Finance committee accepts unmodified FY2025 audit; staff warns reserves declining

The Santa Barbara City Finance Committee accepted an unmodified independent audit for fiscal year 2025 and approved staff’s recommendation by unanimous voice vote.

City finance staff presented the government‑wide financial statements and told the committee that while the city’s net position increased year over year, much of that improvement is tied to capital assets and legal or policy restrictions. Staff reported an approximate $24,000,000 increase in government net position compared with the prior year, total governmental revenues of about $188,800,000 and an increase in tax revenues of roughly $7.3 million.

The audit was presented by the city’s independent auditor, who said the firm’s opinion for FY2025 is unmodified and requires no changes. The auditor described that opinion as the highest level of assurance the firm can provide and noted there were no reportable deficiencies requiring modification in the audit opinion.

Why it matters: an unmodified opinion signals that the city’s financial statements are presented fairly under applicable accounting standards, which can lower borrowing costs and support public confidence. Committee members were, however, urged to focus on liquidity and reserves: staff said total city assets rose by about $166,000,000, but those are largely capital assets that are not readily convertible to cash for near‑term operating needs.

Staff detail and concerns
Staff outlined the general fund and enterprise fund positions in more detail. They reported a committed fund balance of approximately $50,600,000 and an unassigned fund balance reported at about negative $11,800,000, reflecting a deficit relative to the city’s previously targeted reserve level. Fiscal year 2025 produced an operating surplus of approximately $4,800,000 that will contribute to rebuilding reserves, but staff emphasized the city’s reserves have been declining for just over two years and are projected to continue decreasing absent corrective action.

Enterprise funds showed mixed results: most closed the year with positive net positions, but the Clean Energy fund and the downtown parking fund performed worse than in the prior year. Staff said the downtown parking fund currently shows a negative balance of just over $2,000,000 and that several enterprise funds remain below policy reserve targets.

Liabilities and risk management
The presentation also called attention to growing liabilities, chiefly pension and other post‑employment obligations. Staff said the city continues to use a Section 115 trust and related strategies to build assets to help manage long‑term pension exposure and indicated a plan to transfer certain assets to CalPERS over time. The city’s self‑insurance fund was described as underfunded and identified for attention in the next budget cycle.

Operational cost drivers discussed included rising insurance premiums and energy and maintenance costs; staff said property insurance costs have increased by roughly 20% annually over recent years. Officials noted large capital programs — including a recently financed police station and related projects totaling more than $100 million — make favorable debt terms and clear reserve management important to the city’s fiscal strategy.

Council response and next steps
Councilmember Armón thanked staff for the clean audit and asked how a strong net position can coexist with short‑term deficits. Staff explained the difference between accounting net position (which includes non‑liquid capital assets) and liquid reserves available for emergencies or short‑term needs and said that distinction underlies the committee’s focus on reserve policy during the upcoming budget process.

The committee moved, seconded and approved the staff recommendation to accept the audit and related report by unanimous voice vote of members present. Staff said the committee will continue to receive quarterly financial updates, plans a budget‑workshop session in early April and expects to return to the committee in May with updated projections and the third‑quarter report.

(Authorities cited during the presentation included the City Charter requirement for an annual financial report and staff references to use of a Section 115 trust and CalPERS for pension asset management.)