Management’s Discussion and Analysis

This section of the City and County of San Francisco’s (the City) Comprehensive Annual Financial Report presents a narrative overview and analysis of the financial activities of the City for the fiscal year ended June 30, 2001. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal.

  • The assets of the City exceeded its liabilities at the close of the most recent fiscal year by $5.59 billion (net assets). Of this amount, $533.3 million (unrestricted net assets) may be used to meet the government’s ongoing obligations to citizens and creditors.

  • As of June 30, 2001, the City’s governmental funds reported combined ending fund balances of $1.49 billion. Approximately 19% of this total amount, $277.2 million, is unreserved fund balance available for spending at the government’s discretion.

  • The City’s total long-term debt increased by $751.5 million (11 percent) during the current fiscal year. The key factors in this increase were issuances of $137.2 million in certificates of participation for the San Bruno Jail Replacement Project, $238.2 million in revenue bonds for the San Francisco Airport Improvement Project, and $298.2 million in commercial paper by the City’s enterprises including the Airport and Water Departments.

OVERVIEW OF THE FINANCIAL STATEMENTS

Government-wide Financial Statements

The statement of net assets presents information on all of the City’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether or not the financial position of the City is improving or deteriorating.

Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include public protection, public works, transportation and commerce, human welfare and neighborhood development, community health, culture and recreation, general administration and finance, and general city responsibilities. The business-type activities of the City include an airport, port, public transit system, water and power operations, an acute care hospital, a long-term care hospital, sewer operations, and various parking facilities.

Fund Financial Statements

Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements–i.e. most of the City’s basic services are reported in governmental funds. These statements, however, focus on (1) how cash and other financial assets can readily be converted to available resources and (2) the balances left at year-end that are available for spending. Such information may be useful in determining what financial resources are available in the near future to finance the City’s programs.

The City maintains several individual governmental funds organized according to their type (special revenue, debt service, capital projects and permanent funds). Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the general fund, which is considered to be a major fund. Data from the remaining governmental funds are combined into a single, aggregated presentation. Individual fund data for each of the non-major governmental funds is provided in the form of combining statements elsewhere in this report.

Proprietary funds. Proprietary funds are generally used to account for services for which the City charges customers–either outside customers, or internal units or departments of the City. Proprietary funds provide the same type of information as shown in the government-wide financial statements, only in more detail. The City maintains the following two types of proprietary funds:

  • Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for the operations of the San Francisco International Airport (Airport), Port of San Francisco (Port), Water Department/Hetch Hetchy Project, Municipal Railway (Muni), Laguna Honda Hospital, General Hospital Medical Center, Clean Water Program (Clean Water), and various nonprofit parking facilities, all of which are considered to be major funds of the City.

  • Internal Service funds are used to report activities that provide supplies and services for certain City programs and activities. The City uses internal service funds to account for its fleet of vehicles, its management information systems, and its printing and mail services. Because these services predominantly benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. The internal service funds are combined into a single, aggregated presentation in the propriety fund financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report.

Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the City. The City employees’ pension and health plans, the external portion of the Treasurer’s Office investment pool, and the agency funds are reported under the fiduciary funds. Since the resources of these funds are not available to support the City’s own programs, they are not reflected in the government-wide financial statements. The accounting used for fiduciary funds is much like that used for proprietary funds.

Notes to the Financial Statements

Required Supplementary Information

Combining Statements

GOVERNMENT-WIDE FINANCIAL ANALYSIS

Net Assets

As noted earlier, net assets may serve as a useful indicator of a government’s financial position. For the City, assets exceeded liabilities by $5.59 billion at the close of the current fiscal year.

An additional portion of the City’s net assets, $1.30 billion (23 percent) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets, $533.3 million (10 percent) may be used to meet the government’s ongoing obligations to citizens and creditors.

Changes in Net Assets

The City’s net assets overall increased by $565.6 million during the current fiscal year. These increases are explained in the government and business-type activities discussion below, and are primarily a result of revenues increasing faster than ongoing expenses.

