HomeMy WebLinkAboutFinance Committee Agenda - October 12, 2017CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA - Final
100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D
Thursday, October 12, 2017 - 3:00 PM
Finance Committee Members:
Diane Dixon, Chair / Council Member
Kevin Muldoon, Mayor
Will O'Neill, Council Member
William Collopy, Committee Member
Patti Gorczyca, Committee Member
Joe Stapleton, Committee Member
Larry Tucker, Committee Member
Staff Members:
Dave Kiff, City Manager
Carol Jacobs, Assistant City Manager
Dan Matusiewicz, Finance Director / Treasurer
Steve Montano, Deputy Director, Finance
Marlene Burns, Administrative Specialist to the Finance Director
The Finance Committee meeting is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that
the Finance Committee agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that
the public be allowed to comment on agenda items before the Committee and items not on the agenda but are within
the subject matter jurisdiction of the Finance Committee. The Chair may limit public comments to a reasonable amount
of time, generally three (3) minutes per person.
The City of Newport Beach’s goal is to comply with the Americans with Disabilities Act (ADA) in all respects. If, as an
attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, we will
attempt to accommodate you in every reasonable manner. Please contact Dan Matusiewicz, Finance Director, at least
forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is
feasible at (949) 644-3123 or dmatusiewicz@newportbeachca.gov.
NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT
Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance
Department 24 hours prior to the scheduled meeting.
I.CALL MEETING TO ORDER
II.ROLL CALL
III.PUBLIC COMMENTS
Public comments are invited on agenda and non-agenda items generally considered to be
within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments
to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for
the record. The Finance Committee has the discretion to extend or shorten the speakers’ time
limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all
speakers. As a courtesy, please turn cell phones off or set them in the silent mode.
IV.CONSENT CALENDAR
MINUTES OF SEPTEMBER 14, 2017A.
Recommended Action:
Approve and file.
DRAFT MINUTES 091417
October 12, 2017
Page 2
Finance Committee Meeting
V.CURRENT BUSINESS
INVESTMENT PERFORMANCE REVIEWA.
Summary:
Staff and/or investment advisor will provide a brief economic update, review the
performance of the City's investment portfolio and potential strategies moving
forward.
Recommended Action:
Receive and file.
STAFF REPORT
INVESTMENT ADVISOR CONTRACT DISCUSSIONB.
Summary:
Committee member Gorczyca requests that the Finance Committee reconsider its
recommendation to award investment advisor contract, solely, to Chandler Asset
Management.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
DEBT POLICYC.
Summary:
Staff and a municipal advisor from KNN will present a brief history of debt issued by
the City and discuss proposed changes to current Debt Policy F-6. Most proposed
changes are required per Senate Bill No. 1029 (SB 1029), but the Committee may
also wish to address any issues concerning the City’s debt policy. Note that SB 1029
changes require approval by City Council before any new debt can be issued
including pending assessment district financings.
Recommended Action:
Review, comment and provide further staff direction, if appropriate.
STAFF REPORT
ATTACHMENT A
October 12, 2017
Page 3
Finance Committee Meeting
BUDGET AMENDMENTSD.
Summary:
Receive and file a staff report on the budget amendments for the prior quarter.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
PENSION DISCUSSIONE.
Summary:
Agenda item reserved for discussion regarding the status of the City's pension
liability, payment strategies, CalPERS policy updates and or advocacy efforts.
Recommended Action:
Discussion if applicable.
LONG-TERM FINANCIAL FORECASTF.
Summary:
Review of potential forecast scenarios that may be considered in the development of
the FY 2018-2019 budget and beyond. Staff will provide a brief revenue update,
review pension funding scenarios including less aggressive payment plans and other
financial updates that are relevant to the current and future budgets.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
REVIEW OF FINANCE COMMITTEE WORKPLANG.
Summary:
Staff will review with the Committee the agenda topics scheduled for the remainder
of the calendar year.
Recommended Action:
Receive and file.
ATTACHMENT A
VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS
WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR
REPORT (NON-DISCUSSION ITEM)
VII.ADJOURNMENT
Finance Committee Meeting Minutes September 14, 2017
Page 1 of 11
CITY OF NEWPORT BEACH FINANCE COMMITTEE SEPTEMBER 14, 2017 MEETING MINUTES I. CALL MEETING TO ORDER
The meeting was called to order at 3:00 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), Council Member Will O'Neill,
Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and Committee Member Larry Tucker
ABSENT: Mayor Kevin Muldoon and Committee Member William Collopy (Excused)
STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance
Director/Treasurer Dan Matusiewicz, Deputy Director, Finance Steve Montano, Budget Manager Susan Giangrande, Senior Budget Analyst
Shannon Espinoza, Budget Analyst Tam Ho, Budget Analyst Katherine Warnke-Carpenter, and Administrative Specialist to the Finance Director
Marlene Burns
MEMBERS OF THE PUBLIC: Planning Commissioner Lauren Kleiman and Mr. Jim Mosher
III. PUBLIC COMMENTS
Chair Dixon opened public comments.
Jim Mosher spoke regarding citizen appointees to the Committee and reported City Council has
extended their terms of service to June 30, 2018. In terms of arrangements regarding the association with Council Members, the Harbor Commission was told to discontinue those
arrangements, due to concerns by the City Manager and City Attorney relative to serial meetings. Mr. Mosher reported the City budget was adopted three months ago, but is not available on the
City's website. Additionally, he referenced a previous City Council Closed Session Item B, regarding overtime compensation, the possibility of it being miscalculated and the potential
employees may be due back overtime pay that may affect the budget substantially. He noted he was impressed by the open budget overview.
Finance Director Dan Matusiewicz reported the City's new year budget is included in the City's
portal but printed summaries have not been generated. The live budget is available through Socrata in the City's portal.
Council Member Will O'Neill confirmed that terms for Finance Committee Members have been
extended. He made a distinction between the Harbor Commission and the Finance Committee relative to City Council arrangements and acknowledged discussion in Closed Session regarding
overtime compensation but noted he is unable to comment, as it is a Closed Session matter.
At Chair Dixon's request, Finance Director Matusiewicz explained the case came out of the Ninth Circuit Court of Appeals (Flores v. City of San Gabriel) and that it was a surprising change of
direction across the State of California. He stated staff believes the Court overreached, in terms of assessed liability, the City has accrued a liability that management believes to be sufficient to cover
the potential liability, but it is still unclear how the case will be ultimately resolved.
Finance Committee Meeting Minutes September 14, 2017
Page 2 of 11
Chair Dixon closed public comments. IV. CONSENT CALENDAR A. MINUTES OF JUNE 29, 2017 Recommended Action:
Approve and file.
Chair Dixon noted corrections to the minutes as submitted by Mr. Jim Mosher.
Committee Member Gorczyca thanked Mr. Mosher for the corrections he submitted to the minutes and agreed when the minutes indicate, "in response to someone's question," the point made is lost.
MOTION: Committee Member Gorczyca moved, and Council Member O'Neill seconded, to
approve the June 29, 2017, Finance Committee Minutes, as corrected. The motion carried, unanimously.
V. CURRENT BUSINESS A. INVESTMENT ADVISOR CONTRACT DISCUSSION AND RECOMMENDATION Summary: Staff respectfully requests that the Finance Committee reconsider its recommendation to award
contracts to two investment advisors and award a contract solely to Chandler Asset Management (Chandler) on the basis that the City's invested assets will remain sufficiently
diverse and safe under one investment advisor; the use of one investment advisor is efficient, less costly and appropriate for a City of Newport Beach's size; and Chandler manages assets
for several agencies with assets in excess of $100 million and has shown greater responsiveness to the City's needs over the years. Recommended Actions:
(1) Retain the services of Chandler Asset Management as the City's sole investment advisor and enter into a five-year contract based on the firm's proposal for an annual savings of more
than $25,000 per year as compared to a two-investment advisor arrangement and (2) Terminate the existing investment management contract with PFM Asset Management. Finance Director Matusiewicz provided background information including the extensive Request
for Proposals (RFP) process to determine the number of financial advisors the City should have and negotiated fees. Subsequently, the matter was placed on hold and is being presented again
for the Committee's consideration. He introduced and deferred to Terry McCall of Portfolio Services for Government, LLC, for a presentation.
Terry McCall, Portfolio Services for Government, LLC, provided information about his company and
listed his experience. He addressed the scope of his work for the City of Newport Beach, including the RFP process for Financial Advisors. Mr. McCall commented on the respondents, evaluation,
ranking, interview and selection of candidates.
Committee Member Gorczyca asked regarding the presumptions made in terms of the applicant's proposed fees and the assumed level of assets under management when comparing fees. Mr.
McCall noted the original assumption was based on 185 million assets under management. He added applicants had the ability to negotiate fees and could restate their proposals.
Finance Director Matusiewicz explained one of the reason staff likes to discuss flexibility in the fee
schedule is the City would like to compensate investment advisors at the same level, when the City employs more than one investment advisor.
Finance Committee Meeting Minutes September 14, 2017
Page 3 of 11
Mr. McCall addressed public trust, assets under management, and reported both chosen firms are
reliable, have municipal and public agency accounts, and do good work. They both do some private business, but primarily focus on the public sector.
Discussion followed regarding the number of accounts added by Chandler Asset Management in
the last two years.
Mr. McCall addressed account closures for Chandler and PFM and overall performance in the short- and long-term.
Committee Member Gorczyca commented on the two different company profiles and stated when
comparing the two, there cannot be a direct application. Mr. McCall agreed, noted some differences in the two and commented on the accounts of each. He expressed challenges in
comparing apples-to-apples, but reported that he and staff felt the City only needs one investment advisor.
Committee Member Larry Tucker asked regarding the advantage of having a five-year contract and
Mr. McCall reported cities, counties and government typically do not want to extend contract terms for more than five years and prefer to go out to bid towards the end of a contract.
Committee Member Tucker commented on the possibility of avoiding the RFP process and Finance Director Matusiewicz reported there is a thirty-day out clause on virtually all contracts. It is standard
on most contracts except those requiring a large capital investment.
Committee Member Gorczyca reported in her experience, she saw more contracts with two- or three-year terms and one-year renewal, after evaluation of benchmarks.
Chair Dixon reported the Finance Committee gets monthly reports and reviews contracts once a
year.
Committee Member Tucker asked if the City would have to go through the RFP process if it chose to terminate the contract and Finance Director Matusiewicz reported bids are good for eighteen
months and staff would terminate one and execute a new contract with another. Beyond eighteen months, the City would have to initiate an RFP process, which would take between four-to-five
months, plus contracting.
Committee Member Gorczyca noted that would be one advantage of having two advising entities, especially in terms of market and organizational changes. Mr. McCall stated in his experience,
having one investment advisor worked well through various changes.
Committee Member Gorczyca reported when there are changes, having two advisors would ensure uninterrupted service. Mr. McCall stated the possibility of that happening is slim.
Finance Director Matusiewicz stated in such cases, the City could contract with an interim advisor
on an emergency basis
Mr. McCall stated the City would be better off using one advisor rather than two and supports staff recommendation to contract with Chandler.
Chair Dixon reported the study was a year ago and asked whether anything had changed. Mr.
McCall stated nothing has changed since then.
Finance Director Matusiewicz stated that the City will still maintain a diversified portfolio, will have the opportunity to measure performance against benchmarks, and noted the strategies between
Finance Committee Meeting Minutes September 14, 2017
Page 4 of 11
both firms are similar. He addressed long-term returns in income and total returns for Chandler
and PFM and noted they are neck-and-neck.
Committee Member Stapleton commented on the possibility of over-diversification by having two firms.
Finance Director Matusiewicz added there is not great risk in using only one firm, investment
advisors do not hold the securities; the investments are held by the Bank of New York, registered in the City's name and investment advisors do not have access to them, other than how they invest
them. The City independently monitors them on how they are invested. The City does not rely on information from advisors but rather directly from information that derives from its custodial bank,
the Bank of New York. The City receives its market pricing on investments, independently from investment advisors, giving the ability to review three different pricing sources as well as securities'
ratings and accounting and investment activities which are reconciled, daily. He noted it is less efficient to have two investment advisors and reported staff has more flexibility working with one,
in terms of strategies. He addressed the relative size of other cities compared to Newport Beach. In terms of flexibility, he reported, some of the City's reserves have a long investment horizon while
others need to be very liquid, and because of recent opportunities to beat the Local Agency Investment Fund (LAIF) returns, the City is pulling money out of its short-term portfolio and
matching asset maturities with specific liabilities come due to improve performance at both ends of the spectrum. Chair Dixon asked regarding the source of the data and Finance Director
Matusiewicz explained that most data is derived directly from the custody bank and analyzed through a third-party software product. He also made reference to a monthly conference call to
review cash flow needs.
Chair Dixon stated that requires staff to be intimately involved.
Committee Member Stapleton asked regarding Chandler's responsiveness and Finance Director Matusiewicz explained they are more responsive and accessible than PFM.
Brief discussion followed regarding pricing tiers.
Chair Dixon noted the City has about $250 million total of which $180 million goes into two accounts
and the difference goes to LAIF.
Finance Director Matusiewicz reported staff is starting to look at alternatives to LAIF as part of the overall strategy. He stated staff thought it was streamlining operations and reducing costs and
former Finance Committees wanted the City to reduce the number of investment advisors.
Committee Member Stapleton noted servicing costs. He asked how decisions are implemented in terms of percentages to apply to the various investments, Finance Director Matusiewicz stated the
contract's investment policy statement is the driving document.
Council Member O'Neill stated this presentation changed his mind.
Brief discussion followed regarding the City of Anaheim doing its own investing.
Committee Member Tucker stated he accepts staff's recommendations but noted he is uniquely unqualified to comment, but it seems reasonable to him. He liked the fact that the City has a way
to correct itself if it is determined it was heading in the wrong direction.
Committee Member Gorczyca reported the City of Newport Beach is a unique public agency, partly prompted by the Orange County bankruptcy, and has felt it important to have multiple investment
advisors. She added PFM has had a relationship with the City for over 25 years. She noted diversification is important and having two advisors provides a built-in competition with incentives
to perform. She addressed market changes and felt it important to have different sources of advice.
Finance Committee Meeting Minutes September 14, 2017
Page 5 of 11
Relative to servicing, PFM and Chandler have different business models but provide stability in
terms of future changes in the market and circumstances.
Committee Member Stapleton pointed out that by having one advisor, the City will save 20 percent of the total cost of the portfolio. He addressed benchmarking and stated it is all about asset
allocation and noted it is almost impossible to compare two different firms. If it turns out that Chandler is not performing as agreed, he would rely on staff to initiate the thirty-day termination
process.
Chair Dixon opened public comments.
Jim Mosher expressed agreement with the recommendation, especially if staff is comfortable and the City saves money.
Chair Dixon closed public comments.
Chair Dixon noted her past advocacy for two advisors but has changed her mind, based on
performance and cost of service. She reported she was surprised at PFM's disinclination to negotiate fees, but in terms of performance and efficiency, she was comfortable with staff's due
diligence and regular updating to keep the City on track. MOTION: Committee Member Stapleton moved, and seconded by Committee Member Tucker, to recommend that City Council (1) Retain the services of Chandler Asset Management as the City's
sole investment advisor and enter into a five-year contract based on the firm's proposal for an annual savings of more than $25,000 per year as compared to a two-investment advisor
arrangement and (2) Terminate the existing investment management contract with PFM Asset Management. The motion carried with Committee Member Gorczyca, opposed.
B. REVIEW OF PUBLIC EMPLOYEES RETIREMENT SYSTEM (PERS) VALUATION Summary: Staff will discuss the latest actuarial valuation, changes to actuarial assumptions, review
investment returns, the potential impact of future rates, and the results of employee cost sharing. Recommended Action:
Receive and file.
Finance Director Matusiewicz reported last year the City's unfunded liabilities ran in the $275 million range and this year it increased to $321 million. Staff estimated the change in discount rate is
$16.5 million and there will be approximately $25 million as a credit forthcoming due to positive investment experience of 11.2 percent for fiscal year ended June 30, 2017. During 2017-2018, the
City will pay $8.9 million more than the required payments, which should drive down principal. Looking forward to future discount rate reductions, he reported the target amount to payoff is about
$324 million.
Council Member O'Neill asked regarding revenue estimates and Finance Director Matusiewicz reported property taxes are great but staff has not yet reviewed the Transient Occupancy Tax
(TOT), which should be available after the summer, and sales taxes underperformed last year, but property taxes more than made up for the shortfall. He added this is an open discussion and he is
not seeking any decision at this point.
