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HomeMy WebLinkAboutApproved Minutes - March 30, 2017Finance Committee Meeting Minutes March 30, 2017 Page 1 of 10 CITY OF NEWPORT BEACH FINANCE COMMITTEE MARCH 30, 2017 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:01 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Council Member Diane Dixon (Chair), Mayor Kevin Muldoon, Council Member Will O’Neill, Committee Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and Committee Member Larry Tucker STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Assistant to the City Manager/IT Manager Rob Houston, Harbor Resources Manager Chris Miller, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Budget Manager Susan Giangrande, Purchasing Agent Anthony Nguyen, Public Works Director Dave Webb, Public Works/Finance Administrative Manager Jaime Copeland, Fire Administrative Manager Angela Velazquez, Fire Battalion Chief Jeff Boyles, Fire Battalion Chief Brian McDonough, and Administrative Specialist to the Finance Director Marlene Burns OUTSIDE ENTITITES: John Bartel, Bartel Associates LLC and Robert Callanan, White Nelson Diehl Evans LLP MEMBERS OF THE PUBLIC: Carl Cassidy and Jim Mosher III. PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher discussed the City’s financial issues due to unfunded pension liability and lack of development fees. He suggested a future item to discuss developer fees and uses. He discussed the Council’s consideration to purchase a sewer cleaning vactor and expressed concern with the purchasing arrangement. He discussed the recent Supreme Court decision regarding Banning Ranch and lack of City announcement. Chair Dixon asked if the request for proposal was posted on the City’s website. Budget Manager Giangrande would confirm if the bid proposals were posted on Planet Bids. Assistant Manager Jacobs discussed that when comparing two agencies on the purchase of equipment it is important to note that comparisons are challenging as there are differences with equipment depending on the size of each agency which may dictate additional requirements for clean fuel use that add additional costs to the equipment purchase. Chair Dixon closed public comments. IV. CONSENT CALENDAR Finance Committee Meeting Minutes March 30, 2017 Page 2 of 10 A. MINUTES OF MARCH 16, 2017 Recommended Action: Approve and file. Committee Member Tucker suggested changing the third paragraph from the bottom on Page 6 indicating that he was asking if it was realistic for target funding to be at 100 percent. Council Member O’Neill pointed out inconsistencies of his title throughout the minutes. Committee Member Gorczyca requested that “clarified” be changed to “inquired” on Page 3 of 8. MOTION Committee Member O’Neill moved and Committee Member Gorczyca seconded a motion to approve the corrected minutes of March 16, 2017. The motion carried 6-0-1, Mayor Muldoon abstaining. V. CURRENT BUSINESS A. FISCAL YEAR 2015-2016 AUDIT REVIEW (WITH AUDITOR) Summary: The City’s external audit firm, White Nelson Diehl Evans LLP will meet with the Finance Committee to discuss the audit findings for the fiscal year ending June 30, 2016. The committee will have an opportunity to discuss any potential areas of concern and the auditors can discuss any changes in accounting standards or disclosures that were relevant for the audit year. Recommended Action: Receive and file. Finance Director/Treasurer Dan Matusiewicz introduced Bob Callanan. Bob Callanan, White Nielson Diehl Evans LLP, discussed the audit opinion noting new accounting standards including Statement 72 regarding fair value of assets categorizing the valuation methodology as levels 1, 2 or 3. He stated management had discovered that an additional discretionary pension payment was not accurately reflected on the Government Wide statements but had been corrected and did not reflect the opinion. He stated that they agreed with management, and indicated that staff assisted in completion of the audit. Jim Mosher suggested the content of the comprehensive annual financial report would inform the public and Council of future budget recommendations. Mr. Callanan explained the single audit performed on Federal expenditures. He discussed the Federal government’s efforts for uniform guidelines and more detailed compliance steps. Chair Dixon suggested the item be forwarded to the City Council as a Consent Calendar receive and file item. In response to Committee Member Tucker, Mr. Callanan stated internal control evaluation was not an objective of the audit, but that he was required to report significant control deficiencies or material weakness discovered during the course of the financial statement audit, of which there were none. Committee Member Tucker asked if cash accounts were reviewed and appropriately safeguarded. Mr. Callanan discussed review of investment policy and cash transfers. He stated independent verification of cash accounts were conducted. He stated the change of systems was reviewed in the prior year’s audit. Finance Committee