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HomeMy WebLinkAboutApproved Minutes - April 27, 2017Finance Committee Meeting Minutes April 27, 2017 Page 1 of 9 CITY OF NEWPORT BEACH FINANCE COMMITTEE APRIL 27, 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), Mayor Kevin Muldoon, Committee Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and Committee Member Larry Tucker ABSENT (EXCUSED): Council Member Will O’Neill STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Deputy City Manager Rob Houston, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Budget Manager Susan Giangrande, Purchasing Agent Anthony Nguyen, Public Works/Finance Administrative Manager Jaime Copeland, Fire Chief Chip Duncan, Accounting Manager Rukshana Virany, Budget Analyst, Shannon Espinoza, Fire Administrative Manager Angela Velazquez, Public Works Director Dave Webb, Budget Analyst Tam Ho, Budget Analyst Katherine Warnke-Carpenter, and Administrative Specialist to the Finance Director Marlene Burns OUTSIDE ENTITITES: John Bartel, Bartel Associates LLC (via teleconference), and Jayson Schmitt, Chandler Asset Management MEMBERS OF THE PUBLIC: Jim Mosher III. PUBLIC COMMENTS Jim Mosher asked if the budget detail was available to the public. He stated the Council adopted new contracts for the City Manager, City Attorney and City Clerk. He suggested the public be allowed to review the employee goals and reviews but referenced a School District court case. Council Member Dixon stated the City had had a deferred compensation plan since 1980s. IV. CONSENT CALENDAR A. MINUTES OF APRIL 13, 2017 Recommended Action: Approve and file. Corrections were discussed. MOTION Committee Member Tucker moved and Committee Member Gorczyca seconded a motion to approve the corrected minutes of April 13, 2017. The motion carried unanimously. Finance Committee Meeting Minutes April 27, 2017 Page 2 of 9 V. CURRENT BUSINESS B. PENSION DISCUSSION Summary: Agenda item reserved for any discussion regarding the status of the City's pension liability and/or the proposed budgetary pension funding approach, including a discussion of the potential use of a Section 115 prefunding trust specific to the City’s pension liability management. Recommended Action: Discuss and comment. John Bartel presented a PowerPoint outlining the irrevocable supplemental pension trust. He stated the assets might not reduce GASB 68 net pension liability. Finance Director/Treasurer Matusiewicz further distinguished that, since the funds were placed in a trust, they are neither reported on the City’s balance sheet as net asset nor fund balance since the asset would be offset by a liability. Council Member Dixon asked if those funds were specifically tied to the pension. Mr. Bartel explained that the funds were irrevocable and could only be used to reimburse the City for contributions the City made to CalPERS or sent directly. He stated the objection from GASB was that benefit payments could not be made directly from the trust. Mr. Bartel stated investments would be significantly less restricted than City investments, could mitigate volatility, and would impact costs of CalPERS. He recommended the trust for those worried about volatility, where the contributions rates were headed and wanting to maintain budget flexibility. He did not recommend the trust for clients not worried about contribution volatility or if projected contributions did not create budget issues. He discussed the three providers and stated that about 70 agencies had set up trusts. Committee Member Gorczyca asked which California public agencies had created trusts. Mr. Bartel stated Irvine Ranch Water District was the first agency to set up a trust. He stated he would provide a list of other agencies. Committee Member Tucker asked why it might be preferable to put money in trust rather than just paying the sum to CalPERS. Mr. Bartel stated the rate at CalPERS was not guaranteed and could be volatile. He stated the trust allowed more flexibility. In response to Mayor Muldoon, Mr. Bartel stated the trust offered more flexibility rather than control. Mayor Muldoon stated the use of funds was not flexible because it had to be used towards CalPERS. Mr. Bartel explained that, once money was given to CalPERS, the City did not have control over investment and future contributions. He stated the City controlled how the money was sent to CalPERS from the trust. Committee Member Tucker stated that unfunded liabilities would continue to accrue interest at 7.5% if the money was put in the trust rather than paid to CalPERS. Mr. Bartel stated the money in the trust could be used to offset the unfunded liability contributions. He provided an example of how and when to send the money to CalPERS. Committee Member Collopy asked why Mr. Bartel anticipated lower earnings in the trust. Mr. Bartel stated he was not an investment advisor, rather an actuary. He stated private investments entities had higher expenses than CalPERS. Finance Director/Treasurer Matusiewicz stated Jayson Schmitt, Chandler Asset Management, was available to address differences in portfolio scale, investment horizon, and cost efficiencies. Finance Committee Meeting Minutes April 27, 2017 Page 3 of 9 Council Member Dixon discussed the 2016 CalPERS return and shift into more environmentally and politically correct investments. Mr. Bartel discussed the bill preventing CalPERS and CalSTRS from investing in certain types of investments. In response to Mayor Muldoon, Mr. Bartel discussed the Irvine Ranch Water District’s trust. Committee Member Tucker explained that money that was supposed to be with CalPERS (i.e., unfunded