Committee Member Gorczyca noticed property tax bills have gone up steadily in the last three years, explained the rationale and stated the rate may be lower next year. Finance Director
Matusiewicz pointed out the 2017-2018 property tax levies were already set based on January 1, 2017, market values which increase more than what had been projected.
Finance Committee Meeting Minutes September 14, 2017
Page 6 of 11
Regarding a comparison of prior numbers, Chair Dixon noted $25 million is the expected payment
in 2018-2019. Finance Director Matusiewicz clarified that is the City's minimum, required payment. The 2017-2018 budget is $33.8 million. He stated that minimum payment will steadily ramp up well
beyond $33.8 million and the intent is to get ahead of it.
Finance Director Matusiewicz addressed things that play into CalPERS’ decisions and the Board is set to make many decisions by December 2017. He suggested proceeding with caution and
noted the need to see the whole picture. Speculating, he indicated there is likely to be a lower inflation assumption and presumed it will offset the last phase of discount rate changes.
Committee Member Tucker asked for clarification and Finance Director Matusiewicz stated the
gross investment return less inflation will equates to the real rate of return. The current rate is 2.75 percent. John Bartel, Bartel Associates, LLC, added that all seven percent rates of return are not
created equally and explained the calculations. Committee Member Tucker stated the Committee has not spent any time on how the final number is determined; the actuarial number as to what the
City's obligations are. That number has an inflation number to keep the benefits constant. Mr. Bartel added it includes salary increases on which the benefits are based. He reported just because
the actuarial staff makes a recommendation does not mean the CalPERS Board will approve it. He believed there is pressure on the Board to not increase the real rate of return from 4.25 percent to
4.5 percent.
Chair Dixon commented on the inflation rate and noted the rate of return is a direct result of how the investment is managed by CalPERS. Mr. Bartel explained rate of return can be measured
historically, adding that going forward, it is an assumption with two components including what the CalPERS Board thinks inflation will be and what they think they will earn, above inflation, in the
long run. Chair Dixon noted it is subjective in terms of projecting future rate of return because of certain constraints imposed on their investment policy.
Committee Member Gorczyca added it is also based on risk-taking, and there are many other
factors influencing that number.
Finance Director Matusiewicz reported last year he stated CalPERS may have overshot their mortality projection but warned that staff now believes they are unlikely to roll back the increase in
mortality projections.
Mr. Bartel opined that CalPERS staff spoke sooner than they should have and concluding that CalPERS will maintain a similar level of improvement. People are living longer and CalPERS is
anticipating it and building that into their numbers.
Finance Director Matusiewicz added that the previous increase to mortality assumption was already factored into their assumption losses and had hoped for relief if CalPERS were to roll it back, but it
is not likely to happen now. Finance Director Matusiewicz said he anticipated that the City would be budgeting between $32 to $35 million towards unfunded liabilities in 2018-2019.
Chair Dixon stated this is where the City's long-term financial planning tool will come into play
because the City will be able to play with the numbers.
Finance Director Matusiewicz stated this is only one of many options in the City's financial plan, along with other objectives for the City to meet in its long-term goals. He added there may an
opportunity for the City to lower its minimum required contribution by taking credit for significant positive investment gains credits sooner than later. Investment gains are normally amortized into
the rate over a 30-year period. He noted there is a range of budget options to consider and suggested if the City were to continue a 15-year pace, the City could lower its payment to $33.1
million. He addressed Fresh Start, the effect of other discretionary payments and stated, excluding the Fresh Start base, the remaining bases may net to a credit position as of June 30, 17. He
reported more discussions will ensue with the budget.
Finance Committee Meeting Minutes September 14, 2017
Page 7 of 11
Mr. Bartel reported his company's projections and opined the City should wait and see to determine what CalPERS will do and by the end of the calendar year, the City will have a better feel for the
rate of return and what CalPERS will do. He highlighted Item No. 6 in the staff report and suggested the Finance Committee review it closely during a future Finance Committee meeting. The City's
actions will revolve on what CalPERS is going to do, so presently it is all speculation. He addressed a CalPERS demographic experience study noting they have been quiet about it, they are not
expecting any changes, and stated early retirements can be problematic.
Chair Dixon stated they are problematic because they are on pension for longer.
City Manager Dave Kiff commented on a conversation he had with a person running a large public safety agency who said they are actively recruiting immediate retirees because there are no good
candidates coming in at the bottom level.
Chair Dixon offered the scenario of a young person working for the Police Department for ten years and going to work for another CalPERS agency, at a higher salary. Mr. Bartel reported the City
would be responsible for the benefit formula they received during the period they worked, for using the service that they worked. The compensation used to calculate that benefit is reciprocal. The
City would still have a ten-year commitment, but at a higher salary. Mr. Bartel explained the City's liability is split between the participating agencies and the type level of benefit each agency had
offered.
Chair Dixon asked why the City of Newport Beach is financially responsible for the benefits at a higher salary rate than what was paid by the City. Mr. Bartel explained reciprocity exists to
encourage movement from one agency to the next. Chair Dixon felt the taxpayers of Newport Beach should not be responsible for the pension of a past employee, making a fraction of what
they ended up with.
Mr. Bartel clarified the City would pay a portion of the benefit, based on the City's formula and based on the salary at retirement.
City Manager Kiff reported the City assumes an employee will stay in Newport Beach and will make
a progression through the steps of promotion, while it sets aside money.
Chair Dixon opened public comments.
Jim Mosher noted the City also hires people who have worked for other agencies.
Chair Dixon closed public comments.
Mr. Bartel suggested discussing the issue further at a future meeting. C. ENGAGING CALPERS Summary:
The Chair will provide a brief oral update on her plans and recent activities to engage CalPERS staff and policymakers with the intent to influence future pension policies and practices. Recommended Action:
Receive and file.
D. OPPOSITION LETTER TO CALPERS BOARD IMPOSED DIVESTMENT DIRECTIVES Summary:
From time to time, the CalPERS Board imposes divestment directives on the CalPERS Investment Office to promote certain social objectives. Divestment directives can create
Finance Committee Meeting Minutes September 14, 2017
Page 8 of 11
enormous opportunity costs to the pension system at a time when the system, plan sponsors
and plan participants cannot afford to compromise investment return. Recommended Action: With the Finance Committee's concurrence, staff will seek the support of the Mayor and
Finance Committee Chair to urge the CalPERS Board to cease and reverse divestment directives that create artificial barriers for the Investment Office and lessen potential investment
return.
The foregoing items were heard concurrently.
Chair Dixon provided an update on her trip to visit with the CalPERS Investment Committee staff and reported they are a highly-regarded group of experts and reported their recommendations will
go to the Board where it changes from a financial recommendation to a political recommendation. She noted improvements in the market and explained the reason is that there are no constraints
on those investments. However, CalPERS is dictated by legislative regulations that restrict certain investments for political and social correctness. The consequence is the approximate loss to the
corpus of a CalPERS total investment is about $3 billion and growing; the gap is being met by California taxpayers.
Mr. Bartel reported some would argue that the retirement system should not only focus on return,
but also on social issues. He reported their job is to maximize investment return and when you focus on social issues, there is a backslash and noted it should be a transparent approach.
Chair Dixon reported the Investment staff is looking for allies in the employer groups as well as the
public employee associations.
Mr. Bartel reported the reason the Investment staff are socially investing is because they are being directed to by the California Legislature, which takes its direction from bargaining groups.
Chair Dixon reported Investment staff would like an advocate for pointing out they are not poor
investment advisors and that they are being directed by the politically-appointed Board.
Chair Dixon reported the group is organizing to increase presence before the Board to state the effects of their investment strategy.
Committee Member Stapleton opined it is a great idea to be active.
It was noted that socially-responsible funds are not cheap. Committee Member Gorczyca noted the importance of becoming engaged.
Mr. Bartel stressed the importance of having realistic expectations. He reported there is one
representative appointed to the Board by the Governor and addressed bargaining group representatives. He reported bargaining groups focus on short-term compensation. He agreed
that the City should work closely with bargaining groups.
Chair Dixon opened public comments.
Jim Mosher commented on engaging stakeholders and on the targeted bullet points.
Chair Dixon closed public comments.
A suggestion was made to forward the letter to the City of Huntington Beach for their possible use. Committee Member Tucker suggested stating the City recommends that Council send out the letter
and asking that all other Orange County cities support and co-sign it.
Finance Committee Meeting Minutes September 14, 2017
Page 9 of 11
MOTION: Committee Member Tucker moved, and seconded by Committee Member Stapleton, to direct staff to seek the support of the Mayor and Finance Committee Chair to urge the CalPERS
Board to cease and reverse divestment directives that create artificial barriers for the Investment Office and lessen potential investment return. The motion carried, unanimously.
Council Member O'Neill departed the meeting at this juncture (5:06 p.m.).
E. LONG RANGE FINANCIAL PLANNING Summary: As another input to the City's Long Financial Planning model, staff will provide a brief
demonstration of the "GovInvest" software tool that the City is using to assist in the modeling of long-term pension plan costs and liability projections. Recommended Action:
Receive and file.
Finance Director Matusiewicz demonstrated the pension liability forecasting software tool known as GovInvest. The software tool will be another tool for the City to model pension data using
different discount and investment assumptions.
Committee Member Gorczyca asked whether for long-term modeling, the City will use Mr. Bartel's projections and Finance Director Matusiewicz reported it will depend on where the City is but
reported that GovInvest has actuaries on staff and their figures are good enough for budgeting and long-term financial planning. F. BONITA CANYON COMMUNITY FACILITIES DISTRICT UPDATE Summary: The City entered into a Joint Powers Agreement (JPA) to form a Community Facilities District
(CFD) in 1997 to finance certain road, park and school improvements associated with the Bonita Canyon development. The JPA board believes there is an opportunity to refinance
outstanding bonds of the JPA on a current refunding basis to provide an economic benefit to the assessed property owners in excess of $2.5 million. The Committee will be provided a brief
report summarizing the financing effort. Recommended Action: Receive and file. Finance Director Matusiewicz provided background noting the City has been a member of the JPA
since 1998 and addressed the City's interest in the Community Facility’s District (CFD) including the site acquisition and construction of Bonita Canyon Park and certain road improvements. The
City refinanced it once in 2012 and he reported typically the school districts drive the CFDs. Since there is a financial savings that meets the typical matrix for refinancing, staff recommends
proceeding assuming the market metrics hold.
Chair Dixon asked whether this is a line item the City pays and Finance Director Matusiewicz reported it will be a savings to property owners within the City.
Committee Member Gorczyca asked staff to look at the Placement Agent fee and commented
positively on this approach.
Chair Dixon asked about the Placement Agent fee and Finance Director Matusiewicz reported it was not covered in this memo, but would be included in the closing memorandum.
G. BUDGET AMENDMENTS Summary:
Finance Committee Meeting Minutes September 14, 2017
Page 10 of 11
Receive and file a staff report on the budget amendments for the prior quarter.
Recommended Action:
Receive and file.
Chair Dixon noted nothing extraordinary relative to the budget amendments. H. 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.
Finance Director Matusiewicz reported receiving one correction and stated the City wants a review of the City's insurance coverage and stated it will be placed on the December agenda. The City
just finished contract negotiations for a risk-based reserve analysis and work should begin shortly.
Committee Member Gorczyca asked regarding the broker's experience and capabilities and Finance Director Matusiewicz reported the City's insurance broker can explain the City's coverage
most efficiently and can talk about the City's exposure. The reserve analysis will focus on the General Fund revenues and expenditures volatility. Chair Dixon asked whether this delays the
Committee's discussion on reserves and Finance Director Matusiewicz responded not necessarily. He addressed respondents to the RFP and reported he will provide an update on the City's reserve
analysis in November.
Committee Member Gorczyca suggested the need for information on how reserves cross-collateralize.
Committee Member Tucker noted the discussion should be mentioned on the December work plan.
Brief discussion followed regarding Section 115 and Chair Dixon reported the Investment
Committee at CalPERS is in support of creating 115 funds for the sole purpose of having a separate investment strategy. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) Chair Dixon reported the next meeting of the Finance Committee will include an investment
performance review and a review of the City's debt policy.
Finance Director Matusiewicz reported there will be a study session on Tuesday, October 10, 2017, to study the City's debt policies and direction is expected from Council as to the participation of the
Finance Committee. VII. ADJOURNMENT
The Finance Committee adjourned at 6:25 p.m. to the next regular meeting of the Finance Committee on Thursday, October 12, 2017, at 3:00 p.m.
Filed with these minutes are copies of all materials distributed at the meeting.
Finance Committee Meeting Minutes September 14, 2017
Page 11 of 11
The agenda for the Regular Meeting was posted on September 7, 2017, at 6:15 p.m., in the binder
and on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 Civic Center Drive.
Attest:
___________________________________ _____________________ Diane Dixon, Chair Date
Finance Committee
r 4 /ln -- - *?f Finance Committee Meeting MinutesL. I Vaaa' C@lv September-14,2017
Mr. McCall addressed public trust, K"re.r?^"agement, and reported both chosen firms are
reliable, have municipal and public agency accounts, and do good work. They both do some private
business, but primarily focus on the public sector.
Discussion followed regarding the number of accounts added by Chandler Asset Management in
the last two years.
Mr. McCall addressed account closures for Chandler and PFM and overall performance in the
short- and long-term.
Committee Member Gorczyca commented on the two different company profiles and stated when
companng
differences
comparing
advisor.
Committee
Mr. McCall
the two, there
in the two and
be a direct application. Mr. McCall agreed, noted some
on the accounts of each. He expressed challenges in
but that he and staff felt the City only needs one investment
asked regarding the advantage of having a five-year contract and
nties and government typically do not want to extend contract terms
for more than five prefer to go out to bid towards the end of a contract.
Committee Member Tucker commented on the possibility of avoiding the RFP process and Finance
Director Matusiewicz reported there is a thirty-day out clause on virtually all contracts. lt is standard
on most contracts except those requiring a large capital investment.
Committee Member Gorczyca reported in her experience, she saw more contracts with two- or
three-year terms and one-year renewal, after evaluation of benchmarks.
Chair Dixon reported the Finance Committee gets monthly reports and reviews contracts once a
year.
Committee Member Tucker asked if the City would have to go through the RFP process if it chose
to terminate the contract and Finance Director Matusiewicz reported bids are good for eighteen
months and staff would terminate one and execute a new contract with another. Beyond eighteen
months, the City would have to initiate an RFP process, which would take between four-to-five
months, plus contracting.
Committee Member Gorczyca noted that would be one advantage of having two advising entities,
especially in terms of market and organizational changes. Mr. McCall stated in his experience,
having one investment advisor worked well through various changes.
Committee Member Gorczyca reported when there are changes, having two advisors would ensure
uninterrupted service. Mr. McCall stated the possibility of that happening is slim.
Finance Director Matusiewicz stated in such cases, the City could contract with an interim advisor
on an emergency basis
Mr. McCall stated the City would be better off using one advisor rather than two and supports staff
recommendation to contract with Chandler.
Chair Dixon reported the study was a year ago and asked whether anything had changed. Mr
McCallstated nothing has changed since then.
Finance Director Matusiewicz stated that the City will still maintain a diversified portfolio, will have
the opportunity to measure performance against benchmarks, and noted the strategies between
Page3of11
Item No. 4A1
Draft Minutes of September 14, 2017
Correspondence
October 12, 2017
Finance Committee Meeting Minutes
September 14,2017
both firms are similar. He addressed long-term returns in income and total returns for Chandler
and PFM and noted they are neck-and-neck.
Commiftee Member Stapleton commented on the possibility of over-diversification by having two
firms.
Finance Director Matusiewicz added there is not great risk in using only one firm, investment
advisors do not hold the securities; the investments are held by the Bank of New York, registered
in the City's name and investment advisors do not have access to them, other than how they invest
them. The City independently monitors them on how they are invested. The City does not rely on
information from advisors but rather directly from information that derives from its custodial bank,
the Bank of New York. The City receives its market pricing on investments, independently from
investment advisors, giving the ability to review three different pricing sources as well as securities'
ratings and accounting and investment activities which are reconciled, daily. He noted it is less
efficient to have two investment advisors and reported staff has more flexibility working with one,
in terms of strategies. He addressed the relative size of other cities compared to Newport Beach.
ln terms of flexibility, he reported, some of the City's reserves have a long investment horizon while
others need to be very liquid, and because of recent opportunities to beat the Local Agency
lnvestment Fund (LAIF) returns, the City is pulling money out of its short-term portfolio and
matching asset maturities with specific liabilities come due to improve performance at both ends of
the spectrum. Chair Dixon asked regarding the source of the data and Finance Director
Matusiewicz explained that most data is derived directly from the custody bank and analyzed
through a third-party software product. He also made reference to a monthly conference call to
review cash flow needs.