Meeting Minutes March 30, 2017 Page 3 of 10 Finance Director/Treasurer Matusiewicz explained that internal controls are the responsibility of management and not the auditor. He discussed meetings with the certified internal auditor and performance of an internal assessment of internal controls. Chair Dixon asked if the internal auditing of management control could be shared with the Finance Committee. Finance Director/Treasurer Dan Matusiewicz explained that the Finance Committee were policy makers but could weigh in on the practices. He stated the assessment procedures could be summarized and presented to the Committee. Committee Member Tucker stated he had requested review of internal controls due to the change in accounting system. Committee Member Collopy stated he understood the auditor’s roll to review the financial statement, but asked if there was a plan for independent verification of internal controls. Finance Director/Treasurer Matusiewicz stated that it was not planned but that the City could have the auditor review procedures on a test basis or agreed upon procedures. Committee Member Collopy suggested reviewing the internal controls of the higher risk areas. Chair Dixon asked if it would be part of the annual audit. Committee Member Collopy indicated it would be a separate review. Committee Member Tucker agreed that reviewing of internal controls would be valuable with the change in accounting system. Finance Director/Treasurer Matusiewicz added that the review could be done in pieces but it would take time to get through all areas. Chair Dixon stated it appeared the Committee would like an audit of internal controls. In response to Mayor Muldoon, Mr. Callanan discussed potential costs for review of internal systems. He suggested determining specific concerns for review and establishing an agreed upon procedure. Committee Member Collopy suggested Finance Director/Treasurer Matusiewicz prepare a risk matrix. Chair Dixon concurred with the proposed suggestion. Committee Member Gorczyca discussed fraud issues in other cities, including Placentia. Mr. Callanan stated that the auditors revisited wire transfers and ACH transfers due to the City of Placentia. Committee Member Tucker mentioned that he was not casting judgment on employees but noted good internal controls are reliant on well-designed systems rather than the honesty of people. Finance Director/Treasurer Matusiewicz stated professional skepticism is a good management practice. Chair Dixon stated the Fiscal Year 2015-2016 Audit Review would be forwarded to the City Council as a Consent Calendar item. C.PENSION DISCUSSIONSummary: The Committee will review and discuss Stanford University Professor Joe Nation's report:"Newport Beach's Pension Plans: Forecast and Key Metrics”. Recommended Action:Receive and file. City Manager Kiff explained that Joe Nation had contacted the City, Costa Mesa and Huntington Beach to work with the cities on pension research. Finance Committee Meeting Minutes March 30, 2017 Page 4 of 10 Chair Dixon requested information on outcome and suggestions. Finance Director/Treasurer Matusiewicz presented a graphic prepared by CalPERS staff outlining the contributions ramp ups that are expected to occur over the next eight years due to the three expected changes in discount rates. He pointed out Joe Nation’s estimation on PEPRA conversions and statement that the City’s 2013 fresh start was muting impact of contribution increases that other cities are facing. He explained Footnote 9 regarding remaining working life of plan members as it relates to the remaining term of the unfunded liability. City Manager Kiff explained the consequence of employees leaving with a remaining unfunded liability. Finance Director/Treasurer Matusiewicz stated the shorter amortization periods were recommended in order to condense payments for cost savings. John Bartel explained that shorter working durations should encourage agencies to embrace shorter amortization periods. He clarified that that duration was relative to available budget. In response to Council Member O’Neill, Finance Director/Treasurer Matusiewicz explained that the length of amortization schedule was more impactful than the ramp up. He explained further that the miscellaneous plan on Page 7 did not reflect actual employee contributions. Chair Dixon asked about the average contributions to PERS. Mr. Bartel stated the average employee contributions were 7 percent for classic employees and 6.25 percent for PEPRA employees. Committee Member Tucker noted for the benefit of the new members that the City finds itself in a daunting scenario with respect to unfunded pension liabilities. Committee Member Collopy asked for the duration of the City’s longest unfunded liability amortization period. Finance Director/Treasurer Matusiewicz stated the largest portion was at 18 years and dropping. He stated that new loans would default to a 30-year amortization period. Committee Member Collopy asked if it was prudent to provide policy guidance or policy approval on