate risks at the enterprise level of SCC city government. AGREE X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): The annual budget is adopted through a formal, open to the public process in which various risks are communicated and discussed. The largest financial risk to the City in the unfunded actuarial pension liability which has been one of the most discussed topics over the past 10 -15 years.

GOVERNANCE: All SCC Cities do not have a publicly articulated pension Unfunded Actuarial Accrued Liability (UAAL) funding policy that recognizes potential pension cost risks and community expenditure/revenue priorities. X AGREE PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree):

TRANSPARENCY: All SCC Cities do not adequately meet key requirements for transparency as defined by the GFOA. AGREE PARTIALLY DISAGREE – explain the disputed portion X DISAGREE – explain why Response explanation (required for a response other than Agree): Adequate is a subjective term. The City believes data and information is available and communicated to the public adequately.

TRANSPARENCY: All SCC Cities do not provide standard and understandable reporting with regard to: Pension Costs and Associated Impacts (past, current, and projected); Service Level Performance Metrics; State of Key Infrastructure; Risk Assessments and Mitigation Plans for Finance, Operational, and Hazard Risks. AGREE PARTIALLY DISAGREE – explain the disputed portion X DISAGREE – explain why Response explanation (required for a response other than Agree): All information and reports on the above topics are made available to the public and are reported on as required.