liabilities) had an interest factor of 7.5 percent that had to be paid to CalPERS. And money that is with CalPERS is also supposed to be earning 7.5 percent. If those earnings are not achieved, there is an experience loss that creates a further unfunded liability. So Committee Member Tucker wondered how it could be better to put money into a trust rather than paying the money to CalPERS to at least stop the accrual on the unfunded amount. Mr. Bartel provided an extreme example of paying money to CalPERS versus putting it in a trust. He stated he was not advocating the City start a trust, just explaining the flexibility. Finance Director/Treasurer Matusiewicz stated there were two options: 1) making a payment in excess of required amount which would be credited over 30 years; or 2) requesting the actuary apply the principal directly to the base which would reduce the principal. Mr. Bartel provided an example of the trust funds providing flexibility. Mayor Muldoon stated the trust was less useful for those not worried about contribution volatility. Committee Member Tucker stated he failed to see why it would be better to have the prefunding pension trust rather than paying down the unfunded liability. Committee Member Gorczyca stated she was under the impression that IRWD was looking at the trust in terms of asset management. She observed that the City similarly should look at the trust in the same way. Committee Member Tucker inquired if IRWD had unfunded liabilities and staff informed him they did not. Committee Member Tucker acknowledged Committee Gorczyca’s observation that some agencies use a trust to allow broader investments and more flexibility than what governmental agencies are ordinarily allowed to invest in. He stated a trust made sense for IRWD since it did not have unfunded liabilities it had to debt serve and the trust gave it flexibility to be more aggressive in its investments than if it held the money in its own accounts. He noted the City of Newport Beach is not in the same position as IRWD. Council Member Dixon asked if there was a minimum payment on the unfunded liability. She stated it was necessary to discuss paying more than the minimum amount. City Manager Kiff stated the unfunded liability was accruing interest like any other debt obligation. Committee Member Gorczyca suggested that the City’s two fresh starts and prepay was negatively impacting the City’s ability to afford necessary capital projects. She stated the unfunded pension was having a bearing on other budgetary obligations. She suggested exploring options that allow flexibility to accommodate budget changes on an annual basis. She stated money sent to CalPERS is irreversibly spent, but the trust may allow the City flexibility. Finance Director/Treasurer Matusiewicz discussed previous efforts to obtain Committee consensus for a longer range portfolio for endowment funds, with a one to ten-year treasury agency bond strategy was perceived by the Committee as being too risky. Finance Director/Treasurer Matusiewicz explained selling assets from the 115 trust to provide to contributions to PERS may require the City to realize investment losses if there were a Finance Committee Meeting Minutes April 27, 2017 Page 4 of 9 downturn in equity-based securities that are far more volatile than treasury and agency bonds. Somewhat similar to CalPERS. Mr. Bartel finished the PowerPoint presentation explaining the example of contribution rate projections. Council Member Dixon asked if the Committee wanted to set up a working group to review the matter and bring back a recommendation to the full Committee. Mayor Muldoon stated he had basically made up his mind but would like to see actual numbers before finalizing his decision. Mr. Bartel stated he could work with the Finance Department on a Newport Beach specific example. Committee Member Gorczyca discussed the OPEB Section 115 Trust and requested a review of earnings in our CalPERS Section 115 Trust versus the 115 Trust earnings of PARS or PFM. Mr. Bartel stated he would compare CalPERS OPEB 115 Trust with PARS, PFM or Keenan. Committee Member Tucker noted that there could be a discussion about using some of the City’s 25 percent safety net reserve funds for a trust so that it could earn a higher rate of return than it does currently. But that would mean that portion of the safety net would only be usable for pension purposes in the future. Committee Member Gorczyca stated the City could decide to what extent and when to use the 115 Trust. Mayor Muldoon discussed IRWD’s use of the Trust. Committee Member Gorczyca stated the tradeoffs needed to be considered. A. REVIEW OF FISCAL YEAR 2017-2018 PROPOSED BUDGET Summary: Staff will provide an overview of the Proposed Fiscal Year 2017-2018 Operating Budget and/or CIP. Recommended Action: Review and comment on City Manager recommendations and Finance Committee’s desired next steps. City Manager Kiff reviewed the budget book and presented a PowerPoint outlining sources and uses. In response to Council Member Dixon, Finance Director/Treasurer Matusiewicz explained the $1 million contribution to the contingency reserve. Deputy Finance Director Montano stated 25 percent of operating expenses needed to be set aside for the contingency reserve. Council Member Dixon requested the percent change over prior years. City Manager Kiff reviewed General Fund Revenue. Council Member Dixon discussed the changes since Fiscal Year 2016-2017. In response to Mayor Muldoon, City Manager Kiff explained anticipated reductions in sale tax revenues. He discussed the Irvine Company’s concerns about malls and shopping centers. He explained