Chair Dixon stated that requires staff to be intimately involved.
Commiftee Member Stapleton asked regarding Chandler's responsiveness and Finance Director
Matusiewicz explained they are more responsive and accessible than PFM.
Brief discussion followed regarding pricing tiers.
Chair Dixon noted the City has about $250 million total of which $180 million goes into two accounts
and the difference goes to LAIF.
Finance Director Matusiewicz reported staff is starting to look at alternatives to LAIF as part of the
overall strategy. He stated staff thought it was streamlining operations and reducing costs and
former Finance Commiftees wanted the City to reduce the number of investment advisors.
Committee Member Stapleton noted servicing costs. He asked how decisions are implemented in
terms of percentages to apply to the various investments, Finance Director Matusiewicz stated the
contract's investment policy statement is the driving document.
Council Member O'Neill stated this presentation changed his mind.
Brief discussion followed reqardino the Citv of Anaheirn doino its own investino. .rt/; dVt' WV.-qhr^arda'zVw ?VLzr;rmZ-
Commiftee Member Tucftr stated he accepts staffs recommendati5ns but noted he is uniquely
unqualified to commen( but it seems reasonable to him. He liked the fact that the City has a way
to correct itself if it is determined it was heading in the wrong duectionh? 4
"
O e7 fAU44^b
Commiftee Member Gorczyca reported the City of Newport Beach is a unique public agency, partly 4i/d
prompted by the Orange County bankruptcy, and has felt it important to have multiple investment
advisors. She added PFM has had a relationship with the City for over 25 years. She noted
diversification is important and having two advisors provides a built-in competition with incentives
to perform. She addressed market changes and felt it important to have different sources of advice.
Page 4 of 11
Finance Committee Meeting Minutes
September 14,2017
Regarding a comparison of prior numbers, Chair Dixon noted $25 million is the expected payment
in2018-2019. Finance Director Matusiewicz clarified that is the City's minimum, required payment.
The2017-2018 budget is $33.8 million. He stated that minimum payment will steadily ramp up well
beyond $33.8 million and the intent is to get ahead of it.
Finance Director Matusiewicz addressed things that play into CaIPERS' decisions and the Board
is set to make many decisions by December 2017. He suggested proceeding with caution and
noted the need to see the whole pi
inflation assumption and presumed
Committee Member Tucker asked
gross investment return less inflation equates to the real rate of return. The current rate is 2.75
LLC, added that all seven percent rates of return are notpercent. John Bartel, Bartel
created equally and explained the
has not spent any time on how the
City's obligations are. That number has an inflation
Bartel added it includes salary increases on which the
the actuarial staff makes a recommendation does not
believed there is pressure on the Board to not
4.5 percent.
ember Tucker stated the Committee
,the actuarial number as to what thf-
keep the benefits constant. Mr
are based. He reported just because
the CaIPERS Board will approve it. He
lculations. Committee M *rr
4
the real rate of return from 4.25 percent to4*a?n-
Chair Dixon commented on the inflation rate and noted the rate of return is a direct result of how
the investment is managed by CaIPERS. Mr. Bartel explained rate of return can be measured
historically, adding that going fonruard, it is an assumption with two components including what the
CaIPERS Board thinks inflation will be and what they think they will earn, above inflation, in the
long run. Chair Dixon noted it is subjective in terms of projecting future rate of return because of
certain constraints imposed on their investment policy.
Committee Member Gorczyca added it is also based on risk-taking, and there are many other
factors influencing that number.
Finance Director Matusiewicz reported last year he stated CaIPERS may have overshot their
mortality projection but warned that staff now believes they are unlikely to roll back the increase in
mortality projections.
Mr. Bartel opined that CaIPERS staff spoke sooner than they should have and concluding that
CaIPERS will maintain a similar level of improvement. People are living longer and CaIPERS is
anticipating it and building that into their numbers.
Finance Director Matusiewicz added that the previous increase to mortality assumption was already
factored into their assumption losses and had hoped for relief if CaIPERS were to roll it back, but it
is not likely to happen now. Finance Directed Matusiewicz said he anticipated that the City would
be budgeting between $32 to $35 million towards unfunded liabilities in 2018-2019
Chair Dixon stated this is where the City's long-term financial planning tool will come into play
because the City will be able to play with the numbers.
Finance Director Matusiewicz stated this is only one of many options in the City's financial plan,
along with other objectives for the City to meet in its long-term goals. He added there may an
opportunity for the City to lower its minimum required contribution by taking credit for significant
positive investment gains credits sooner than later. lnvestment gains are normally amortized into
the rate over a 30-year period. He noted there is a range of budget options to consider and
suggested if the City were to continue a 1S-year pace, the City could lower its payment to $33.1
million. He addressed Fresh Start, the effect of other discretionary payments and stated, excluding
the Fresh Start base, the remaining bases may net to a credit position as of June 30, 17. He
reported more discussions will ensue with the budget.
Page6of11
1
Burns, Marlene
From:O'Neill, William
Sent:Thursday, October 12, 2017 12:49 PM
To:Burns, Marlene
Cc:Dixon, Diane
Subject:Minutes Alteration
For today’s Finance Committee meeting, page 1 references my comments to Jim. It states: “and acknowledged
discussion in Closed Session regarding overtime compensation but noted he is unable to comment, as it is a Closed
Session matter.” That is incorrect. It should read: “and acknowledged that a matter was agendized for discussion at
Closed Session concerning the Flores issue but noted he is unable to comment, as it is a Closed Session matter.” There is
a really big difference.
Will O’Neill
City of Newport Beach
City Councilmember
100 Civic Center Drive
Newport Beach, CA 92660
woneill@newportbeachca.gov
Item No. 4A2
Draft Minutes of September 14, 2017
Correspondence
October 12, 2017
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5A
October 12, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov
SUBJECT: INVESTMENT PERFORMANCE REVIEW
EXECUTIVE SUMMARY This memorandum provides a financial markets overview and reports the performance of the City’s
investment portfolio relative to the City’s investment objectives through September 30, 2017. All investments are in compliance with California Government Code and the City’s adopted Statement of
Investment Policy. DISCUSSION Financial Markets Overview
The Federal Open Market Committee (FOMC) left the fed funds target rate unchanged at a range of 1.00-1.25 percent at the September 19-20 meeting. As expected, the Committee announced it will initiate its
balance sheet normalization program in October. The process of unwinding the Fed's $4.5 trillion balance sheet will begin gradually by allowing $6 billion per month in Treasury securities and $4 billion per month
in mortgage-backed and agency securities to roll off the balance sheet. Over time, the amounts will slowly increase to $30 billion per month in Treasury securities and $20 billion per month in mortgage-backed and
agency securities. The Fed's plans to unwind the balance sheet was widely telegraphed and the policy statement was generally in line with expectations. There were no dissenting votes among FOMC members
in September. The Fed's updated economic projections still indicate one more rate hike before year-end is expected. However, the Fed lowered its median longer-run fed funds rate projection to 2.8 percent from 3.0
percent. The Fed's other economic projections were little changed, although the median 2018 inflation forecast was lowered slightly, suggesting that the Committee now thinks inflation may remain below the
Fed's 2.0 percent target until 2019.
GDP grew by 3.1 percent in the second quarter, following growth of 1.2 percent in the first quarter. The consensus forecast currently calls for GDP growth of about 2.6 percent in the current quarter. We believe
economists may trim their forecast for third quarter GDP growth, to reflect disruptions caused by Hurricanes Harvey and Irma. Tax reform or fiscal stimulus may ultimately help fuel stronger economic growth, but the
timing and magnitude of such programs remains uncertain.
The Treasury yield curve steepened in September, partially reversing some of the curve flattening that has happened year-to-date. The 2-year Treasury yield increased 16 basis points in September to 1.48 percent
and the 10-year Treasury yield increased about 22 basis points to 2.33 percent. On a year-to-date basis,
Investment Performance Review October 12, 2017
Page 2 the 2-year Treasury yield increased 29 basis points and the 10-year Treasury yield declined 11 basis points. Since the beginning of this year, some experts believe market participants have grown skeptical that the
Trump administration will deliver on many of their legislative objectives. However, the administration recently outlined a general framework for tax reform, sparking some renewed optimism that changes to the
tax code may help boost economic growth.
(Source: Chandler)
Second quarter GDP grew at an annualized pace of 3.1 percent, following growth of 1.2 percent in the first
quarter. Second quarter GDP growth was revised up slightly from the second estimate of 3.0 percent, after being revised up from the advance estimate of 2.6 percent. Growth was driven by consumer spending and business investment. The Consensus forecast currently calls for GDP growth of about 2.6 percent in the third quarter.
(Source: US Department of Commerce)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
US Treasury Yield Curve
Sep-17
Jun-17
Sep-16
Yi
e
l
d
(
%
)
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Gross Domestic Product (GDP)
GDP QOQ % Change
GDP YOY % Change
Investment Performance Review October 12, 2017
Page 3 Nonfarm payrolls rose 156,000 in August, weaker than the 180,000 consensus estimate of economists. In addition, June and July payrolls were revised down by a total of 41,000. On a trailing 3-month and 6-month
basis, payrolls increased by an average of 185,000 and 160,000 per month, respectively. The unemployment rate increased to 4.4 percent in August from 4.3 percent in July, and the labor participation
rate held steady at 62.9 percent. A broader measure of unemployment called the U-6, which includes those who are marginally attached to the labor force and employed part time for economic reasons, was
unchanged from the prior month at 8.6 percent. Wages increased 0.1 percent in August and 2.5 percent on a year-over-year basis.
(Source: US Department of Labor)
(Source: US Department of Labor)
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
Unemployment Rate
Underemployment Rate (U6)
Unemployment Rate (U3)
Ra
t
e
(
%
)
0
50
100
150
200
250
300
350
MO
M
C
h
a
n
g
e
I
n
(
0
0
0
'
s
)
Nonfarm Payroll (000's)
Investment Performance Review October 12, 2017
Page 4 Investment Portfolio Overview
The City’s strategy continues to focus on identifying value from high quality marketable securities among
the full range of investment options ensuring the portfolio continues to be well diversified.
As of September 30, 2017, the City’s entire investment portfolio totaled over $236 million. These investments are pooled assets of the City Newport Beach, which includes the General Fund, special
revenue funds, internal service funds, the enterprise funds (i.e., Water and Wastewater), as well as various other funds.
Ultra Short-Term Portfolio
The City uses a combination of demand deposit accounts (DDA), the Local Agency Investment Fund (LAIF), and short-term securities to provide sufficient liquidity to meet its day-to-day operating requirements. Municipal deposits in DDA accounts are 110 percent collateralized by bank assets, and the City received a compensating balance credit against bank fees at an average rate of 0.51 percent during September 2017.
The average investment life of LAIF was 194 days at June 30, 2017. LAIF’s earning’s rate for the quarter ending June 30, 2017, was 0.92 percent. (LAIF reports this information quarterly. At the time of this writing,
LAIF had not yet released the information for the quarter ending September 30, 2017.)
Money that is likely to be spent in the near future, that is not needed immediately, is invested in a short-term investment account, and will be withdrawn when the City’s cash in-flow is at its slowest pace. As of
September 30, 2017, this account held about $26 million in securities. These securities may be either new purchases, or securities transferred from one of the City’s short-term accounts. Securities maturing when the City’s cash in-flow is more than sufficient to cover its cash out-flow will be reinvested for maturity when
cash in-flows are not sufficient. It is anticipated that these investments will be expended commensurately with the City’s anticipated cash needs during that time period. By laddering security maturities, the City is able to earn a slightly higher rate of return than it would otherwise earn with LAIF. As of September 30,
2017, the average yield-to-maturity on this group of securities was 1.391 percent.
Short-Term Portfolio
The City’s core investment portfolio of almost $174 million is actively managed in accordance with the California Government Code and the City’s investment policy. The investments are held by a custody bank and are registered in the City’s name. The City accounts for and monitors the portfolio independently of
the investment advisors, by a direct feed from the custody bank and the use of third party analytical
software. The core portfolio also follows a relatively short-term bond strategy. At the end of September 2017, the
core portfolio’s weighted average life was approximately 1.8 years. With that life, the core portfolio has an
average yield-to-maturity of 1.58 percent (forward looking measure). This portfolio aims to find value and maximize yield within the high quality fixed income market within the duration range of the City’s strategic
benchmarks. The City currently uses the Bank of America Merrill Lynch 1-3 Year US Treasuries index as one benchmark. The City also uses a second benchmark, the Bank of America Merrill Lynch 1-3 Year US Gov/Corp A Rated and Above securities index, which is more reflective of the portfolio’s risk and return
characteristics. The use of two benchmarks provides a means to evaluate the added value that high quality
corporate bonds bring to the portfolio. The City’s core portfolio finished the twelve months ending September 30, 2017, with a total return of 0.68
percent. As illustrated in the chart on the following page, by the end of those twelve months, virtually all of the total return was from the income return on the securities in the portfolio. Price return for the portfolio by
the end of that time period was negative, partially offsetting the positive income return. The likely explanation of this is the Federal Reserve increasing its target federal funds rate by 25 basis points three
times (December 2016, March 2017, and June 2017). As interest rates increase, bond prices decrease creating unrealized losses and therefore significantly diluting total return as is illustrated on the following
Investment Performance Review October 12, 2017
Page 5 chart. It is important to note however, that unrealized losses only become realized if securities are sold prior to maturity.
Cumulative Monthly Returns for the Twelve Months Ending September 30, 2017
In the comparisons below, the portfolio’s return compares favorably to both of its benchmarks. The
favorable comparison was driven primarily due to active management and security selection.
Short-Term Portfolio Two Year Comparison of For the Twelve Months Ending September 30, 2017 and 2016
2017 2016
Portfolio Returns
Income Return 1.286%1.083%
Price Return -0.606%0.128%
Total Return 0.680%1.211%
Benchmark Returns
B of A ML 1-3 Year US Treasuries 0.237%0.884%
B of A ML 1-3 Year US Gov/Corp A Rated and Above 0.489%1.119%
Ending Duration
Short-term Portfolio 1.787 1.756
B of A ML 1-3 Year US Treasuries 1.879 1.903
B of A ML 1-3 Year US Gov/Corp A Rated and Above 1.885 1.896
September 30
Investment Performance Review October 12, 2017
Page 6
Short-Term Portfolio Benchmark Comparisons 1, 3 & 5 Year Returns
Prepared by: Submitted by:
/s/Jeremiah Lim
/s/Dan Matusiewicz
Jeremiah Lim Dan Matusiewicz Accountant Finance Director
Annualized Returns at 9/30/2017
1 Year Ending 3 Years Ending 5 Years Ending
Short-Term Portfolio 9/30/2017 9/30/2017 9/30/2017
Income Return 1.286%1.085%0.956%
Price Return -0.600%-0.048%-0.115%
Total Return 0.686%1.038%0.845%
B of A ML 1-3 Year US Treasuries 0.237%0.758%0.628%
B of A ML 1-3 Year US Gov/Corp A Rated and Above 0.489%0.937%0.810%
9255 Towne Centre Drive | Suite 350 | San Diego, CA 92121-3039 | Phone800.317.4747 | Fax 858.546.3741 | www.chandlerasset.com
CHANDLER ASSET MAN AGEMEN T
Period Ending
September 30, 2017
City of Newport Beach
Investment Report
Item No. 5A1
Investment Performance Review
Presentation
October 12, 2017
Table of Contents
Economic Update
Financial Market Landscape
Portfolio Review
SECTION 1
SECTION 2
SECTION 3
2
SECTION 1
Economic Update
3
GDP grew by 3.1%in the second quarter,following growth of 1.2%in the first quarter.The consensus forecast
currently calls for GDP growth of about 2.6%in the current quarter.We believe economists may trim their forecast for
third quarter GDP growth,to reflect disruptions caused by Hurricanes Harvey and Irma.Tax reform or fiscal stimulus
may ultimately help fuel stronger economic growth,but the timing and magnitude of such programs remains
uncertain.