Governmental activities. Governmental activities increased the City’s net assets by $203.6 million, thereby accounting for 36 percent of the total growth in the net assets of the City. Key factors of this increase are as follows:

  • Other local taxes including sales, hotel and utility users taxes increased by approximately $34 million or six percent during the year. The increases are a result of strong economic activity, continued high hotel occupancy rates during the first six months of the fiscal year, and significantly increased prices for electricity that occurred during some months of the fiscal year.

  • Grant and subvention revenue from state and federal sources increased by approximately three percent in the aggregate, largely related to increases of approximately $30 million in grants for various programs received by the Department of Human Services and Department of Public Health, and to receipt of new state cigarette tax revenues received for early childhood programs through California Proposition 10.

The charts above illustrate the City’s governmental expenses and revenues by function, and its revenues by source. As shown, public protection is the largest function in expense (27.9 percent), followed by human welfare and neighborhood development (20.9 percent) and community health (18.2 percent). General revenues such as property, business, and sales taxes are not shown by program, but are effectively used to support program activities citywide. For governmental activities overall, without regard to program, operating grants and contributions are the largest single source of funds (27.1 percent), followed by property taxes (22.3 percent) and other local taxes (20.6 percent). As with the statement of net assets and the statement of activities, because the GASB No. 34 reporting model significantly changes the form of financial data, the City has not restated prior fiscal year revenue and expenditure information. Year to year comparisons will be included in future reports.

Business-type activities. Business-type activities increased the City’s net assets by $362.1 million, accounting for 64 percent of the total growth in the City’s net assets. Key factors of this increase are as follows:

  • The Water Department net assets increased by $129 million, primarily due to a one-time gain on the sale of property of $126 million. The Department sold approximately 500 acres of land in Alameda County.

  • At the San Francisco International Airport, capital assets increased by approximately $460 million (13 percent) largely due to projects associated with the Near Term Master Plan, and the ongoing Air Train System project to construct a transportation network between the terminals and parking facilities. The increase in capital assets was partially offset by additional depreciation expense of $57.0 million.

FINANCIAL ANALYSIS OF THE CITY’S FUNDS

Governmental funds

As of the end of the current fiscal year, the City’s governmental funds reported combined ending fund balances of $1.49 billion, an increase of $309.3 million in comparison with the prior year. Approximately $277.2 million of this total amount constitutes unreserved fund balance, which is available for spending at the City’s discretion. The remainder of fund balance is reserved to indicate that it is not available for new spending because it has already been committed, (1) to liquidate existing contracts and purchase orders ($410.8 million), (2) to fund continued programs or projects in future fiscal periods ($586 million), (3) to pay debt service ($63.3 million), and (4) for a variety of other restricted purposes ($155.1 million).

The general fund is the chief operating fund of the City. At the end of the current fiscal year, the unreserved fund balance of the general fund was $207.5 million, while total fund balance was $479.2 million. As a measure of the general fund’s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 12 percent of total general fund expenditures of $1.8 billion, while total fund balance represents 27 percent of that same amount.

Proprietary funds

At the end of the fiscal year, the unrestricted net assets for the San Francisco International Airport were $272.3 million, the Water Department/Hetch Hetchy Project $216.6 million, the Clean Water Program $20.9 million, the Port of San Francisco $72.2 million, and the Parking Garages were $62.9 million. Three proprietary funds had deficits in unrestricted net assets–the Municipal Railway fund had a deficit of $42.7 million, and the San Francisco General Hospital and the Laguna Honda Hospital had deficits in unrestricted net assets of $9.6 million and $13.8 million respectively. The internal service funds which are used to account for certain governmental activities also had a deficit in unrestricted net assets of $3.9 million.

Fiduciary Funds

General Fund budgetary highlights

Differences between the final budget and the actual (budgetary basis) resulted in a $97.9 million decrease in total charges to appropriations. This is primarily due to the following factors:

  • A decrease in expenditures by the Department of Public Health of approximately $36.5 million, primarily associated with a reduction in the local match requirement for the SB 855 Medi-Cal disproportionate share program. This decrease is non-program related and does not result in service reductions.

  • The General Fund was able to reduce its transfers to other funds by $3 million, stemming primarily from unanticipated state revenues which were received by San Francisco General Hospital and Laguna Honda Hospital, thus allowing for reduced subsidy transfers.