online sales tax returns. Finance Director/Treasurer Matusiewicz explained that online sales are either distributed through the County pool while others are distributed to the jurisdiction where the store is located depending on various circumstances. Finance Committee Meeting Minutes April 27, 2017 Page 5 of 9 City Manager Kiff reviewed the Fiscal Year 2017-2018 General Fund Proposed Operating Expenditures by function and type. Council Member Dixon requested detail on the uncontrolled expenditures. In response to Committee Member Gorczyca, Finance Director/Treasurer Matusiewicz stated the debt service was not expended in the General Fund and pensions were shown in salaries and benefits. Committee Member Gorczyca requested information on changes to the budget. City Manager Kiff stated the unfunded liability at $276 million. Finance Director/Treasurer Matusiewicz stated the minimum 2016-2017 contribution rate was based on a $276 million UAL but with known experience losses, it is more realistic to assume a UAL of $353 million. He explained his contribution projections included known losses that are not yet included in the current actuarial valuation. Committee Member Gorczyca discussed the City’s unfunded pension liability in 2017. Finance Director/Treasurer Matusiewicz stated the actuarial accrued liability (AAL) grew at compounded annual growth rate of 7.3 percent per year. Finance Director/Treasurer Matusiewicz explained the phase-in of new amortization bases and proposed 20 year level payment. He stated that a use of a Section 115 trust would increase our minimum contribution rate substantially. When compared to direct additional payments to CalPERS via prepayment or fresh start. City Manager Kiff described the pension payment history. Finance Director/Treasurer Matusiewicz discussed the increase in employee contributions. In response to Council Member Dixon, City Manager Kiff explained payment of the employee’s share of CalPERS. He explained that 14 percent of pay was deducted for PERS payments. In response to Mayor Muldoon, City Manager Kiff discussed the impact of salary increases on pension contributions. In response to Committee Member Collopy, City Manager Kiff stated the budget proposed a 20-year-level pension payment that was already incorporated into the proposed budget. Committee Member Collopy stated the goal would be achieved if the contribution level could be maintained for five years. He stated the point was to not tie the hands of future Councils but the proposal would give a gift to future Council members. He expressed hope that it could be afforded for the next five years. Committee Member Stapleton, Finance Director/Treasurer Matusiewicz stated he could tell CalPERS where to apply the principal reduction to achieve the greatest payment efficiency. Mayor Muldoon left the meeting at this juncture, 4:32 p.m. Committee Member Collopy asked whether settlements on lawsuits and costs for counsel were billed to individual departments. Finance Director/Treasurer Matusiewicz stated each department was charged an annual insurance premium instead. Committee Member Collopy asked if that was sufficient to change behavior. City Manager Kiff discussed claims and the responsibility of the department. Finance Director/Treasurer Matusiewicz stated the claims were reviewed every five years or so to determine the appropriate allocation by department. Committee Member Collopy suggested the Human Resources Department review the matter. Finance Committee Meeting Minutes April 27, 2017 Page 6 of 9 Deputy Finance Director Montano provided an overview of reserve status, three-year budget change for pensions, three-year budget change for CIP, and financial detail for the tidelands funds. Finance Director/Treasurer Matusiewicz referenced the annual Tidelands report, provided to the Committee, describes to how the tidelands expenses were allocated and reimbursed. In response to Council Member Council Member Dixon, City Manager Kiff explained that the anticipated Newport Uptown project payment would create a larger fund balance in the FFP earlier than anticipated. Public Works Director Webb described the CIP summaries and project sheets. He explained Appendix C. In response to Committee Member Collopy, Public Works Director Webb discussed conversations regarding a dredging strategy and difficulties with dredging. Committee Member Stapleton discussed difficulties with not owning equipment and disposition of dredged material. Committee Member Collopy accepted that it was a difficult, but asked if there was an overarching strategy. City Manager Kiff indicated that to be the goal and discussed efforts to work with the Harbor Commission. He anticipated a strategy would be complete in the next eight to ten months. Council Member Dixon discussed the Council’s priority focus on dredging. Committee Member Collopy stated there were four budget line items for dredging but questioned the backup guidance for use of the funds. Public Works Director Webb explained the line items related to dredging. Public Works/Finance Administrative Manager Copeland stated the document compiled all the information into in one place. Council Member Dixon thanked staff for showing the total capital needs in one document. City Manager City Manager Kiff stated the Council would review the CIP plan at a detailed study session. He encouraged the Committee to thoroughly review the budget detail. Committee Member Collopy stated he would inform City Manager Kiff if he wanted a deep dive into any budget categories. Committee Member Tucker stated he did not believe it was within the Committee’s purview to recommend to the