Economic Update
The Federal Open Market Committee (FOMC)left the fed funds target rate unchanged at a range of 1.00%-1.25%at
the September 19-20 meeting.As expected,the Committee announced it will initiate its balance sheet normalization
program in October.The process of unwinding the Fed’s $4.5 trillion balance sheet will begin gradually by allowing $6
billion per month in Treasury securities and $4 billion per month in mortgage-backed and agency securities to roll off
the balance sheet.Over time,the amounts will slowly increase to $30 billion per month in Treasury securities and $20
billion per month in mortgage-backed and agency securities.The Fed’s plans to unwind the balance sheet was widely
telegraphed and the policy statement was generally in line with expectations.There were no dissenting votes among
FOMC members in September.The Fed’s updated economic projections still indicate one more rate hike before year-
end is expected.However,the Fed lowered its median longer-run fed funds rate projection to 2.8%from 3.0%.The
Fed’s other economic projections were little changed,although the median 2018 inflation forecast was lowered
slightly, suggesting that the Committee now thinks inflation may remain below the Fed’s 2.0% target until 2019.
The Treasury yield curve steepened in September,partially reversing some of the curve flattening that has happened
year-to-date.The 2-year Treasury yield increased 16 basis points in September to 1.48%and the 10-year Treasury
yield increased about 22 basis points to 2.33%.On a year-to-date basis,the 2-year Treasury yield increased 29 basis
points and the 10-year Treasury yield declined 11 basis points.Since the beginning of this year,we believe market
participants have grown skeptical that the Trump administration will deliver on many of their legislative objectives.
However,the administration recently outlined a general framework for tax reform,sparking some renewed optimism
that changes to the tax code may help boost economic growth.
4
Nonfarm payrolls rose 156,000 in August,weaker than the 180,000 consensus estimate of economists.In addition,June and July
payrolls were revised down by a total of 41,000.On a trailing 3-month and 6-month basis,payrolls increased by an average of 185,000
and 160,000 per month,respectively.The unemployment rate increased to 4.4%in August from 4.3%in July,and the labor participation
rate held steady at 62.9%.A broader measure of unemployment called the U-6,which includes those who are marginally attached to
the labor force and employed part time for economic reasons,was unchanged from the prior month at 8.6%.Wages increased 0.1%in
August and 2.5% on a year-over-year basis.
Employment
Source: US Department of Labor Source: US Department of Labor
0
50
100
150
200
250
300
350
MO
M
C
h
a
n
g
e
I
n
(
0
0
0
'
s
)
Nonfarm Payroll (000's)
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
Unemployment Rate
Underemployment Rate (U6)
Unemployment Rate (U3)
Ra
t
e
(
%
)
5
The Consumer Price Index (CPI)was up 1.9%year-over-year in August,versus up 1.7%year-over-year in July.Core CPI (CPI less
food and energy)was up just 1.7%year-over-year in August,unchanged from the prior month.The Personal Consumption
Expenditures (PCE)index was up 1.4%year-over-year in August,unchanged from June or July.Core PCE (excluding food and energy)
was up just 1.3% year-over-year in August, versus up 1.4% year-over-year in July. Inflation remains below the Fed's 2.0% target.
Inflation
Source: US Department of Labor Source: US Department of Labor
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Consumer Price Index (CPI)
CPI YOY % Change
Core CPI YOY % Change
YO
Y
(
%
)
C
h
a
n
g
e
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Personal Consumption Expenditures (PCE)
PCE Price Deflator YOY % Change
PCE Core Deflator YOY % Change
YO
Y
(
%
)
C
h
a
n
g
e
6
On a year-over-year basis,total retail sales were up 3.2%in August compared with a 3.5%increase in July.On a month-over-month
basis,retail sales declined 0.2%in August,below expectations for a 0.1%increase.Excluding autos and gas,retail sales fell 0.1%in
August.Overall,August retail sales were lackluster.Although August results may have been negatively impacted by Hurricane Harvey,
the retail sales figures for July were also revised down.Meanwhile,the consumer confidence index remained strong in September at
119.8 versus 120.4 in August, despite weakness in the hurricane states of Texas and Florida.
Consumer
Source: US Department of Commerce Source: Federal Reserve
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Retail Sales YOY % Change
YO
Y
(
%
)
C
h
a
n
g
e
85
90
95
100
105
110
115
120
125
130
In
d
e
x
L
e
v
e
l
Consumer Confidence
7
The Index of Leading Economic Indicators (LEI)rose 0.4%in August,following a 0.3%increase in July.The increase in the LEI
suggests economic growth may improve through year-end.However,the Chicago Fed National Activity Index (CFNAI)decreased to -
0.04 in August on a 3-month moving average basis from zero in July.According to the Chicago Fed,the CFNAI points to subpar
economic growth. Overall, we believe the economy remains on a slow growth trajectory.
Economic Activity
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
Leading Economic Indicators (LEI)
MO
M
(
%
)
C
h
a
n
g
e
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
Chicago Fed National Activity Index
(CFNAI)
3
M
o
n
t
h
A
v
e
r
a
g
e
Source: The Conference Board Source: Federal Reserve Bank of Chicago
8
Total housing starts fell slightly in August but were still stronger than expected.Single-family starts increased 1.6%in August,partially
offsetting a 6.5%decline in multi-family starts.Permits were stronger than expected in August,up 5.7%,driven by a 19.6%surge in
multi-family permits.Overall,the August housing starts report was favorable,particularly considering it includes some effects from
Hurricane Harvey.According to the Case-Shiller 20-City home price index,home prices were up 5.8%year-over-year in July,versus up
5.6% year-over-year in June.
Housing
Source: US Census Bureau Source: S&P
0
200
400
600
800
1000
1200
1400
1600
MO
M
C
h
a
n
g
e
(
I
n
T
h
o
u
s
a
n
d
s
o
f
U
n
i
t
s
)
Housing Starts
Multi Family Housing Starts
Single Family Housing Starts
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
S&P/CaseShiller 20 City Composite Home
Price Index
YO
Y
(
%
)
C
h
a
n
g
e
9
The Institute for Supply Management (ISM)manufacturing index increased to 60.8 in September from 58.0 in August.A reading above
50.0 suggests the manufacturing sector is expanding.Meanwhile,capacity utilization,which is production divided by capacity,
decreased to 76.1%in August from 76.9%in July.The capacity utilization rate remains below the long-run average of 79.9%(1972-
2016), suggesting there is still excess capacity in the industrial sector.
Manufacturing
Source: Institute for Supply Management Source: Federal Reserve
46
48
50
52
54
56
58
60
62
Institute of Supply Management Purchasing
Manager Index
Expanding
Contracting
74.0%
75.0%
76.0%
77.0%
78.0%
79.0%
Capacity Utilization
Ra
t
e
(
%
)
10
Second quarter GDP grew at an annualized pace of 3.1%,following growth of 1.2%in the first quarter.Second quarter GDP growth
was revised up slightly from the second estimate of 3.0%, after being revised up from the advance estimate of 2.6%. Growth was driven
by consumer spending and business investment.The consensus forecast currently calls for GDP growth of about 2.6%in the third
quarter.
Gross Domestic Product (GDP)
Source: US Department of Commerce Source: US Department of Commerce
9/16 12/16 3/17 6/17
1.9%2.0%1.3%2.2%
0.4%1.3%-0.2%0.6%
0.4%-1.6%0.2%0.2%
0.1%0.0%-0.2%0.1%
0.0%0.1%0.1%-0.2%
2.8%1.8%1.2%3.1%
Federal Government Expenditures
Total
Net Exports and Imports
Personal Consumption Expenditures
Gross Private Domestic Investment
State and Local (Consumption and Gross
Investment)
Components of GDP
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Gross Domestic Product (GDP)
GDP QOQ % Change
GDP YOY % Change
11
SECTION 2
Financial Market
Landscape
12
Investment Landscape Highlights
■Reshaping the Federal Reserve:
■On October 13, 2017 there will be three vacancies on the Federal
Reserve.
■Balance Sheet reduction starts October 2017.
■Chair Yellen’s four-year term ends on February 3, 2018.
■Interest rates have moved off their extreme historical lows mitigating
some of the risks related to rising rates on bond portfolios.
■Low yield over the last 10 years:
■2 Year US Treasury note: 0.16% (9/19/2011)
■5 Year US Treasury note: 0.54% (7/24/2012)
13
Federal Reserve
Federal Open Markets Committee 2017 Members
Janet Yellen
Chair, Board of Governors
William Dudley
Vice Chair, New York
Lael Brainard
Board of Governors
Jerome Powell
Board of Governors
Stanley Fischer*
Board of Governors
Randal Quarles**
Board of Governors
VacantBoardof Governors VacantBoard of Governors Charles EvansChicago Robert KaplanDallas Neel KashkariMinneapolis Patrick HarkerPhiladelphia
Federal Open Markets Committee Alternate Members
Raphael Bostic
Atlanta
Loretta Mester
Cleveland
Mark Mullinix
First Vice President, Richmond
John Williams
San Francisco
Michael Strine
First Vice President, New York
*Retires on October 13,2017
**Randal Quarles was confirmed by the Senate on October 5,2017.
Source:Federal Reserve and US Department of Commerce
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Fe
d
'
s
B
a
l
a
n
c
e
S
h
e
e
t
%
o
f
G
D
P
GD
P
Q
o
Q
%
G
r
o
w
t
h
Fed's Balance Sheet as a % of GDP
GDP QoQ
14
Central Bank Balance Sheets
15
Source: Bloomberg
(In Billions)(In Billions)
Historical US Treasury Rates
16
Source: Bloomberg
The yield curve has flattened meaningfully this year. The spread between 2-year and 10-year Treasury yields was just 85 basis points at
the end of September,compared to 126 at the end of 2016.In the three months ending in September,the 2-year Treasury yield
increased about ten basis points while the 10-year Treasury yield increased just three basis points.Immediately following the US
Presidential election last fall,the Treasury yield curve steepened meaningfully,driven by heightened expectations for tax reform,fiscal
stimulus,and above-trend economic growth under the Trump administration.However,market participants are skeptical the Trump
administration will deliver on their legislative agenda.
Bond Yields
Source: Bloomberg
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
US Treasury Note Yields
2-Year
5-Year
10-Year
Yi
e
l
d
(
%
)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
US Treasury Yield Curve
Sep-17
Jun-17
Sep-16
Yi
e
l
d
(
%
)
17
SECTION 3
Portfolio Review
18
Segmenting the Portfolio
LAIF and Money Market Funds
Matching maturities to known
expenditures
Money market instruments
Agency Discount Notes
Commercial Paper
Certificates of Deposit
Target generally to a higher duration
to enhance the potential to increase
earnings
Investment Strategies:
Limited Maturity 1-3 Year
Short Term Bond 1-5 Year*
Intermediate Bond 1-10 Year*
Total Portfolio
Reserve PortfolioLiquidity Portfolio
19
(Ultra Short-term)
*Not Currently Utilized
Sector Distribution
City of Newport Beach, California
September 30, 2017
20
Sector Mkt Value % of Portfolio
ABS 10,047,301 5.0%
Agency 83,830,504 41.9%
Commerical Paper 7,232,785 3.6%
Money Market Fund FI 165,591 0.1%
Negotible CD 14,500,954 7.2%
Supranational 8,016,042 4.0%
US Corporate 46,854,297 23.4%
US Treasury 29,528,108 14.8%
Total 200,175,582 100.0%
ABS5.0%
Agency41.9%Commerical Paper
3.6%
Money Market
Fund FI
0.1%
Negotible CD7.2%
Supranational
4.0%
US Corporate
23.4%
US Treasury14.8%
Liquidity Alternatives Effective Yield
Bank Compensating Credit 0.60%
Money Market 0.82%
LAIF as of 8/30/2017 1.08%
Portfolio Segment Yield to Maturity
Ultra Short-term 1.39%
Limited-Term 1.58%
0%
10%
20%
30%
40%
50%
60%
0-0.25 0.25-0.50 0.50-1.0 1.0-2.0 2.0-3.0 3.0-4.0 4.0-5.0 5+
Portfolio
BAML 1-3 Year Treasury
Duration Distribution
City of Newport Beach, California
September 30, 2017
21
Cumulative Monthly Returns September 2016 to 2017
Short-Term Portfolio Performance
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5B
October 12, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov SUBJECT: INVESTMENT ADVISOR CONTRACT DISCUSSION
DISCUSSION
Committee member Gorczyca requests that the Finance Committee reconsider its recommendation to award investment advisor contract, solely, to Chandler Asset Management. The previous investment
advisor recommendation staff reports and presentations are attached.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Attachments: A. Investment Advisor Discussion and Recommendation, September 14, 2017
B. Investment Advisor Recommendation, September 15, 2016 C. PowerPoint Presentations (2) Used During the September 14, 2017, Finance
Committee Meeting
ATTACHMENT A
INVESTMENT ADVISOR DISCUSSION AND RECOMMENDATION, SEPTEMBER 14, 2017
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5A
September 14, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov
SUBJECT: INVESTMENT ADVISOR DISCUSSION AND RECOMMENDATION
SUMMARY:
Staff respectfully requests that the Finance Committee reconsider its recommendation to award contracts to two investment advisors and award a contract solely to Chandler Asset Management
(Chandler) on the basis that the City’s invested assets will remain sufficiently diverse and safe
under one investment advisor. The use of one investment advisor is efficient, less costly and appropriate for a City of Newport Beach’s size; and Chandler manages assets for several
agencies with assets in excess of $100 million and has shown greater responsiveness to the
City’s needs over the years.
RECOMMENDATIONS:
(1) Retain the services of Chandler Asset Management as the City’s sole investment advisor and
enter into a five-year contract based on the firm’s proposal for an annual savings of more than $25,000 per year as compared to a two-investment advisor arrangement. (2) Terminate the existing investment management contract with PFM Asset Management.
With Finance Committee concurrence of staff’s recommendation, staff will proceed with the
recommended action and bring the new investment advisor contract with Chandler to the City
Council for approval.
DISCUSSION:
As part of its due diligence, staff conducts a complete and competitive selection process for
investment advisory services at the end of every five-year contract term. The contracts for the
City’s two investment advisory firms Chandler Asset Management (Chandler) and PFM Asset Management (PFM), were originally set to expire in June 2016, but were extended through
December 2017, in order to allow sufficient time to solicit new proposals from investment advisory
firms. The City issued a Request for Proposal (RFP) for Investment Advisory Services on May 16, 2016. By the proposal due date of June 17, 2016, six firms submitted proposals. The City hired
the firm Portfolio Services for Government, LLC (PSG) to review RFP expectations and logistics with the City, prepare the RFP documents, analyze and summarize RFP responses, and facilitate the finalist interview process.
Investment Advisor Contract Discussion and Recommendation September 14, 2017
Page 2 Staff evaluated proposals from investment advisory firms to evaluate the possibility of reducing
its number of investment managers in order to greatly improve efficiency and reduce fees in the
process. During the September 15, 2016, Finance Committee meeting, staff recommended retaining the investment advisory services of Chandler Asset Management (Chandler) as its sole investment advisor and that the City enter into a five-year contract based on the firm’s new
proposal. (See Attachment A).
The Finance Committee recommended the City Council enter into five-year contracts with two
firms, PFM and Chandler, and expressed the following concerns with hiring only one investment advisor:
• The City would not realize a diversification of asset classes through the use of only one
investment advisory firm.
• Maintaining two investment advisors provides the means to evaluate the relative
performance of each firm (check and balance) and facilitate a spirit of competition that will
result in higher performance.
• Chandler is a relatively small firm that has few clients with assets under management
greater than $100 million, or at least the size of Newport Beach’s portfolio.
Staff respectfully requests that the Finance Committee reconsider its recommendation and award
the investment advisor contract solely to Chandler based on the additional information provided below.
The City’s Invested Assets Will Remain Sufficiently Diverse and Safe Under One
Investment Advisor
California Government Code contains very specific provisions regarding the types of investments and practices permitted and statute specifies a percentage restriction on a certain categories of
investment. These legal requirements are designed to meet the broad requirement of preserving principal and maintaining liquidity before seeking yield. As the result, there is no variability in the asset classes used by PFM and Chandler and only differences in the relative size of the asset
classes utilized by each firm. Market performance for both firms over the years has been nearly the same. Lastly, the City’s assets are registered in the City’s name and held by a custodial bank
so the likelihood of embezzlement is eliminated.