During the year, actual revenues and other resources exceeded budgetary estimates by $101 million. The majority of this amount is attributable to local taxes–specifically the property, sales, hotel, and utility taxes where actual performance was greater than estimates. The City also started the fiscal year with an available fund balance approximately $21 million greater than anticipated when the fiscal year 2001 final budget was developed. The net effect of the under-utilization of appropriations and the receipt of actual revenues greater than estimates resulted in a positive budgetary fund balance of $199 million.

Capital Assets and Debt Administration

The City’s capital assets for its governmental and business type activities as of June 30, 2001, amount to $9.6 billion (net of accumulated depreciation). Capital assets include land, buildings and improvements, machinery and equipment, park facilities, roads, streets, and bridges. The total increase in the City’s capital assets for the current fiscal year was 10.33 percent (a 1.61 percent increase for governmental activities and a 8.72 percent increase for business-type activities) as shown in the table below.

Major capital asset events during the current fiscal year included the following:

  • MUNI capital assets increased by $219.9 million due to progress on the Third Street Light Rail Project, acquisition of 160 motor coaches and 25 light rail vehicles, renovation of Woods Division, and a stepped up rail replacement program.

  • Clean Water’s capital expenditures included $7.7 million to complete pump station and primary treatment upgrade projects at the Southeast Plant and to complete the Southeast Water Pollution Control Plan Anaerobic Digestion Facility.

  • Governmental activities construction in progress increased by $147.2 million due to progress on the Moscone Center Expansion, the Asian Art Museum, and various recreation and park, and public works improvement projects.

For governmental activities, no major net infrastructure assets are reported at the beginning of the year because the historical costs did not meet the threshold established in GASB 34. In fiscal year 2001, ongoing infrastructure projects are accounted for in construction in progress.

Debt Administration

During fiscal year 2001, the City’s total bonded debt increased by approximately $511.6 million. The key factors were the issuances of $137.2 million for the San Bruno Jail Replacement Project, $157.5 million for the Moscone Expansion Project, and $238.2 million for the San Francisco Airport Improvement Project.

Comparison of Indicators

The City’s ratings on uninsured general obligation bonds as of June 30, 2001 were:

The City’s enterprise activities have experienced some changes in debt ratings since June 30, 2001. On July 9, 2001, the Water Department’s underlying rating on outstanding debt was downgraded by Standard & Poor’s from AA- negative outlook to A+ stable outlook, affecting approximately $233 million of uninsured Water Department debt. Following the events of September 11th, Standard & Poor’s placed all its North American airport and airport-related facilities, including the San Francisco International Airport, on CreditWatch with negative implications. Moody’s Investors Service affirmed its A1 rating for the Airport, but revised the outlook from developing to negative, and Fitch ICBA, Inc. affirmed its AA- rating for the Airport, but revised the outlook from evolving to negative.

Since the close of the 2001 fiscal year, the City has issued additional debt of $488.5 million in Airport Revenue bonds, $50.8 million of subordinated commercial paper notes, $140 million of Water Revenue bonds, $60.8 million in Settlement Obligation Bonds for business tax obligations related to litigation against the City, $17.7 million in General Obligation bonds to finance improvements and construction of branch library facilities, and $52.7 million in Certificates of Participation and Refunding Certificates of Participation related to the financing of City office buildings.

Economic factors and next year’s budget and rates

  • The City currently faces a less favorable economic environment resulting from the decline in the technology industries. San Francisco’s unemployment rate has almost doubled from its low point of 2.9 percent in 2000 to approximately 5.4 percent by the end of June 2001 and 6.1 percent as of November 2001.
  • Sales tax revenue, with slower growth already experienced related to the economic downturn generally and layoffs of information technology workers particularly, has been somewhat aggravated by the September 11 tragedy. The City has restricted departmental spending to budget for this and other reductions in local revenue sources.
  • Revenues from airlines and concessionaires at the San Francisco International Airport, including those at the new International Terminal were already projected to be less than expected due to the declining economy. The decrease in passenger traffic following the events of September 11 has accelerated this trend.
  • The financial position of the City hospitals continues to deteriorate. Medicare and Medicaid reimbursements and insured patients cover a smaller proportion of the hospitals’ costs than in prior years, while the cost of staff, drugs, supplies and medical equipment is increasing significantly faster than the rate of inflation.

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