reducing the amortization years or reviewing annually. City Manager Kiff stated both would be valuable and that staff’s recommendation on payments would be presented at the next meeting. Chair Dixon asked if the City could memorialize a policy. City Manager Kiff suggested a goal be established. Finance Director/Treasurer Matusiewicz suggested establishing a goal to pay down liabilities over twenty (20) year term or shorter would be desirable and consistent with the Government Finance Officers Association (GFOA) best practices and the California Actuarial Advisory Panel (CAAP) recommendations. . Committee Member Tucker expressed concern about a policy that ties the hands of Council, and would prefer that each Council have the ability to make that determination on an annual basis based upon the facts before it. Chair Dixon suggested defining a concept of affordability. Committee Member Gorczyca stated that it would be difficult to determine affordability without 20-year budget projections. Chair Dixon suggested memorializing a generic policy. City Manager Kiff stated the budget projections would be available with the new forecasting tool. Finance Committee Meeting Minutes March 30, 2017 Page 5 of 10 In response to Committee Member Stapleton, City Manager Kiff stated the cost of Joe Nation’s report was under $8,000. Finance Director/Treasurer Matusiewicz discussed the relative insignificance of a change to future benefits would have on the current unfunded liability. He referenced the Miscellaneous Plan table on Page 6 that identified a relatively small portion of the liability that could be impacted by future accrued benefits. Chair Dixon stated Safety on Page 11 was larger. Mr. Bartel discussed the comparison of the City’s projections with Mr. Nation’s report. He stated the City was more conservative. Committee Member Gorczyca asked if the Sunnyvale 20-year budget projection included a percent policy position. Mr. Bartel stated he provided a projection on funded ratios and long-term projection of contributions. He opined that it would take longer than 20 years to get to 100 percent. Finance Director/Treasurer Matusiewicz stated that having a goal to amortize future liabilities over a 15 to 20 year period was a good goal. He questioned if the Council would be willing to pay extra interest costs associated with a 30-year amortization policy rather than a 20-year amortization policy, if they understood the extra costs involved. He stated that it was prudent to provide future Councils with guidance that 30-year amortization policies were extraordinarily expensive with respect to repaying pension liabilities Mr. Bartel explained the amount of interest on 30-year amortization. He suggested preparing for adverse events. Committee Member Collopy advocated creating a policy as guidance for future Councils with the goal of paying off unfunded liability as soon as possible. Committee Member Gorczyca stated that there would be competition between pension, capital program and reserves. Finance Director/Treasurer Matusiewicz noted that it would be necessary to make an active decision to pay additional interest if the pension liability were pushed out 30 years. Chair Dixon stated the Committee would be revisiting the merits of a policy. Committee Member Tucker suggested that the Council retain flexibility but would support a policy that requires a staff analysis using 20, 25 and 30-year amortization terms. Committee Member Collopy stated his point of avoiding placing the Council in a dilemma. Mayor Muldoon stated the policy could have a sunset date. Finance Director/Treasurer Matusiewicz stated that new bases would be coming each year and it was necessary to pay down new unfunded liabilities in a timely manner. He stated there was a better return on investment paying down the unfunded liability over a short time horizon than cash funding all new capital projects. Chair Dixon suggested a general framework for future Councils to consider spending on pension, capital projects and reserves. Mr. Mosher clarified that the report cost $6000. He expressed surprise that the report did not state its purpose nor a conclusion. He asked if hyperinflation would offset retiree funds. Mr. Bartel discussed hyperinflation, causing hyper-pay raises and increased cost of living. City Manager Kiff stated the item was presented for information purposes. Finance Committee Meeting Minutes March 30, 2017 Page 6 of 10 Chair Dixon discussed total city costs on Page 16. Finance Director/Treasurer Matusiewicz stated the numbers did not reflect the 13 percent employee contributions. Mr. Bartel stated he would have to teleconference for the next two meetings and might be late to the first meeting in May. Finance Director/Treasurer Matusiewicz stated that Senator John Moorlach would be at the next meeting. B.HARBOR/TIDELANDS MASTER PLAN REVIEWSummary:Staff will present the timing, means of financing, and fiscal impacts associated with funding harbor and tidelands capital projects.Recommended Action: Receive and file. City