Investment Advisor Contract Discussion and Recommendation September 14, 2017
Page 3 The Use of One Investment Advisor is Efficient, Less Costly and Appropriate for a City of Newport Beach’s Size
In moving to one investment manager from two, the City will lower its fee structure; further optimize the investment program by better managing short-term liquidity and long-term funds under one manager; reduce coordination efforts and
the number of quarterly meetings with investment advisors from eight to four per year; conduct fewer
account reconciliations and substantially reducing the
incremental cost of investing from 7 basis points (bps) to 4 bps on newly invested capital. Chandler’s
proposal would provide an annual savings of more
than $25,000 per year as compared to the City’s current two-investment advisor arrangement.
Responding firms proposed a tiered fee structure based on the total assets under management. The relative rankings, average fee rate and cost based on
$185 million are summarized in the table to the right. Staff was not successful with negotiating a lower fee
structure than was originally proposed by PFM. When asked, Chandler did accept a lower counter
fee proposal. Staff surveyed all
Orange County cities and found
that Newport
Beach is the only City in the County
that uses more
than one investment advisor
and approximately half manage their investments in-
house. Six cities in Orange County
have portfolios
larger than Newport Beach.
Chandler Manages Assets for Several Agencies with Assets in Excess of $100 Million
and Has Shown Greater Responsiveness to the City’s Needs Over the Years
Chandler manages assets for 22 public agencies in California with assets greater than Newport
Beach, and for nine agencies with assets greater than $300 million. While PFM is a larger firm,
Chandler has a higher qualitative dedication of portfolio management resources. The average number of accounts served per portfolio manager for Chandler is 21 while for PFM it is 40. This
may explain why PFM has experienced a greater rate of client attrition than Chandler. The number of discontinued firm’s services in the last three years for Chandler has been three; whereas for PFM the number is 31.
Investment Advisor Contract Discussion and Recommendation September 14, 2017
Page 4
Chandler is currently the best fit for City at present because of their narrow focus on fixed income
investments, frequent direct communication with portfolio managers, customizable solutions, favorable pricing when compared to PFM and other intangibles. Chandler, unlike PFM, also has
a proven track record of understanding and delivering on the City’s cash flow needs. Chandler also has a history of providing excellent service and has consistently performed well in up and down market conditions. Since 1991, Chandler’s portfolio managers have worked diligently to
invest the City’s portfolio in a manner that fulfills the specific objectives for safety, liquidity and income in a prudent manner at a very competitive price.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Attachment:
A. Investment Advisor Recommendation Staff Report to the Finance Committee, September 15, 2016
ATTACHMENT B
INVESTMENT ADVISOR RECOMMENDATION, SEPTEMBER 15, 2016
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5B
September 15, 2016
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director
(949)644-3123 or danm@newportbeachca.gov
SUBJECT: INVESTMENT ADVISOR RECOMMENDATION
SUMMARY:
The Finance Department has outsourced the management of the City’s investment portfolio for more than twenty-five years. With increased staff workloads over the years, it is increasingly clear that the City’s
portfolio has benefited from full time expert management by professionally managed investment firms. As part of its due diligence, staff intends to continually evaluate the City’s comprehensive investment
program needs and conduct a complete and competitive selection process for investment advisory services at the end of every five-year contract term. The City issued a Request for Proposal (RFP) for
Investment Advisory Services on May 16, 2016. By the proposal due date of June 17, 2016, six firms submitted proposals. Staff narrowed its selection to three firms, conducted interviews, and selected
Chandler Asset Management (Chandler) as the sole investment manager. We believe Chandler to be the best overall fit for the City at this time. In moving to one investment manager from two, the City will lower
its fee structure; further optimize the investment program by better managing short-term liquidity and long-term funds under one manager; reduce coordination efforts and the number of quarterly meetings with
investment advisors from eight to four per year; conduct fewer account reconciliations and substantially reducing the incremental cost of investing from 7 basis points (bps) to 4 bps on newly invested capital.
RECOMMENDED ACTION:
Staff recommends retaining the services of Chandler and the City enter into a five-year contract based on
the firm’s new proposal for an annual savings of more than $25,000 per year as compared to a two investment advisor arrangement. In addition, staff recommends terminating the existing investment
management contract with PFM Asset Management as of December 31, 2016. With Finance Committee concurrence of staff’s recommendation, staff will proceed with the recommended action and bring the
new investment advisor contract to the City Council for approval.
DISCUSSION:
The Finance Department has outsourced the management of the City’s investment portfolio for more than twenty-five years. With increased staff workloads over the years, it is increasingly clear that the City’s
portfolio has benefited from full time expert management by professionally managed investment firms. During the last eight years, the Federal Government has kept interest rates historically low, and reduced the inventory of agency securities making investing the City’s idle money and diversifying the portfolio
more challenging. Contracting for investment advisory services avails the City to a full complement of investment services that would not be possible to do in-house without the economy of scale that full-time
Investment Advisor Recommendation September 15, 2016
Page 2 investment advisory services command. This means our investment portfolio is invested more safely because it benefits from full-time professional attention, ongoing credit analysis and the industry tools and
resources to manage public funds effectively and prudently.
The City previously engaged five separate investment managers and five separate custodial banks to oversee and safeguard its investment portfolio. In 2011, the City evaluated proposals from investment
advisory firms to evaluate the possibility of reducing its number of investment managers and custody banks greatly improving efficiency and reducing fees in the process. Based on the circumstances at that
time, the City reduced the number of service providers to Chandler, Cutwater Asset Management (Cutwater), and PFM Asset Management (PFM) who each were awarded five-year contracts. On October
6, 2014, the firm BNY Mellon, our current custody bank, announced its intention to acquire Cutwater. The City terminated its contract with Cutwater shortly after and transferred the assets previously managed by
Cutwater to Chandler and PFM proportionately. As part of its due diligence, staff intends to conduct a complete and competitive selection process for investment advisory services at the end of every five-year contract term. The contracts for Chandler and PFM, originally set to expire in June 2016, were extended through December 2016 in order to allow sufficient time to solicit new proposals from investment advisory
firms.
Staff has traditionally undertaken the task of planning, preparing and facilitating the RFP process for
investment advisory services. Since the City had already engaged two excellent firms, the task to differentiate the quality of services and best fit was going to be a difficult task. Staff thought it was prudent to hire a consultant with (1) years of industry experience who could attract a group of highly qualified firms
to respond to the RFP; (2) a demonstrated commitment to government excellence; (3) and the ability to undertake this important and detailed work during a time when staff was consumed with preparing the Fiscal Year 2016-2017 Budget and undertaking the ERP implementation. The City hired the firm Portfolio
Services for Government, LLC (PSG) to review RFP expectations and logistics with the City, prepare the RFP documents, analyze and summarize RFP responses, and facilitate the finalist interview process.
Together with PSG, the City issued a Request for Proposal (RFP) for Investment Advisory Services on
May 16, 2016. By the proposal due date of June 17, 2016, six firms submitted proposals, including: Atlanta Capital, Chandler, Eaton Vance Management, PFM, Public Trust Assets, and Reams Asset
Management. Proposals were submitted in two parts, including a written technical proposal and a separated sealed dollar cost bid. Under the coordination of the Finance Director and PSG, proposals were reviewed and ranked by a three-person Selection Committee comprised of the Finance Director, the Deputy Finance Director and a staff Accountant in charge of investment accounting and reconciliation.
The written technical proposals were reviewed and ranked by the Committee before the sealed dollar cost bids were opened and scored.
Staff evaluated and ranked each firm’s proposals based on qualifications and experience, management
approach and discipline, value added services, and fees. Due to the lower rankings assigned to Reams, Atlanta Capital, and Eaton Vance, staff did not advance these three firms for further consideration. Staff
narrowed their selection consideration to Chandler, PFM, and Public Trust – all reputable firms that have experience with meeting investment goals while providing continuity through challenging market cycles. These firms were then invited back to a finalist presentation and interview responding to sixteen specific questions that were provided to them in advance, and to respond to any other questions the Selection
Committee chose to probe further into.
While the three finalists met the qualifications; based on the technical content of the proposals, the quality and experience of the proposed engagement staff, comparable clients, and other intangibles; the
Selection Committee ranked Chandler as the top overall proposer deemed best able to meet the City’s overall needs. Sealed dollar cost bids were opened and revealed annual cost. Firms proposed a tiered
fee structure based on the total assets under management. The relative rankings, average fee rate and cost based on $185 million are summarized in the table to follow:
Investment Advisor Recommendation September 15, 2016
Page 3
While any of the three finalists would make a great choice, staff selected Chandler as the sole investment manager. The City values the relationship it has had with its past investment advisors, we believe
Chandler is currently the best fit for City at present because of their narrow focus on fixed income investments, frequent direct communication with portfolio managers, customizable solutions, favorable
pricing and other intangibles. Chandler also has proven track record of understanding and delivering on the City’s cash flow needs, a history of providing excellent service and has consistently performed well in
up and down market conditions. Since 1991, Chandler’s portfolio managers have worked diligently to invest the City’s portfolio in a manner that fulfills the specific objectives for safety, liquidity and income in a
prudent manner at a very competitive price. Chandler Asset Management is an SEC-registered investment advisor and woman-owned business enterprise with its principal place of business located in
San Diego, California. Chandler’s primary focus is managing funds for public agencies and other conservative-minded clients who are guided by the objectives of preservation of principal, access to cash, and maximization of investment outcome without undue exposure to risk.
Public Trust is a relatively new firm that has been in operation for five years. While Public Trust has highly experienced financial professionals, staff believes that having a few more years as an established
firm would make it more attractive. Although the City has been very satisfied with the past expert
performance of PFM, City Staff believes that a single investment manager could more efficiently manage its portfolio at a lower cost and streamline treasury operations without introducing new portfolio risk. In moving to one investment manager, the City will lower its fee structure from approximately $140,000 to
$114,000, a savings of over $25,000 per year based on a $185 million average balance. The City will also optimize the investment program by making better use of liquidity and long-term funds. There will be additional staff efficiency by reducing coordination efforts, reducing the number of quarterly meetings with
investment advisors year and fewer account reconciliations. The incremental cost of investing new funds is also reduced by reaching lower tiered pricing through one investment advisor.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Attachment:
A. Chandler Asset Management RFP Proposal
ATTACHMENT C
POWERPOINT PRESENTATIONS (2) USED DURING THE SEPTEMBER 14, 2017, FINANCE COMMITTEE MEETING
City of Newport Beach Finance Committee
September 14, 2017
Presented by Terry McCall, Principal
Portfolio Services for Government, LLC
Item No. 5A1
Investment Advisor Contract Discussion and Recommendation
Presentation
September 14, 2017
Terry McCall, Principal
Experience:
Principal and Owner of PSG, has advised numerous cities ,
counties , special districts and federal agencies since 2008
Former CFO City of Gresham, OR
Former Vice President, US Bank
PSG Scope
Assess the overall effectiveness of investment portfolio and
investment policies
Investment Advisor RFP development and selection
Investment Advisor Selection Process
Portfolio Services for Government (PSG) facilitated process
Issued Request for Proposals (May 2016)
6 firms responded
PSG analyzed/compared proposals
Staff narrowed to 3 finalists for interviews:
Chandler Asset Management
PFM Asset Management
Public Trust Advisors
Firms were evaluated
and ranked based on
qualifications and
experience,
management approach
and discipline, value
added services, and
fees.
Staff narrowed finalists
to Chandler and PFM
Notable Qualification Topics Chandler Asset Mgt PFM Asset Mgt
Firm highly qualified?Yes Yes
Assets Under Management 255 accounts
$9.5 Bn
668 accounts
$94.8 Bn
Accounts added last 3 years 153 210
Accounts closed last 3 years 3 (1.2% of 255)31 (4.6% of 668)
Reported performance
compared to benchmarks
(Note: Fairly similar;
differences were slight)
•Short-term lower
•Long-term higher
•Short-term higher
•Long-term lower
Selected Qualification
Topics Chandler Asset Mgt PFM Asset Mgt
Average accounts per
portfolio manager 21 40
Agree just 1 advisor
needed?Yes Yes
Advantage to City Workload & Costs Workload & Costs
Willingness to negotiate
fees?Yes No
Things to consider:
City’s portfolio size is a better fit for 1 advisor versus 2 or more
(Portfolios over $1 Billion may be able to justify multiple firms)
Staff likes both firms but sees the overall fit as better with
Chandler
Reconsideration of Investment Advisor
Recommendation
Finance Committee Meeting
September 14, 2017
Background
•During the September 16, 2016, Finance Committee meeting, staff
recommended retaining the investment advisory services of Chandler Asset
Management (Chandler) as its sole investment advisor and that the City enter
into a five-year contract based on the firm’s new proposal.
•The Finance Committee recommended the City Council enter into five-year
contracts with two firms, PFM and Chandler.
Background
The Finance Committee expressed the following concerns with hiring only one
investment advisor:
•The City would not realize a diversification of asset classes through the use of
only one investment advisory firm.
•Maintaining two investment advisors provides the means to evaluate the relative
performance of each firm (check and balance) and facilitate a spirit of
competition that will result in higher performance.
•Few local agencies only use one investment advisor, or at least those with a
portfolio size similar to Newport Beach
Strategies and Performance has been very similar
•California Government Code contains very specific provisions regarding the types of investments and practices permitted and statute specifies a percentage restriction on a certain categories of investment.
•There has been little variability in duration and asset class selection used by PFM and Chandler and in recent years.
•Market performance and strategies for both firms over the years has been very similar
•The City can measure relative performance relative to appropriate well known transparent benchmarks
Similar Performance over time
0.000%
1.000%
2.000%
3.000%
4.000%
5.000%
6.000%
Trailing 12 Months
Income Return
Prior Year Income Return Prior 3 Years Income
Return
Trailing 5 Years Income
Return
Income Return Comparison
CNB-Chandler CNB-PFM
0.000%
0.200%
0.400%
0.600%
0.800%
1.000%
1.200%
1.400%
1.600%
1.800%
Year to Date Total Return Prior Year Total Return Trailing 3 Years Total Return Prior 5 Years Total Return
Total Return
(Includes Unrealized Gains & Losses)
CNB-Chandler CNB-PFM
The City’s Investments Will be Exposed to no additional
risk under one vs. two Investment Advisors
The City’s Investments are registered in the City’s name and held by a custodial bank (Bank of New
York) so the likelihood of embezzlement by investment advisor is extremely limited.
Investments will continue to be broadly diversified over market classes, sectors and concentration will
be limited amongst entities that may pose a default risk (Corporate Bonds)
City receives a direct feed from the custodial bank
City monitors compliance with investment policy and risk metrics including corporate and sector
concentration risk, security ratings all independently from investment advisor
City receives market value pricing independently from investment advisor
Accounting for investment activity is reconciled daily
The Use of One Investment Advisor is Efficient, Less
Costly and Appropriate for a City of Newport Beach’s
Size
•In moving to one investment manager from two, the City will:
•Lower its fee structure
•Better manage short-term liquidity and long-term funds under one manager
•Streamline coordination efforts and allow staff to focus on matching assets with liabilities
and appropriate investment strategies
•Reducing the incremental cost of investing from 7 basis points (bps) to 4 bps on newly
invested capital.
•Chandler’s proposal would provide an annual savings of more than $25,000 per
year as compared to the City’s a two investment advisor arrangement.
•Staff was not successful with negotiating a lower fee structure than was
originally proposed by PFM. When asked, Chandler did accept a lower counter
fee proposal.
Cities with Investment Assets Larger Than
Newport Beach ($ millions)
Staff surveyed all
Orange County cities
and found that
Newport Beach is
the only City in the
County that uses
more than one
investment advisor
and approximately
half manage their
investments in-
house. Six cities in
Orange County have
portfolios larger
than Newport
Beach.
Chandler Manages Assets for Several Agencies with
Assets in Excess of $100 Million and Has Shown Greater
Responsiveness to the City’s Needs Over the Years
•Chandler manages assets for 22 public agencies in California with
assets greater than Newport Beach, and for nine agencies with
assets greater than $300 million.
•The average number of accounts served per portfolio manager for
Chandler is 21 while for PFM it is 40.
•The number of discontinued firm’s services in the last three years
for Chandler has been three; whereas for PFM the number is 31.