Council how to spend capital dollars, except to the extent capital dollars were needed to address work that could expose the City to liability if not performed. C. UPDATE ON LONG-TERM FINANCIAL FORECAST Summary: Staff will review with the Committee the updates of the high-level long-term financial forecast including future assumptions and other key elements of the City’s finances. Recommended Action: Review and comment. Deputy Finance Director Montano explained the fiscal forecast model. Finance Committee Meeting Minutes April 27, 2017 Page 7 of 9 In response to Council Member Dixon, Deputy Finance Director Montano suggested a summary and chart be included in the financial budget document. Committee Member Collopy suggested building a model showing the reserves if the City did not level fund. He requested showing the payment beginning in 2023 if the City did not level fund the pension obligation. Deputy Finance Director Montano suggested the impact of not level funding the pension obligation is already an available scenario built into the model. Committee Member Gorczyca asked how longer-term pension was projected. Finance Director/Treasurer Matusiewicz stated it was not addressed in the model but the pension amortization model considered the risk of future investment returns of 6.5 percent and its impact. Committee Member Gorczyca asked for long-term pension projections along with earnings. Finance Director/Treasurer Matusiewicz stated Mr. Bartel had previously provided the Committee with a financial forecast using stochastic investment results. He stated he personally could not model random market variables, such as annual investment return; therefore, an annual analysis was necessary. Committee Member Gorczyca is requesting 20-year expenditure projections with the ability to toggle selected market earnings assumptions, similar to Sunnyvale. Council Member Dixon stated the budget presented worst case scenarios. Committee Member Committee Member Tucker stated he had requested a series of assumed returns, showing a broad spectrum of a various rates of returns. Finance Director/Treasurer Matusiewicz explained that he took a static average rate of return for his forward projections. Committee Member Tucker requested data on a four percent return so the model included a scenario in which returns were well below expectation so the Committee could see what that would mean. Council Member Dixon requested the Committee be provided with the model. Deputy Finance Director Montano stated the model was in Excel but he could create a narrative including growth assumptions, what ifs, and charts. Council Member Dixon discussed the City of Sunnyvale’s 20-year projection. Committee Member Tucker requested something readily understandable be posted on the website. Committee Member Collopy requested the information be completed for the current proposed budget. In response to Committee Member Committee Member Tucker, Finance Director/Treasurer Matusiewicz proposed budget assumed moving to a 20-year level payment plan. City Manager Kiff stated the Council could assume a discount rate of less than seven percent. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz stated the City’s current payment was $25 million. Committee Member Tucker requested showing 20 and 30-year payments. Committee Member Collopy requested also showing 25 years. Council Member Dixon suggested showing the minimum mandated payment. Finance Director/Treasurer Matusiewicz referenced Page 17. Council Member Dixon requested showing the minimum and proposed payment. Finance Committee Meeting Minutes April 27, 2017 Page 8 of 9 Committee Member Tucker suggested including alternatives to show where the money went and how much was left over. Finance Director/Treasurer Matusiewicz stated that various contribution options were included in the model. Committee Member Tucker requested showing 20, 25 and 30 years. He stated he was inclined to suggest paying it off more quickly. Council Member Dixon anticipated an interesting Council discussion. City Manager Kiff stated it was the City Manager’s proposed budget, with staff’s professional recommendation. Committee Member Tucker stated the pension was the largest annual obligation. Council Member Dixon stated the capital budget was usually where debate ensued. Committee Member Gorczyca requested information on where the surplus sources used to pay additional pension payments came from. City Manager Kiff stated residents had not yet seen a reduction in service. Council Member Dixon stated the City had been tightening its belt and not increasing head counts. D. REVIEW OF FINANCE COMMITTEE WORK PLAN Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Review and comment. In response to Committee Member Tucker, City Manager Kiff stated the budget would be presented to the Council on June 13, 2017. Committee Member Tucker suggested the Committee finalize its recommendation on June 8, 2017. Assistant City Manager Jacobs stated the water rate study was time sensitive. Committee Member Stapleton and Committee Member Collopy indicated they were unavailable on June 8, 2017. Council Member Dixon discussed the upcoming agenda items for Committee consideration. Council Member Dixon suggested Jayson Schmitt, Chandler Asset Management, be invited back to provide input on June 29, 2017. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) Deputy Finance Director Montano commended the Budget staff. VII. ADJOURNMENT The Finance Committee adjourned at 5:35 p.m. to the next regular meeting of the Finance Committee on May 11, 2017. Filed with these minutes are copies of all materials distributed at the meeting.