Manager Kiff stated Public Works Director Webb was distributing a chronological list of projects. He requested that the Committee become familiar with the cost of the projects, the timing of phase-in, and how to provide payment for them. Public Works Director Webb presented a PowerPoint explaining the Harbor/Tidelands Master Plan as a planning tool, Harbor Commission consideration, seawall overtopping and capping, and dredging. Committee Member Gorczyca asked if the County or sanitation districts would engage in water quality efforts. Public Works Director Webb indicated that there might be a connection with the County of Orange based on water quality. Harbor Resources Manager Miller stated that the County was responsible for the 50 percent of the tidelands in the lower bay. Public Works Director Webb discussed the funding partnership for the upper bay. Committee Member Stapleton asked if the City could purchase its own dredging barge. Public Works Director Webb explained suction dredging and placement of material. He stated there were permitting issues. He explained potential funding sources. Mayor Muldoon questioned whether the funds were allocated. He discussed projects included in the upcoming budget including water quality compliance; Balboa Island replacement; Balboa cap; American Legion repairs; Grand Canal Phase 2 and 3; and piers, floats and gangways. In response to Mayor Muldoon, Public Works Director Webb stated that the project was proposed to replace the existing bulkhead for number 14. He stated the project was not yet budgeted. In response to Chair Dixon, Public Works Director Webb discussed the items proposed to be funded in the Fiscal Year 2017-2018 budget. He stated dredging was not proposed due to need for additional information. Chair Dixon stated funds would be taken from Tideland Funds. Finance Director/Treasurer Matusiewicz explained the operational and capital tideland funds. In response to Committee Member Tucker about the cash resources of the capital Tideland Fund, Finance Director/Treasurer Matusiewicz confirmed that the General Fund is owed Finance Committee Meeting Minutes March 30, 2017 Page 7 of 10 money from the capital Tideland Funds associated with the initial harbor dredging projects and the Marina Park harbor. City Manager Kiff explained incremental increases set aside into the capital fund. Chair Dixon asked if the numbers reflected the new rates. Finance Director/Treasurer Matusiewicz explained the chart representing incremental rent contributions, one-time infusion of surplus, and new General Fund contributions. City Manager Kiff stated a General Fund subsidy was necessary to fund the proposed seawall and dredging projects. Committee Member Tucker inquired as to whether $5 million was still going to be paid out of the General Fund to the Facilities Financing Plan in the coming year in addition to the money being transferred to the capital Tidelands Fund. City Manager Kiff stated that staff would be presenting a balanced budget including contributions to pension, Harbor and FFP. In response to Mayor Muldoon, Finance Director/Treasurer Matusiewicz expressed the importance of long term financial planning and identifying the important capital projects. Chair Dixon stated the FFP was historically funded from development fees. City Manager Kiff stated the dredging project assumed an 80 percent donation from the Federal Government. Public Works Director Webb discussed the Tidelands Commission’s efforts for seawall funding. Committee Member Tucker suggested the Committee not make recommendations on how the Council chooses to spend capital dollars, except he recommended that projects necessary to avoid financial exposure to the City have priority funding. Public Works Director Webb discussed the proposed projects to be funded in Fiscal Year 2017-2018. In response to Committee Member Gorczyca, City Manager Kiff stated that the plan was presented in inflated dollars. Committee Member Gorczyca discussed the ramp up in 2033 and 2035 and suggested planning evolve to include projects to offset the numbers. She suggested the data reflect realistic numbers. Chair Dixon stated that it was a fund balance with no spending. City Manager Kiff discussed accumulation of fund balances and difficulty with projecting after 20 years. Committee Member Tucker stated that the budget and financial plan should constantly be a work in progress, with a competition for potential uses of the capital dollars. City Manager Kiff mentioned that all of the elements would be tied together to be presented to the Committee at the next meeting. Committee Member Stapleton stated the projects were critical if the Harbor was the City’s number one asset. He encouraged the Committee to consider the process rather than the projects. D.OVERVIEW OF BUDGET FORECASTSummary: Staff will report on progress made towards the development of the Long Range Fiscal Forecastmodel. Recommended Action: Finance Committee Meeting Minutes March 30, 2017 Page 8 of 10 Receive and file. Deputy Finance Director