Assets Under Sole Chandler Management in
California ($ millions)
Flexibility in Executing Portfolio Strategies
4%
14%
82%
ONE-SIZE-FITS-ALL STRATEGY
Checking LAIF 1-3 Yr Strategy
1%10%
14%
61%
14%
CUSTOM STRATEGY
Checking LAIF 6-18 Month ALM 1-5 Yr Strategy 1-10 YR ALM or 115 Trust
Transition
In Summary: Benefits of Single Investment
Asset Management with Chandler
•The City benefits from working with Chandler serving largely California institutions with a public sector focus. Located in San Diego vs. Harrisburg Pennsylvania.
•Portfolio manager, Jayson Schmitt, CFA, Executive Vice President, is a Principal of Chandler and a member of the firm’s Executive Committee. Jayson has been working with the City of Newport Beach since 1995.
•As the City’s portfolio has grown and investment needs have changed, Chandler has provided opportunities to enhance returns through a custom investment strategies appropriate for related liabilities.
•The City benefits from Chandler’s portfolio manager-to-client ratio. Chandler has in-depth knowledge of the City’s investment program, risk tolerances, and objectives, and strives to be an extension of staff. Client since 1992.
Reconsideration of Investment Advisor
Recommendation
Finance Committee Meeting
September 14, 2017
REQUEST FOR PROPOSALS 16-55
(INVESTMENT ADVISORY SERVICES)
PROCUREMENT PROCESS OVERVIEW
Item No. 5B1
Investment Advisor Contract
Staff Presentation
October 12, 2017
∗Assistance provided by a consultant (Portfolio
Services for Government, LLC)
∗Procurement conducted as a Request for Proposal
(RFP), using a QBS (Qualifications-Based Selection)
process
∗Process phases (PCI):
1.Proposal analysis
2.Cost analysis
3.Interview analysis
RFP PROCESS OVERVIEW (1 of 2)
∗Six (6) firms submitted proposals
∗Three (3) firms advanced to interviews
∗Chandler Asset Management and PFM Asset
Management, LLC identified as most-qualified
proposers
RFP PROCESS OVERVIEW (2 of 2)
∗Was the City unclear the potential of retaining one
or possibly multiple investment advisors?
∗Did the proposers understand the City was looking
into retaining one or possibly multiple investment
advisors?
PROCESS QUESTIONS
∗RFP stated the possibility that the City may retain 2 investment advisors (Process)
∗RFP Questionnaire contained questions regarding the benefits or disadvantages of retaining 1 vs. multiple investment advisors (Process)
∗RFP called for proposers to submit discretionary fee schedules based on assets under management up to $400 million (Cost)
∗Panel interviews involved a discussion on the merits of a 1 vs. 2 investment advisor model (Interview)
CITY ACTIONS BY PHASE
∗Questionnaire responses
PROPOSER AWARENESS –
PROPOSAL PHASE
PROPOSER AWARENESS –
PROPOSAL PHASE
PROPOSER AWARENESS –
COST PHASE
Average Assets
Under
Advisement (in $
millions)
Chandler Asset
Management
PFM Asset
Management
0-25 Basis Point Tier 1 Basis Point Tier 1
25-50 Basis Point Tier 2 Basis Point Tier 2
50-75 Basis Point Tier 3
75-100
100-125 Basis Point Tier 3 Basis Point Tier 4
125-150
150-175 Basis Point Tier 4
175-200
200-225
225-250
250-275
275-300
300-325
325-350
350-375
375-400
PROPOSER AWARENESS –
INTERVIEW PHASE
CLARIFICATION POINTS
∗Intent of the RFP process
∗Resulting narrative
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5C
October 12, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov
SUBJECT: DEBT POLICY
SUMMARY:
Revisions are proposed to the City’s Debt Management Policy F-6 to include recent
revisions to California Government Code Section 8855.
RECOMMENDATION:
Based on the changes made to comply with Senate Bill No. 1029 (SB 1029), possible
City Council directives and Finance Committee recommendations, staff recommends
submitting revisions to Policy F-6 for City Council consideration and approval.
DISCUSSION:
The City’s Debt Management Policy (Policy) needs to be updated periodically to ensure
compliance with the California Government Code regarding how local agency debt is
managed. Senate Bill No. 1029, which became effective on January 1, 2017, amends
California Government Code Section 8855 related to local government debt
management. SB 1029 expands the information that a municipal debt issuer (the “City) is required to provide to the California Debt and Investment Advisory Commission
(CDIAC). Under SB 1029, local governments that issue debt and certain other financing
obligations must certify, in a report to the CDIAC at least 30 days prior to the sale of such
financing obligations, that it has adopted a debt policy addressing the use of debt and
that the contemplated debt issuance is consistent with its debt policies.
Prior to SB 1029, debt policies have been adopted at the discretion of municipal debt
issuers. The City previously adopted a Debt Management Policy on May 14, 2013. Staff
has prepared updates to the Policy to be in conformance with SB 1029.
The City’s Debt Management Policy is designed to ensure that a due diligence review is
performed for each debt transactions. This includes evaluating potential risks and
Debt Policy October 12, 2017
Page 2 benefits, as well as analyzing the impact that the transaction will have on city creditworthiness, debt affordability, and capacity. It is important to note that the proposed Policy predominantly reflects these practices, all of which are in place to safeguard the
City’s funds and maintain fiscal stability.
The updated Debt Management Policy that is being proposed for consideration meets all
of the requirements of California Government Code Section 8855, as amended by SB 1029. Specific requirements mandated by SB 1029, which are all incorporated in to the City’s revised Debt Management Policy, include the following:
• That agencies adopt a Debt Management Policy before issuing any new debt
• That agencies comply with the adopted policy when issuing new debt and managing existing debt
• That agencies submit an annual report to CDIAC on the status of new and existing
debt
• That agencies include the following five elements in their Debt Management Policy:
1. The purposes for which the debt proceeds may be used
2. The types of debt that may be issued
3. The relationship of the debt to, and integration with, the issuer’s capital
improvement program or budget, if applicable
4. Policy goals related to the issuer’s planning goals and objectives
5. The internal control procedures that the issuer has implemented, or will
implement, to ensure that the proceeds of the proposed debt issuance will
be directed to the intended use.
Other Changes
Separate from the revisions required by SB 1029, the introduction of the following and
other policy guidelines improve the governance parameters of the policy:
1. The City will utilize debt obligations only after giving due consideration to all
available funding sources, including available cash reserves in the City’s Facilities
Financial Plan (FFP), Harbor & Beaches master plan, other strategic savings programs, available current revenues, potential future revenue sources, potential
grants, and all other financial sources legally available to be used for such
purposes.
Debt Policy October 12, 2017
Page 3 2. The City shall seek to issue debt in a timely manner to avoid having to make unplanned expenditures for capital improvements or equipment from its general fund. Long-term debt will not be used to fund City operations.
3. Call Provisions - In general, the City’s securities will not include an optional
redemption feature that is longer than 10 years or allow a “make-whole” option. If
market conditions exist where a call option greater than 10 Years or a “make-whole” call would benefit the City, the authorizing bond resolution must explicitly provide staff the authorization to negotiate these options.
Based on the changes made to comply with SB 1029, City Council directives and Finance
Committee recommendations, staff will bring revisions to Policy F-6 to the City Council
for consideration and approval.
. Prepared by: Submitted by:
/s/Steve Montano
/s/Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Attachment:
A. Debt Policy Revisions
ATTACHMENT A
DEBT POLICY REVISIONS
F-6
1
DEBT MANAGEMENT POLICY
A. PURPOSE
The purpose of this policy is to establish guidelines and parameters for the effective
governance, management and administration of City debt. This Debt Policy is intended
to comply with Government Code Section 8855(i) and shall govern all debt undertaken
by the City.
The City hereby recognizes that a fiscally prudent debt policy is required in order to:
1. Maintain the City’s sound financial position.
2. Ensure the City has the flexibility to respond to changes in future service priorities,
revenue levels, and operating expenses.
3. Protect the City’s credit-worthiness., including maintaining the City’s
AAA/Aaa/AAA credit ratings.
4. Ensure that all debt is structured in order to protect both current and future
taxpayers, ratepayers and constituents of the City.
5. Ensure that the City’s debt is consistent with the City’s planning goals and
objectives and capital improvement program or budget, as applicable.
B. BACKGROUND
The City is committed to fiscal sustainability by employing long-term financial planning
efforts, maintaining appropriate reserves levels and employing prudent practices in
governance, management, budget administration and financial reporting.
Debt levels and their related annual costs are important long-term obligations that must
be managed within available resources. A disciplined thoughtful approach to debt
management includes policies that provide guidelines for the City to manage its debt
program in-line with those resources. Therefore, the objective of this policy is to provide
written guidelines and restrictions concerning the amount and type of debt issued by the
City and the ongoing management of the debt portfolio.
F-6
2
This debt management policy is intended to improve the quality of decisions, provide
justification for the structure of debt issuance, identify policy goals and demonstrate a
commitment to long-term financial planning, including a multi-year capital plan.
Adherence to a debt management policy signals to rating agencies and the capital
markets that a government is well managed and should meet its obligations in a timely
manner.
C. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an equitable and cost-effective
means of financing major infrastructure and capital project needs of the City. Debt
will be considered to finance such projects if:
a) It meets the City’s goal of distributing the payments for the asset over itsfor no
longer than its useful life so that benefits more closely match costs for both
current and future residents.
b) It is the most cost-effective funding means available to the City, taking into
account cash flow needs and other funding alternatives.
c) It is fiscally prudent and meets the guidelines of this Policy. Any consideration
of debt financing shall consider financial alternatives, including pay-as-you-go
funding, proceeds derived from development or redevelopment of existing
land and capital assets owned by the City, and use of existing or future cash
reserves, or combinations thereof.
2. Acceptable Uses of DebtPurposes for Which Debt May Be Issued
The City will consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The
primary purpose of debt is to finance one of the following:
a) Acquisition and or improvement of land, right-of-way or long-term easements.
b) Acquisition of a equipment or a capital asset with a useful life of 3 or more
years.
c) Construction or reconstruction of a facility.
F-6
3
d) Refunding, refinancing, or restructuring debt, subject to refunding objectives
and parameters discussed in Section E.
e) Although not the primary purpose of the financing effort, project
reimbursables that include project planning design, engineering and other
preconstruction efforts; project-associated furniture fixtures and equipment;
capitalized interest, original issuer’s discount, underwriter’s discount and
other costs of issuance.
f) Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
g) Refinancing or advance funding of City pension obligations, but only to the
extent significant financial benefit is achieved and limited by Section FE.
3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a) Financing of operating costs except for anticipation notes with a term of less
than one year.
b) Debt issuance used to address budgetary deficits.
c) Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
F-6
4
D. RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGAM AND
BUDGET
The City has established long-term plans for replacing aging physical infrastructure. The
City strives to maintain a level funding plan that will minimize the peaks and valleys in
General Fund support levels and that allows for the cash funding of projects over time.
The City will utilize debt obligations only after giving due consideration to all available
funding sources, including available cash reserves in the City’s Facilities Financial Plan
(FFP), Harbor & Beaches master plan, other strategic savings programs, available current
revenues, potential future revenue sources, potential grants, and all other financingcial
sources legally available to be used for such purposes. When and if deemed necessary,
the City will issue debt for the purposes stated in this Debt Policy and to implement
policy decisions incorporated in the City’s Facilities Financing, Harbor and Beaches, and
Capital Improvement Plans.
The City shall strive to fund the upkeep and maintenance of its infrastructure and
facilities due to normal wear and tear through the expenditure of available operating
revenues. The cCity shall seek to avoid the use of debt to fund infrastructure and facilities
improvements that are the result of normal wear and tear.
The City shall integrate its debt issuances with the goals of its capital improvement
program by timing the issuance of debt to ensure the projects are available when needed
in furtherance of the City’s public purposes.
The City shall seek to issue debt in a timely manner to avoid having to make unplanned
expenditures for capital improvements or equipment from its general fund. Long-term
debt will not be used to fund City operations.
E. POLICY GOALS RELATED TO PLANNING GOALS AND OBJECTIVES
The City is committed to long-term financial planning, maintaining appropriate reserve
levels, and employing prudent practices in governance, management, and budget
administration. The City intends to issue debt for the purposes stated in this Debt Policy
and to implement policy decisions incorporated in the City’s Facilities Financing, Harbor
F-6
5
and Beaches, and Capital Improvement Plans. Adoption of this Debt Policy will help
ensure that debt is issued and managed in a manner that protects the public interest.
It is a policy goal of the City to protect taxpayers, ratepayers (if applicable) and
constituents by utilizing conservative financing methods and techniques so as to obtain
the highest practical credit ratings (If applicable and the lowest practical borrowing costs.
The City will comply with applicable state and federal law as it pertains to the maximum
term of debt and the procedures for levying and imposing any related taxes, assessments,
rates, and charges.
F. STRUCTURE OF DEBT (Fixed Rate)
1. Term of Debt – Debt will be structured with the goal of distributing the payments
for the asset over its useful life so that benefits more closely match costs for both
current and future residents. Borrowings by the City should be of a duration that
does not exceed the useful life of the improvement that it finances. The standard
term of long-term borrowing is typically 15-30 years.
2. Rapidity of Debt Payment – Accelerated repayment schedules reduce debt
burden faster and reduce total borrowing costs. The Finance Department will
amortize debt through the most financially advantageous debt structure and to the
extent possible, match the City’s projected cash flow to the anticipated debt service
payments. “Backloading” of debt service will be considered only when one or
more of the following occur:
a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years prohibitive.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City’s aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the project’s operation.
3. Level Payment – To the extent practical, bonds will be amortized on a level
repayment basis, and revenue bonds will be amortized on a level repayment basis
F-6
6
considering the forecasted available pledged revenues to achieve the lowest rates
possible. Bond repayments should not increase on an annual basis in excess of 2%
without a dedicated and supporting revenue funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds – For each issuance,
the City will select serial bonds or term bonds, or both. On the occasions where
circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The
decision to use term, serial, or CAB bonds is driven based on market conditions.
5. Reserve Funds – The City shall strive to maintain fund balance in the Facilities
Replacement Plan Reserve at a level equal to or greater than the maximum annual
debt service of existing obligations.
6. Capitalized Interest - The City will seek to avoid the use of capitalized interest,
which defers debt service by increasing the size of a debt issue to fund interest. On
occasion, capitalized interest will be considered to the extent that the City wishes
to defer the beginning of debt service until project completion, in order to match
project revenues with debt service.
7. Discount Bonds - While discount and deep discount bonds may reduce the
interest cost of the bonds below that of par or premium bonds, they should only
be recommended in limited situations as they reduce the potential for future
savings from refunding of the bonds.
8. Premium Bonds - Premium bonds may provide for a lower overall interest cost
compared to par or discount bonds. An analysis should be prepared comparing
the yield to maturity and yield to call of the premium bond structure compared
to alternative couponing. This comparison should be done on maturity by
maturity basis. The value of the call option of the higher coupon with respect to
the future ability to refund should be reviewed as well.
9. Call Provisions - In general, the City’s securities will not include an optional
redemption feature that is longer than 10 years or allow a “make-whole” option.
If market conditions exist where a call option greater than 10 Years or a “make-
whole” call would benefit the City, the authorizing bond resolution must
F-6
7
explicitly provide staff the authorization to negotiate these options.In general,
the City’s securities will not include an optional redemption feature that is longer
than 10 years. It is the City’s intent to maximize prepayment flexibility on all
bond issues. Shorter call provisions should be considered on a case-by case basis.
D.G. USE OF ALTERNATIVE DEBT INSTRUMENTS
The City recognizes that there are numerous types of financing structures and funding
sources available, each with specific benefits, risks, and costs. All potential funding
sources are reviewed by management within the context of the Debt Policy and the
overall portfolio to ensure that any financial product or structure is consistent with the
City’s objectives. Regardless of what financing structure(s) is utilized, due-diligence
review must be performed for each transaction, including the quantification of potential
risks and benefits, and analysis of the impact on City creditworthiness and debt
affordability and capacity. Because fixed rate debt transfers most financial risks to
bondholders, fixed rate debt will always be considered the preferred method of financing
long-term capital needs.
