City Gets Strong Financial Audit Report

The City of Hermosa Beach wrapped up fiscal year 2024-25 with a clean bill of financial health from its independent auditors, a growing asset base, and a General Fund that spent less than it took in. But a closer reading of the Annual Comprehensive Financial Report, due to be presented to the City Council this week, reveals genuine operational strength sitting alongside structural pressures that residents should understand.

The City's financial year runs to June 30th, so this audit reflects a picture that is almost a whole year old. City Council and staff have already indicated in recent discussions that the financial picture is tightening. There is a growing list of unfunded future projects, and contract negotiations with LA County for fire and lifeguard services are looming.

The Hermosa Review · Data briefing

FY 2024–25 city finances at a glance

Year ended June 30, 2025 · Audit opinion: clean (unmodified) · Auditor: Gruber and Lopez, Inc.

Total net position

$92.5M

+$4.5M year-on-year

General Fund surplus

$4.6M

revenues over expenditures

Pension liability (CalPERS)

$58.2M

down $5.1M from FY24

TOT revenue

$4.76M

hotel & short-term rental levy

Capital invested

$10.4M

streets, sewers, Clark Bldg

Pension context: The $10M unrestricted deficit is driven almost entirely by a GASB 68 accounting requirement to record the $58.2M CalPERS liability on the balance sheet. Exclude pension and net position is approximately $150.8M. The liability itself improved by $5.1M in FY25.

Where the money comes from

Total revenues: $65.8M · Government-wide, FY25

Property taxes 40% Other taxes 20% Charges for services 18% Grants 15% Other 6%

Where the money goes

Total expenses: $61.4M · Government-wide, FY25

Revenues vs expenses: two-year view

Government-wide totals ($M) · Expenses grew 11% in FY25 vs 5% revenue growth

Revenues Expenses

Pressure points to watch

County contract renegotiations

Fire and lifeguard contracts with LA County are due for renewal. Even a 10% increase could add $2–3M annually to public safety costs — which already represent 56 cents of every General Fund dollar spent.

Deferred maintenance backlog

A citywide Facilities Condition Assessment is listed as forthcoming — meaning the full backlog has not yet been formally quantified. Known items include city-wide roof repairs, police facilities, Lot C, and pier inspections.

Expense growth outpacing revenue

Expenses grew at more than twice the rate of revenues in FY25. The street rehabilitation cycle drove the Public Works spike and should normalise, but the gap bears watching across the FY26-27 budget cycle.

Unrestricted deficit deepening

Worsened from −$4.4M to −$10M, almost entirely pension-driven rather than operational. Warrants annual monitoring alongside pension liability progress.

What the city owns and owes

Total net position stood at $92.5 million at year-end, up $4.45 million from FY 2024. That improvement represents a significant slowdown from the $7.39 million gain the prior year, as expenses grew 11.2 percent while revenues grew just 5.2 percent.

The most striking figure is the unrestricted net position: negative $10 million, worsening from negative $4.4 million. This is almost entirely a pension accounting artefact. Hermosa carries a net pension liability of $58.2 million, recorded under a requirement that forces cities to put CalPERS obligations directly on the balance sheet. Exclude that liability and adjusted net position is roughly $150.8 million. The city is not in crisis territory on this front, but the liability's servicing consumes a meaningful share of the annual operating budget.

The General Fund

The General Fund brought in $55 million in revenues and spent $50.4 million, leaving $4.6 million of revenues over expenditures. Audited unspent funds totalled $2.39 million at year-end; $317,833 was transferred to the Insurance Fund and the remaining $2.07 million assigned toward the FY 2026-27 budget. The city maintained its 20 percent contingency reserve throughout the year.

Property taxes came in at $26.3 million government-wide, up roughly 5.4 percent. The transient occupancy tax generated $4.76 million, and TOT remains a very important factor going forward as the city weighs potential short-term vacation rental income and the possibility of additional hotel development in Hermosa.

Where the money went: public safety and the contracts that underpin it

Public safety is the single largest spending category at just under $28 million in the General Fund. Hermosa does not operate its own fire department or beach lifeguard service – both are provided under contracts with Los Angeles County, whose Lifeguard Division tracked beach attendance swinging from 51,650 in November 2024 to 536,000 in July 2024, reflecting seasonality impact.

Both contracts are due for renegotiation. County costs have risen sharply, driven by pension, wage, and benefits pressures that flow directly into the rates charged to contract cities. A meaningful increase in either contract would land as a significant step-up in the city's largest spending category. Even a 10 percent increase in county contract rates would add roughly $2 to $3 million to annual expenditure -- absorbing most or all of the current General Fund operating surplus in a single budget cycle. That is not a prediction of crisis, but it is the single most consequential near-term financial variable not captured in these audited numbers.

Capital spending

Total capital outlay across all governmental funds reached $10.4 million. The biggest items were Clark Building Renovations at $3.2 million, Annual Street Improvements at $3 million, and Annual Sewer Improvements at $2.2 million. That spending drove combined governmental fund balances down $3.95 million to $45.5 million -- a deliberate drawdown of capital reserves, not an operational warning sign. The Capital Improvement Fund ended the year at $13.1 million, with $841,393 designated for City Yard construction.

The longer-term pressure points

Four structural issues deserve ongoing attention.

The first is the county contract exposure. It is the most immediate and least predictable cost risk on the city's horizon.

The second is deferred maintenance. The ACFR does not publish a backlog figure -- and a Citywide Facilities Condition and Needs Assessment is listed among capital projects still to be completed, meaning the city does not yet have a comprehensive accounting of what it would cost to bring all facilities to a state of good repair. The queue of already-identified work includes City Wide Roof Repairs, Police Facilities Improvements, a new Corporate Yard Facility, Parking Structure (Lot C) Assessment, Pier Structural Inspection and Assessment, and Kelly Courts Improvements, alongside the annual street and sewer cycles. The Facilities Condition Assessment, when it arrives, is likely to reframe how residents and elected officials think about medium-term capital needs and the revenue required to meet them.

The third is the pace of expense growth. Public Works costs jumped 45 percent due to the street rehabilitation program and should normalise. But if underlying expense growth continues to outpace revenue growth, the General Fund surplus will compress regardless of the contract outcome.

The fourth is pension obligations. At $58.2 million, CalPERS remains the city's largest single liability by a wide margin. If investment returns underperform the 6.9 percent discount rate assumption over the long run, required contributions will rise.

The bottom line

The audit is clean, the General Fund is operating with a surplus, pension obligations are improving, and the city is investing in infrastructure rather than deferring it. The questions worth watching are whether the county fire and lifeguard contract renegotiations land at a cost the General Fund can absorb, what the Facilities Condition Assessment reveals about the maintenance backlog, and whether TOT and property tax revenues hold up strongly enough to support both ongoing operations and the financing demands of the pier. The FY 2025 report does not raise red flags – but it marks the baseline against which those pressures will be judged. The 2026-27 budget cycle is about to begin, and the squeeze is most definitely on.