Montano demonstrated various components of the model including growth assumptions. Chair Dixon asked about the 3 percent annual growth of maintenance and repair. City Manager Kiff stated the costs were ratcheted down to cost of living. In response to Committee Member Collopy, City Manager Kiff explained that staff was assisted on revenue estimates by an outside advisor. Deputy Finance Director Montano stated HDL assisted with forward projections and staff worked together on other assumptions. City Manager Kiff stated the assumptions were based on staff’s professional judgement. Deputy Finance Director Montano discussed growth factors and assumptions. Finance Director/Treasurer Matusiewicz explained that some were more relevant than others, such as insurance claims. City Manager Kiff indicated that a 1 percent change in property tax would have a huge impact. Deputy Finance Director Montano continued reviewing the model. Committee Member Collopy asked how Item No. 207 would impact the budget. City Manager Kiff stated that the spreadsheet could be built out. Committee Member Collopy asked if it would show the impact on each year. City Manager Kiff stated that the model showed mild aggressiveness for pension and the Harbor, with a slight ratchet back on FFP based on Council direction. Finance Director/Treasurer Matusiewicz continued reviewing the model modifying the numbers demonstrate the sensitivity model when different assumptions are selected. Chair Dixon stated the models would be a useful tool for planning and decision-making. Committee Member Tucker noted that the Committee would need to provide staff with any additional scenarios it would like run through the model. Committee Member Gorczyca stated that the Council would be able to determine its priorities. Deputy Finance Director Montano requested input on the Committee’s preferred scenarios. He explained the flexibility and interaction capabilities of the models. He stated the models would be populated with actual data once the budget proposal was complete. In response to Chair Dixon, Deputy Finance Director Montano explained the relation between the new ERP system and Excel-based Long-Range Fiscal Forecast model. Chair Dixon stated the model was useful. Committee Member Gorczyca concurred and asked if the budgeted and filled staff positions could be reflected. Finance Director/Treasurer Matusiewicz stated that the model is geared to depict budget numbers, not staffing counts. Finance Director/Treasurer Matusiewicz stated that there were currently approximately salary savings assumption equal to 1.5 of budgeted salaries. Budget Manager Giangrande stated Police was overstaffed due to turnover. Finance Director/Treasurer Matusiewicz explained that Fire might have overtime staffing. Adding that there was usually a $1 million salary savings. Committee Member Gorczyca inquired as to what produced salary savings. Finance Committee Meeting Minutes March 30, 2017 Page 9 of 10 Jim Mosher expressed concern regarding the multiple assumptions in the budget forecast and suggested alternative means to determine reliable growth assumptions. Finance Director/Treasurer Matusiewicz reminded the Committee that budgets were not necessarily built on an expected forecast but rather included a safety margin for adverse results. Mayor Muldoon left the meeting at 5:17 p.m. E. REVIEW OF FINANCE COMMITTEE WORKPLAN Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Receive and file. Committee Member Tucker suggested the Committee determine a date for formal recommendation to the Council on the operating budget. Committee Member Gorczyca requested a status update on the Reserve Study and Committee discussion on Section 115 funds. Jim Mosher expressed concern that the Committee would be considering the budget at only two meetings. He asked about the proposed item for the Committee to provide direction to the auditors. Chair Dixon stated the budget could be considered by the Committee on April 13, April 27, May 11, and May 25. Committee Member Tucker discussed the proposed consideration of the budget by the Finance Committee. Finance Director/Treasurer Matusiewicz suggested placeholders on each of the upcoming meetings. In response to Committee Member Tucker, Deputy Finance Director Montano anticipated the Fiscal Year 2017-2018 base operating budget to be in the range $200-210 million. Committee Member Tucker suggested a third meeting date be reserved for budget consideration if it turns out to be needed. Committee Member Gorczyca suggested consideration of parameters on when project financing comes before the Committee, such as the Discovery Cube. Committee Member Tucker questioned whether the Committee needed to review projects where the City had no exposure. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON- DISCUSSION ITEM) Mayor Dixon suggested the Committee discuss use of the Section 115 Trust at a future meeting. VII. ADJOURNMENT The Finance Committee adjourned at 5:27 p.m. to the next regular meeting of the Finance Committee on April 13, 2017.