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on market conditions. However, the City will seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
a) Purpose
The City shall consider the use of variable rate debt for the purposes of:
i. Reducing the costs of debt issues.
ii. Increasing flexibility for accelerating principal repayment and
amortization.
iii. Enhancing the management of assets and liabilities (matching short-
term “priced debt” with the City’s short-term investments).
iv. Diversifying interest rate exposure.
iv.v. As a short-term source of construction/acquisition financing, i.e.,
commercial paper, to reduce interest cost
F-6
8
b) Considerations and Limitations on Variable-Rate Debt
The City may consider the use of all alternative structures and modes of variable
rate debt to the extent permissible under State law and will make determinations
among different types of modes of variable-rate debt based on cost, benefit, and
risk factors. The Finance Director shall consider the following factors in
considering whether to utilize variable rate debt:
i. Any long-term issuance of variable rate debt should not exceed 20% of
total City General Fund supported debt.
ii. Any long-term issuance of variable rate debt should be fully hedged by
expected future Facility Financing Plan reserves or unrestricted General
Fund reserve levels.
iii. Whether interest cost and market conditions (including the shape of the
yield curves and relative value considerations) are unfavorable for
issuing fixed rate debt.
iv. The likelihood of projected debt service savings when comparing the
cost of fixed rate bonds.
v. Costs, implementation and administration are quantified and
considered.
vi. Cost and availability of liquidity facilities (lines of credit necessary for
variable rate debt obligations and commercial paper in the event that
the bonds are not successfully remarketed) are quantified and
considered.
vii. Ability to convert debt to another mode (daily, monthly, fixed) or
redeem at par at any time is permitted.
viii. The findings of a thorough risk management assessment.
c) Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate debt
subjects the City to additional financial risks (relative to fixed rate bonds),
including interest rate risk, tax risk, and certain risks related to providing liquidity
for certain types of variable rate debt.
The City will properly manage the risks as follows:
F-6
9
i. Interest Rate Risk and Tax Risk – The risk that market interest rates
increase on variable-rate debt because of market conditions, changes in
taxation of municipal bond interest, or reductions in tax rates.
Mitigation – Limit total variable rate exposure per the defined limits
and match the variable rate liabilities with short term assets.
ii. Liquidity/Remarketing Risk – The risk that holders of variable rate
bonds exercise their “put” option, tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider to
repurchase the bonds. This will result in the City paying a higher rate
of interest to the facility provider and the potential rapid amortization
of the repurchased bonds. Mitigation - Limit total direct variable-rate
exposure. Seek liquidity facilities which allow for longer (5-10 years)
amortization of any draws on the facility. Secure credit support facilities
that result in bond ratings of the highest short-term ratings and long-
term ratings not less than AA. If the City’s bonds are downgraded
below these levels as a result of the facility provider’s ratings, a
replacement provider shall be sought.
iii. Liquidity/Rollover Risk – The risk that arises due to the shorter term of
most liquidity provider agreements (1-5 years) relative to the longer-
term amortization schedule of the City’s variable-rate bonds. In
particular, (1) the City may incur higher renewal fees when renewal
agreements are negotiated and (2) the liquidity bank market constricts
such that it is difficult to secure third party liquidity at any interest rate.
Mitigation – Negotiate longer terms on provider contracts to minimize
the number of rollovers
2. Derivatives
The use of certain derivative products to hedge variable rate debt, such as interest rate
swaps, may be considered to the extent the City has such debt outstanding or under
consideration. The City will exercise extreme caution in the use of derivative
instruments for hedging purposes, and will consider their utilization only when
sufficient understanding of the products and sufficient expertise for their appropriate
use has been developed. A comprehensive derivative policy will be adopted by the
City prior to any utilization of such instruments.
E.H. REFUNDING GUIDELINES
F-6
10
The Finance Director shall monitor at least annually all outstanding City debt obligations
for potential refinancing opportunities. The City will consider refinancing of outstanding
debt to achieve annual savings. Absent a compelling economic reason or financial benefit
to the City, any refinancing should not result in any increase to the weighted average life
of the refinanced debt.
The City will generally seek to achieve debt service savings which, on a net present value
basis, are at least 3% of the current debt being refinanced. Any potential refinancing
executed more than 90 days in advance of the outstanding debt optional call date shall
require at least a 5% present value savings threshold. If there is negative arbitrage in an
advance refunding, the escrow efficiency should at least be 50%. Under any savings
scenario, tThe net present value assessment shall factor in all costs, including the total
cost of issuance, escrow, and foregone interest earnings of any contributed funds on
hand. Any potential refinancing shall additionally consider whether an alternative
refinancing opportunity with higher savings is reasonably expected in the future.
Any potential refinancing executed more than 90 days in advance of the outstanding debt
optional call date shall require a higher savings threshold. Consideration of this method
of refinancing shall place greater emphasis on determining whether an alternative
refinancing opportunity with higher savings is reasonably expected in the future.
F.I. MARKET COMMUNICATION, ADMINISTRATION AND
ADMINISTRATION, AND REPORTING, AND INTERNAL CONTROL
PROCEDURES
1. Rating Agency Relations and Annual or Ongoing Surveillance – The Finance
Director shall be responsible for maintaining the City's relationships with
Standard & Poor's Ratings Services, Fitch Ratings and Moody’s Investor’s Service.
The City is committed to maintaining its existing rating levels. In addition to
general communication, the Finance Director shall:
a) Ensure the rating agencies are provided updated financial information of
the City as it becomes publically available.
b) Communicate with credit analysts at each agency at least once each year, or
as may be requested by the agencies.
c) Prior to each proposed new debt issuance, schedule meetings or conference
calls with agency analysts and provide a thorough update on the City’s
financial position, including the impacts of the proposed debt issuance.
F-6
11
2. Council and Finance Committee Communication – The Finance Director should
report feedback from rating agencies, when and if available, regarding the City's
financial strengths and weaknesses and recommendations for addressing any
weaknesses as they pertain to maintaining the City’s existing credit ratings.
Continuing Disclosure Compliance – The City shall remain in compliance with
Security and Exchange Commission Rule 15c2-12 by filing its annual financial
statements and other financial and operating data for the benefit of its bondholders
within 270 days of the close of the fiscal year, or as required in any such agreement
for any debt issue. The City shall maintain a log or file evidencing that all
continuing disclosure filings have been made promptly.Arbitrage Rebate – The
use of bond proceeds and their investments must be monitored to ensure
compliance with all Internal Revenue Code Arbitrage Rebate Requirements. The
Finance Director shall ensure that all bond proceeds and investments are tracked
in a manner which facilitates accurate calculation; and, if a rebate payment is due,
such payment is made in a timely manner.
3.
3. Debt Issue Record-Keeping – A copy of all debt-related records shall be retained
at the City’s offices. At minimum, these records shall include all official
statements, bond legal documents/transcripts, resolutions, trustee statements,
leases, and title reports for each City financing (to the extent available).
4. Compliance - When issuing debt, in addition to complying with the terms of this
Debt Policy, the city shall comply with any other applicable policies regarding
initial bond disclosure, continuing disclosure, post-issuance compliance, and the
investment of bond proceeds in accordance with applicable bond indentures and
City Administrative Procedures (AP-009), concerning tax compliance with tax
exempt bonds and Build America Bonds (BABs). Without limiting the foregoing,
the City will periodically review the requirements of and will remain in
compliance with the following:
a. Continuing Disclosure – The City will comply with federal securities law,
including any continuing disclosure undertakings entered into by the City in
accordance with Securities and Exchange Commission Rule 15c2-12. The City
will file by filing its annual financial statements and other financial and
operating data for the benefit of its bondholders within 270 days of the close of
the fiscal year, or as required in any such agreement for any debt issue. The
City shall maintain a log or file evidencing that all continuing disclosure filings
have been made promptly.
F-6
12
b. Arbitrage Rebate – The use of bond proceeds and their investments will be
monitored to ensure compliance with all Internal Revenue Code Arbitrage
Rebate Requirements. The Finance Director shall ensure that all bond proceeds
and investments are tracked in a manner that facilitates accurate calculation;
and, if a rebate payment is due, such payment is made in a timely manner.
c. Government Code section 8855(k) and the annual reporting requirements
therein.
d. Other compliance requirements imposed by regulatory bodies.
5. Proceeds Administration - Proceeds of debt will be held either (a) by a third-party
trustee or fiscal agent, which will disburse such proceeds to or upon the order of
the City upon the submission of one or more written requisitions by the Finance
Director/City Treasurer (or his or her written designee), or (b) by the City, to be
held and accounted for in a separate fund or account, the expenditure of which
will be carefully documented by the City. On a quarterly basis, the City Treasurer
shall monitor the proceeds and the disposition of unexpended proceeds.
[Probably should expand the monitoring of proceeds and the disposition on any
unexpended proceeds.]
4.
5.1.Arbitrage Rebate – The use of bond proceeds and their investments must be
monitored to ensure compliance with all Internal Revenue Code Arbitrage Rebate
Requirements. The Finance Director shall ensure that all bond proceeds and
investments are tracked in a manner which facilitates accurate calculation; and, if
a rebate payment is due, such payment is made in a timely manner.
G.J. CREDIT RATINGS
The City will consider published ratings agency guidelines regarding best financial
practices and guidelines for structuring its capital funding and debt strategies to maintain
the highest possible credit ratings consistent with its current operating and capital needs.
H.K. LEGAL DEBT LIMIT
Newport Beach Charter section 1109 indicates that the City shall not incur an
indebtedness evidenced by general obligation bonds which shall in the aggregate exceed
the sum of fifteen percent (15%) of the total assessed valuation, for purposes of City
taxation, of all the real and personal property within the City. While this limit defines
F-6
13
the absolute maximum legal debt limit for the City, it is not an effective indicator of the
City’s affordable debt capacity.
I.L.AFFORDABILITY
Prior to the issuance of debt to finance a project, the City will carefully consider the
overall long-term affordability of the proposed debt issuance. The City shall not assume
more debt without conducting an objective analysis of the City’s ability to assume and
support additional debt service payments. The City will consider its long-term revenue
and expenditure trends, the impact on operational flexibility and the overall debt burden
on the tax payers. The evaluation process shall include a review of generally accepted
measures of affordability and will strive to achieve and or maintain debt levels consistent
with its current operating and capital needs. The Finance Director shall review
benchmarking results of other California cities of comparable size with the City’s Finance
Committee prior to any significant project financing.
1. General Fund-Supported Debt – General Fund Supported Debt generally include
Certificates of Participation (COPs) and Lease Revenue Bonds (LRBs) which are
lease obligations that are secured by an installment sale or by a lease-back
arrangement between the City and another public entity. The general operating
revenues of the City are pledged to pay the lease payments, which are, in turn,
used to pay debt service on the bonds or Certificates of Participation. These
obligations do not constitute indebtedness under the state constitutional debt
limitation and, therefore, are not subject to voter approval.
Payments to be made under valid leases are payable only in the year in which use
and occupancy of the leased property is available, and lease payments may not be
accelerated. Lease financing requires the fair market rental value of the leased
property to be equal to or greater than the required debt service or lease payment
schedule. The lessee (City) is obligated to place in its Annual Budget the rental
payments that are due and payable during each fiscal year the lessee has use of
the leased property.
The City should strive to maintain its net General Fund-backed debt service at or
less than 8% of available annually budgeted revenue. This ratio is defined as the
City’s annual debt service requirements on Certificates of Participation and Lease
Revenue Bonds compared to total General Fund Revenues net of interfund
F-6
14
transfers. This ratio, which pertains to only general fund backed debt, is often
referred to as “lease burden.”
2. Revenue Bonds – Long-term obligations payable solely from specific pledged
sources, in general, are not subject to a debt limitation. Examples of such long-
term obligations include those which achieve the financing or refinancing of
projects provided by the issuance of debt instruments that are payable from
restricted revenues or user fees (Enterprise Revenues) and revenues generated
from a project.
In determining the affordability of proposed revenue bonds, the City will perform
an analysis comparing projected annual net revenues (exclusive of depreciation
which is a non-cash related expense) to estimated annual debt service. The City
should strive to maintain a coverage ratio of at least 125% using historical and/or
projected net revenues to cover annual debt service for bonds. The City may
require a rate increase to cover both operations and debt service costs, and create
debt service reserve funds to maintain the required coverage ratios.
3. Special Districts Financing – The City’s Special Districts primarily consist of
Community Facilities Districts (CFDs) and 1913/1915 Act Assessment Districts
(Assessment Districts). The City will consider requests for Special District
formation and debt issuance when such requests address a public need or provide
a public benefit. Each application will be considered on a case by case basis, and
the Finance Department may not recommend a financing if it is determined that
the financing could be detrimental to the debt position or the best interests of the
City.
4. Conduit Debt – Conduit financing provides for the issuance of securities by a
government agency to finance a project of a third party, such as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and are consistent with the
City’s overall service and policy objectives. Unless a compelling public policy
rationale exists, such conduit financings will not in any way pledge the City’s faith
and credit.
F-6
15
J. [ I would suggest we move this up before we discuss debt
alternatives]STRUCTURE OF DEBT
1. Term of Debt – Debt will be structured with the goal of distributing the payments
for the asset over its useful life so that benefits more closely match costs for both
current and future residents. Borrowings by the City should be of a duration that
does not exceed the useful life of the improvement that it finances. The standard
term of long-term borrowing is typically 15-30 years.
2. Rapidity of Debt Payment – Accelerated repayment schedules reduce debt
burden faster and reduce total borrowing costs. The Finance Department will
amortize debt through the most financially advantageous debt structure and to the
extent possible, match the City’s projected cash flow to the anticipated debt service
payments. “Backloading” of debt service will be considered only when one or
more of the following occur:
a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years prohibitive.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City’s aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the project’s operation.
3. Level Payment – To the extent practical, bonds will be amortized on a level
repayment basis, and revenue bonds will be amortized on a level repayment basis
considering the forecasted available pledged revenues to achieve the lowest rates
possible. Bond repayments should not increase on an annual basis in excess of 2%
without a dedicated and supporting revenue funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds – For each issuance,
the City will select serial bonds or term bonds, or both. On the occasions where
circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The
decision to use term, serial, or CAB bonds is driven based on market conditions.
5. Reserve Funds – The City shall strive to maintain fund balance in the Facilities
Replacement Plan Reserve at a level equal to or greater than the maximum annual
F-6
16
debt service of existing obligations.[This is a little confusing given the fact that you
did not fund a DSR in the 2010 financing, Is this meant to be an internal reserve.
The
Adopted – May 14, 2013
Amended – _____________
Finance Committee PresentationDebt Policy
October 12, 2017
Item No. 5C1
Debt Policy
Staff Presentation
October 12, 2017
Importance of a Debt Policy
•Essential financial management tool to ensure acceptable levels of
indebtedness are maintained and future generations are not
burdened by large amounts of debt.
•Demonstrates to investors and rating agencies that the City is
committed to sound financial management.
•Provides consistency and continuity to public policy development
when elected officials work from guidelines that govern the planning
and execution of projects for which debt is used.2
Purpose of Debt Policy Revisions
•Good practice to review policies frequently
•New legal requirements mandated by SB 1029*
•Opportunity to improve upon current policy
•Allow for more public input into Debt issuance terms
3*It is important to note that no new debt can be issued until SB 1029 provisions
are adopted by City Council including pending assessment district financings.
New Requirements of SB 1029
4
•Agencies shall adopt a Debt Management Policy before issuing any new debt
•Agencies shall comply with the adopted policy when issuing new debt and
managing existing debt
•Agencies shall submit an annual report to CDIAC on the status of new and existing
debt
•Agencies shall include the following five elements in their Debt Management Policy:
1.The purposes for which the debt proceeds may be used
2.The types of debt that may be issued
3.The relationship of the debt to,and integration with,the issuer’s capital improvement program or budget,
if applicable
4.Policy goals related to the issuer’s planning goals and objectives
5.The internal control procedures that the issuer has implemented,or will implement,to ensure that the
proceeds of the proposed debt issuance will be directed to the intended use.
Options to retain more control over terms?
Prescriptive Policy, Process & Restrictions
•Policy restriction to not allow make-whole call provision or lock-out periods
greater than 10 Years without explicit authorization in authorizing bond
resolution.
•Require Finance Committee, which includes four members of the public, to
craft and recommend terms of authorizing bond resolution, with the benefit
of a financial advisor, underwriter and bond counsel.
•Council to be as explicit and restrictive in authorizing bond resolution
language as is desired with full understanding of current market conditions.
