Grand Jury City of Scotts Valley 2019-2020 Grand Jury Responses 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 Scotts Valley agrees that the assessment methodology used by the Auditor’s Office (AO) is a valid and valuable assessment tool in assessing financial risk, and can be used to effectively communicate financial risk to decision makers, stakeholders and the community. However, it should not be considered authoritative in that there are several other tools that have been developed by the Government Finance Officers Association, the League of California Cities, and others that can also be used as a valuable assessment of inherent financial risk of a city like ours. The Auditor’s Office methodology places a heavy reliance on pension obligations. While this may be an important risk to consider, likewise risks associated with revenues, infrastructure, other post employment benefit obligations, and operational costs such as maintaining competitive salaries in an area that competes heavily for talent in Silicon Valley but without the financial resources to effectively compete, are just as much if not a higher risk to our community.

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 Scotts Valley developed a fiscal sustainability plan in 2017 that identified a fiscal gap that the City’s General Fund was going to experience without corrective action. The impacts on operations, services and capital assets/infrastructure have been at the forefront of the collective minds and efforts of the City Council, senior management team, and operations staff. The City addressed the risks associated with several key financial indicators included in the AO’s methodology: 3) General Fund reserves; 4) revenue trends; 5) pension obligations; 6) pension funding; 7) pension costs; 8) future pension costs; and, 9) OPEB obligations. Each of these were incorporated into the financial model/forecast that the City used to determine future fiscal impact. The result was a keen understanding of the impacts to funding core General Fund operations, including potential reductions in police, parks, recreation, public works and city administration. The potential reduction in funding City streets and parks infrastructure improvements was indicated as potential outcomes of not addressing the fiscal gap. To say that we did not consider those risks is inaccurate and demonstrates a lack of understanding of the importance of the City’s fiscal sustainability plan in addressing the financial risks faced by the City.

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): The City’s pension costs have been fully discussed and disclosed in all of its key financial documents, including: 1. Annual Budget for FY 2017-18, 2018-19, 2019-20 and 2020-21 2. Five Year Forecast included within each of the Annual Budget documents indicated above 3. Comprehensive Annual Financial Reports (CAFR) for FY 2017-18, and 2018-19 2019-20 (FY 2020-21 CAFR has not yet issued). In addition, and as a direct result of the COVID-19 pandemic, the City contracted with a consultant to develop an updated recessionary fiscal model that was presented to the City Council in May 2020. This fiscal model included an analysis of pension cost risks associated with potential market losses by CalPERS and the long-term potential decline in the discount rate and the impacts that those would have on the City’s General Fund in future years.

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): The City believes it has adequately evaluated the financial risks as evidenced in its annual adopted budgets and fiscal sustainability plan indicated earlier. Hazard risk is addressed in the City’s risk management program with its public entity risk pool administrator. Operational risks are addressed through consultation between the City Manager and respective department heads and/or managers within each operational area.

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 X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): While the City does not publish a “score card” of its infrastructure, per se, the City does evaluate its key infrastructure in the form of third party studies or analyses on its infrastructure. For example, the City conducts pavement management studies on its streets infrastructure, and wastewater system master plan and analysis as required by State law to ensure that collection and treatment systems are maintained properly. In these two examples, the City establishes fiscal policy to maintain these capital assets to standards established by Council policy and/or State requirements. These forms of analyses factor into the development of a 5-year Capital Improvement Project (CIP) Plan that is included in the five-year financial forecast incorporated into the annual budget process. Council then makes funding decisions regarding operations and capital investment based on an assessment of the status of infrastructure in those analyses. Operational and hazard risks are not ignored as the finding might suggest.

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): As mentioned in F4, the City contracted with a consultant to develop an updated recessionary fiscal model that was presented to the City Council in May 2020. This fiscal model included an analysis of pension cost risks associated with potential market losses by CalPERS and the long-term potential decline in the discount rate and the impacts that those would have on the City’s General Fund in future years. The model has the capability of modeling investment shortfalls/losses in future years. Those were addressed when determining potential impacts to the City’s fiscal sustainability plan as a result of the pandemic recession. Ultimately, the City Council must determine what set of assumptions it wishes to make in terms of its baseline forecast in developing its fiscal plan. The City does not make an assumption that long-term investments will operate at losses or shortfalls, per se, but the Council is informed in regards to the potential fiscal and associated operational impacts as a result of reduction in the long-term discount rate as it makes its budgetary decisions.

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): Financial risks at the enterprise level are discussed as part of the key assumptions and policy choices indicated in the City’s annual budget adopted by the City Council after public hearing, and were discussed relative to the development of a fiscal sustainability plan.

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. AGREE X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): The City adheres to the CalPERS funding methodology for UAAL and incorporates fully funding the annual actuarially required contribution to the plan in its annual budget. This is disclosed in the CAFR per GASB requirements. Those costs are incorporated as a contractually required core service cost, and as such community expenditure/revenue priorities are factored in based on funding UAAL costs first.

TRANSPARENCY: All SCC Cities do not adequately meet key requirements for transparency as defined by the GFOA. AGREE X PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree): The City’s CAFR and annual adopted budget principally meet GFOA elements for communicating financial information. The only GFOA element lacking is a searchable, live data set.

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. X AGREE PARTIALLY DISAGREE – explain the disputed portion DISAGREE – explain why Response explanation (required for a response other than Agree):