5
Options to gather Public Input:
Protest Hearing
•Mirror Prop 218 Notice and Protest Hearing Procedures
Ballot Initiative Required for Capital Improvement Projects
•Require Ballot initiative for all Capital Improvement Projects over $___Million
Ballot Initiative Required for new Debt Issuance
•Require Ballot initiative for all Lease Financings over $___ Million
6
Suggested Phasing of Changes
Phase I
•SB1029
•KNN Suggestions
•Staff Suggestions
•Initial Committee Input
•Get Council approval so we
have an SB1029 Compliant
Policy for pending Assessment
District Financing(s)7
Phase II
•Public Input Revisions
•KNN to study and return to
future Finance Committee with
Pros and Cons
•Phase II Options return to
Finance Committee
•If applicable, charter
amendment could take some
time
Next Steps?
•
•
•
•
•
8
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5D
October 12, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov SUBJECT: BUDGET AMENDMENTS
EXECUTIVE SUMMARY
The purpose of this memorandum is to report on the budget amendments for the first quarter of Fiscal Year
2017-2018. All budget amendments are in compliance with City Council Policy F-3, Budget Adoption and Administration.
DISCUSSION
The Finance Committee requested that staff provide a quarterly report of budget amendments including their effect on fund balance. City Council Policy F-3, Budget Adoption and Administration, identifies how
appropriations can be transferred, amended or reduced. Please find the list of budget amendments for the quarter ending September 30, 2017, as Attachment A.
Prepared by: Submitted by:
/s/ Susan Giangrande
/s/ Dan Matusiewicz
Susan Giangrande Dan Matusiewicz
Budget Manager Finance Director
Attachment:
A. Budget Amendments Fiscal Year 2017-2018 Quarter Ending September 30, 2017
ATTACHMENT A
BUDGET AMENDMENTS FISCAL YEAR 2017-2018 QUARTER ENDING SEPTEMBER 30, 2017
Date Amount
Amendment
Type Fund
Net Effect on Fund
Balance
Increase/(Decrease)Department Explanation
General Fund (3,000.00)
To increase expenditures by $3,000 from the General Fund for
the City Clerk's records storage services and to increase
expenditure appropriations by $2,000 from AQMD
07/11/17 5,000.00 City Manager AQMD (2,000.00) City Clerk for program enhancements to the City Rideshare Program.
07/17/17 10,011.00 City Manager General Fund - City Council
To transfer expenditure appropriations from the Signature Special Event Budget to the Community and Charitable Event Grant budget to cover additional City fee credits granted by
Council at their meeting on 7/11/17.
07/25/17 250,000.00 City Council General Fund -
To increase revenue estimates and expenditure appropriations
for library and literacy programming and materials funded by a
donation from the Friends of the Library.
08/08/17 200,000.00 City Council Water Capital (200,000.00) Public Works
To increase expenditure appropriations for the Big Canyon
Reservoir Flow Metering Vault and Treatment Improvements
Project.
09/12/17 300,000.00 City Council OTS Fund - Police
To increase revenue estimates and expenditure appropriations
for the 2018 State of California Office of Traffic Safety (OTS)
Grant.
09/12/17 155,025.00 City Council General Fund - Library
To increase revenue estimates and expenditure appropriations for Library and Literacy supplies, materials, furniture, and
programming funded by a donation from the Newport Beach
Library Foundation.
Public Arts (804,393.25) To transfers funds from Public Arts & Cultural, Facilities Financing Plan, and Business Excise Tax to increaseFFP(2,305,606.75) expenditure appropriations in the Fire Station Fund for the BET (900,000.00) Community purchase of the property for the Lido Fire Station09/12/17 4,010,000.00 City Council Fire Station Fund 4,010,000.00 Development relocation project.
09/12/17 280,305.00 City Council Tidelands CIP - Public Works
To transfer expenditure appropriations from the Harbor
Dredging/Planning project to the Regional General Permit-RGP54 project.
Gas Tax 96,250.00 To decrease expenditure appropriations in the Gas Tax fund for
the Coast Highway Traffic Signal project which will 09/13/17 96,250.00 City Manager Contributions 96,250.00 Public Works instead be funded by a contribution from OCTA.
09/13/17 4,058.00 City Manager AQMD (4,058.00) City Clerk
To increase expenditure appropriations related to the City
Rideshare Program. The funding for the quarterly awards were omitted during development of the FY 2017-18 budget.
09/26/17 18,000.00 City Council General Fund (18,000.00) Library
To increase expenditures for literacy services funded by a grant
from the California Library Literacy services. Grant revenue was included in FY 18 adopted budget.
City of Newport Beach
Budget AmendmentsFiscal Year 2017-18Quarter Ending September 30, 2017
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5F
October 12, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov SUBJECT: LONG-TERM FINANCIAL FORECAST
DISCUSSION
The Finance Committee Chair requested that staff provide a performance summary of the City’s top three revenue sources. The attached report summarizes the budget and actual receipt history for property, sales,
and transient occupancy taxes between fiscal years 2014 and 2017 and projects the same for fiscal years 2018 through 2020. Staff will also review pension funding scenarios including less aggressive payment
plans and other financial updates that are relevant to the current and future budgets.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Attachment: A. Top Three Revenue Historical Analysis and Projection
ATTACHMENT A
TOP THREE REVENUE HISTORICAL ANALYSIS AND PROJECTION
CITY OF NEWPORT BEACH TOP 3 REVENUE SOURCES
Historical Analysis and Future Projection
Historical Projected
Property Tax
2014 2015 2016 2017 2018 2019 2020
Budget 77,434,791 81,965,214 85,770,279 91,685,344 97,120,660 104,021,074 108,181,917
/77,954,939 82,298,226 88,810,860 94,350,181 99,067,690 104,021,074 109,222,128
Variance (Actual +Over/-Under Budget)520,148 333,012 3,040,581 2,664,837 1,947,030 - 1,040,211
Pct Var From Budget 0.7%0.4%3.5%2.9%2.0%0.0%1.0%
YOY Growth 4,343,286 6,512,635 5,539,320 4,717,509 4,953,384 5,201,054
Pct YOY Growth 5.6%7.9%6.2%5.0%5.0%5.0%
Sales Tax
2014 2015 2016 2017 2018 2019 2020
Budget 30,193,894 32,800,745 37,000,093 34,612,648 35,932,370 35,487,307 35,867,041
/30,869,941 32,878,836 36,808,460 33,702,895 34,872,297 35,487,307 35,867,041
Variance (Actual +Over/-Under Budget)676,047 78,091 (191,633) (909,753) (1,060,073) - -
Pct Var 2.2%0.2%-0.5%-2.6%-3.0%0.0%0.0%
YOY Growth 2,008,895 3,929,624 (3,105,566) 1,169,402 615,010 379,734
Pct YOY Growth 6.5%12.0%-8.4%3.5%1.8%1.1%
Transient Occupancy Tax
2014 2015 2016 2017 2018 2019 2020
Budget 17,291,420 19,377,767 20,656,850 22,578,447 24,327,966 23,975,985 25,174,784
/18,176,369 20,369,158 21,083,199 22,382,361 23,053,832 23,975,985 25,174,784
Variance (Actual +Over/-Under Budget)884,949 991,391 426,349 (196,086) (1,274,134) - -
Pct Var 5.1%5.1%2.1%-0.9%-5.2%0.0%0.0%
YOY Growth 2,192,789 714,041 1,299,162 671,471 922,153 1,198,799
Pct YOY Growth 12.1%3.5%6.2%3.0%4.0%5.0%
Property Tax Notes: Consistent and vigorous demand for coastal property has allowed the City to enjoy long-term growth trends with its number
one revenue source. Value changes along with infill development in Newport Beach result in continued appreciation in property values through FY
17. We project continued strong growth through FY 20. Property taxes are calculated by multiplying the property's tax assessed value by the tax
rate, which is set at 1%, per Proposition 13. Properties are valued by the Assessor on January 1st annually by reviewing the values from the prior
year. Proposition 13 allows a maximum of 2% CPI applied to the property valuation. The most recent CPI that will be applied for the 2018-19 tax
roll valuation is 2.0%.
Sales Tax Notes: FY 17 sales tax is, and FY 18 to FY 20 sales tax receipts are projected to be, lower than expected due to the tapering of high-end
auto sales, especially Tesla and Mercedes, an increase in the number of auto leases which results in lower sales tax when compared to auto sales,
negative audit corrections and an increase in on-line shopping overall. In FY 16, approximately $2.7 million of the sales tax increase is due to a one-
time true-up payment from the state known as the “triple-flip.”
TOT Notes: The rate of year-over-year growth in TOT revenue is anticpated to be lower over the next few years due to the confluence of
simultaneous hotel renovations. See bar chart below that depicts historical TOT revenue growth. Renovations are scheduled at Pelican Hill
beginning in September 2017 through June 2018 that will result in lower hotel tax. The Duke Hotel will undergo room renovations from October
2017 through June 2018 and will open as a Renaissance hotel. All 498 rooms will be renovated and TOT revenue is anticipated to decrease for the
duration of the renovations. The Radisson Hotel started undergoing significant renovations in October 2016 and is anticipating completion and
rebranding as a Hyatt in May 2018. Nearly half of all Radisson rooms will be unavailable during the renovation; however higher room rates are
anticipated when the hotel is rebranded as a Hyatt.
Projected
Projected
Projected
Historical
Historical
Historical
All General Fund Revenue
2014 2015 2016 2017 2018 2019 2020
Budget 170,130,361 181,451,410 194,296,230 200,105,331 210,193,365 218,664,157 225,224,082
/174,432,930 185,828,583 199,245,805 204,832,321 212,295,298 218,664,157 225,224,082
Variance (Actual +Over/-Under Budget)4,302,568 4,377,173 4,949,575 4,726,990 2,101,934 - -
Pct Var 2.5%2.4%2.5%2.4%1.0%0.0%0.0%
YOY Growth 11,395,653 13,417,222 5,586,517 7,462,977 6,368,859 6,559,925
Pct YOY Growth 6.5%7.2%2.8%3.6%3.0%3.0%
ProjectedHistorical
1October 12, 2017
History
1932 CalPERS established
1937 Counties allowed to establish plans
1939 Counties and other public agencies allowed to
participate in CalPERS
Item No. 5F1
Long -Term Financial Forecast
Presentation
October 12, 2017
2October 12, 2017
CalPERS 13 Member Board
6 Elected by Members
2 all members
1 active State members
1 active School members
1 active Public Agency members
1 retired members
3 Appointed:
2 Governor
1 Legislature
3October 12, 2017
CalPERS 13 Member Board
4 Ex Officio
State Treasurer
State Controller
Director Department of Human Resources
State Personnel Board designee
4October 12, 2017
Proposition 162
In 1992 gave CalPERS (and most other retirement
system boards) plenary authority to
Invest plan assets
Set actuarial methods & assumptions
Determine contribution rates
Designates Board’s highest priority is to provide
benefits to members and beneficiaries
Prevents legislature from changing Board make
up without voter approval
5October 12, 2017
Investment History
1953 CalPERS allowed to invest in real estate
> Bonds only prior to 1953
1966 Prop 1–Allowed to invest up to 25% in
equities
1984 Prop 21 –25% limit removed
6October 12, 2017
CalPERS Benefit History
Benefit levels essentially unchanged for 30+ years
1.43%@ 65 formula
1968 2% COLA
1970 2%@60 became option for Public Agencies
1983 Safety 2.5%@55 & 2.7%@55 (aka 2%@50)
became option for Public Agencies
1990 2%@55 became option for Public Agencies
1991 Previous formulas closed to new State hires
with new hires getting 1.25%@65 formula
7October 12, 2017
CalPERS Benefit History
1999 Safety 3%@55 & 3%@50 became option for
Public Agencies & eliminated 1991 State
reform
2001 Miscellaneous 2.5%@55, 2.7%@55 and
3%@60 became option for Public Agencies
2012 PEPRA provided lower formulas for new
Members
2%@62 for Miscellaneous
2.7%@57 for Safety
8October 12, 2017
CalPERS Divestment
January 2017 Wilshire report said:
$7.9 billion losses over past 30 years
< 0.1% lower return on average each year
Primarily due to tobacco and South Africa
Does not include relatively recent coal divestment
imposed by legislature
Generally opposed by CalPERS staff
9October 12, 2017
Address Unfunded Liability
Make payments directly to CalPERS
Set up Internal Service Fund
Establish IRC §115 Supplemental Pension
Trust
10October 12, 2017
Make Payments to CalPERS
Target specific amortization bases
Longer amortization bases give you:
Bigger long term savings but
Lower short term rate reductions
Shorter amortization bases give you:
Smaller long term savings but
Higher short term rate reductions
11October 12, 2017
Establish Internal Service Fund
Could be used for rate stabilization
Restricted investments:
Likely low (0.5%-1.0%) investment returns
Short term/high quality
Designed for preservation of principal
Assets could be used by Council for other
purposes
12October 12, 2017
Establish (§115) Irrevocable
Supplemental Pension Trust
Typically used for rate stabilization
Investments significantly less restricted than City
investments:
Designed for long term returns
Likely much higher (4%-6%) investment returns
Investments will likely earn less than CalPERS
investments
13October 12, 2017
Establish Irrevocable Supplemental
(§115) Trust
Can only be used to :
Reimburse for CalPERS contributions
Make payments directly to CalPERS
Assets could not be used by Council for other
purposes
PARS, PFM & Keenan
> 100 California agencies
14October 12, 2017
Establish Irrevocable Supplemental
(§115) Trust
Improves City flexibility but
Likely gets lower investment returns than
CalPERS
15October 12, 2017
16October 12, 2017
17October 12, 2017
CalPERS Background
John E. Bartel
Bartel Associates, LLC
October 12, 2017
18October 12, 2017
Agenda
CalPERS History 1
CalPERS Divestment 8
Addressing the Unfunded Liability & 9
Rate Stabilization
ATTACHMENT A
FINANCE COMMITTEE WORKPLAN
I:\Users\FIN\Shared\Admin\Finance Committee\WORKPLAN\2017\2017 FC Workplan 1
Updated 09/07/2017
Scheduled Date Agenda Title Agenda Description
Thursday, September 14, 2017 Investment Advisor Contract Discussion & Recommendation Staff will review the previous request for proposal process and
recommendations.
Public Employees Retirement System (PERS) Valuation Update Staff and independent actuary John Bartel discuss the latest changes to actuarial valuation, changes to actuarial assumptions, a review of recent
investment returns and the potential impact on future plan contribution rates.
Long Range Financial Planning Staff will demonstrate the "GovInvest" software tool that the City is using to
assist in the modeling of long-term pension plan liabilities and cost.
Budget Amendments Receive and file a staff report on the budget amendments for the prior quarter.
Review of Finance Committee Workplan Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year.
Thursday, October 12, 2017 Investment Performance Review Staff and/or one or more investment advisors will describe the performance of the City's investment portfolio.
Reconsider of Investment Advisor Contract Finance Committee Member Request to reconsider committee recommendation
to award financial advisor contract solely to Chandler Asset Management
Budget Amendments Receive and file a staff report on the budget amendments for the prior quarter.
Debt Policy Staff and a municipal advisor from KNN will present changes to current Debt Policy F-6 that are required per SB1029 and other aspects of the policy the
committee wishes to discuss.
Long Range Financial Planning Staff will review the performance and provide future projections of the City's top
three revenue sources.
Pension Discussion Agenda item reserved for any discussion regarding the status of the City's pension liability.Review of Finance Committee Workplan Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year.
Thursday, November 09, 2017 Review of Post Employment Retiree Insurance Actuarial Valuation (AKA OPEB)The City's OPEB actuary will review the City's latest OPEB valuation and liability.
Risk Based Reserve Analysis Update Only
Pension Discussion Agenda item reserved for any discussion regarding the status of the City's pension liability, funding policy and Section 115 Pension Prefunding Funding Trust.
Review of Finance Committee Workplan Staff will review with the Committee the agenda topics scheduled for the
remainder of the calendar year.
Thursday, December 14, 2017 Year-End Closing Results Staff will present the preliminary year-end closing results for Fiscal Year 2016-
2017.
Risk Based Reserve Analysis City staff and or consultant will provide an update or present the results of the study current reserve policies and risk exposure.
Insurance Coverage The City's insurance broker will prepare a presentation of current insurance coverage, market conditions and or changes in coverage that the City might
Pension Discussion Agenda item reserved for any discussion regarding the status of the City's pension liability, funding policy and Section 115 Pension Prefunding Funding
Review of Finance Committee Workplan Staff will review with the Committee the agenda topics scheduled for the
remainder of the calendar year.
November
December
City of Newport Beach Finance Committee Work Plan 2017
October
September