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HomeMy WebLinkAboutApproved Minutes - November 9, 2017Finance Committee Meeting Minutes November 9, 2017 Page 1 of 11 CITY OF NEWPORT BEACH FINANCE COMMITTEE NOVEMBER 9, 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 William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and Committee Member Larry Tucker ABSENT: Mayor Kevin Muldoon 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, Accounting Manager Rukshana Virany, Fire Chief Chip Duncan, Public Works Finance Administrative Manager Jamie Copeland, and Administrative Specialist to the Finance Director Marlene Burns OUTSIDE ENTITY: Ms. Marilyn Jones (Nyhart) MEMBERS OF THE PUBLIC: Mr. Jim Mosher III. PUBLIC COMMENTS There were no public comments. IV. CONSENT CALENDAR A. MINUTES OF OCTOBER 12, 2017 Recommended Action: Approve and file. Discussion ensued regarding the quality of the minutes. The draft minutes were tabled to a subsequent meeting for approval. V. CURRENT BUSINESS A. OPEB VALUATION REVIEW Summary: Actuary, Marilyn Jones, will provide a brief overview of our latest OPEB (Retiree Insurance Plan) actuarial valuation. Recommended Action: Receive and file. Chair Dixon provided an overview of the Finance Committee’s agenda and its responsibilities for review prior to the City’s official budget planning process. Finance Committee Meeting Minutes November 9, 2017 Page 2 of 11 Ms. Jones provided the review of the valuation report. The purpose of the updated valuation, done every two years, is to provide updated funding requirements and information related to the City’s OPEB program. There are new funding requirements this year. The packet provided included the funding valuation report and a separate accounting report to provide details related to compliance with the new accounting requirements. The current program provided by the City, implemented in 2006, is a “defined contribution” Retirement Health Savings account. Chair Dixon inquired whether the program was self-funded. Ms. Jones responded it is not 100% self-funded as the City provides supplemental funding for the program. Ms. Gorczyca confirmed the program (RHS) is a pre-tax Health Savings Account. Ms. Jones reviewed the four groups which participate in the program, including new hires, employees other than new hires who elected to stay in the former program, employees already in retirement, and part-time employees who can stay in the program and receive the minimum contribution. As a requirement of participation in CalPERS, the City must provide a minimum contribution, which will increase to $133 in 2018. The minimum contribution amount is indexed annually to medical price inflation. Employees can use the plan to offset costs until they reach eligibility for Medicare in the CalPERS medical plan. The program is open enrollment, and many early retirees will return to the City’s program in later years. Mr. Matusiewicz stated the Public Employees' Medical & Hospital Care Act (PEMHCA) minimum contribution liability continues to be required as long as an individual is alive and chooses to participate in the plan. Ms. Gorczyca inquired whether the requirement to keep employees on retiree medical, post-retirement, comes from CalPERS. Ms. Jones stated PEMHCA refers to the statue statute, which opened the State’s health program to other public entities. It requires a public agency to provide the same health savings benefit to retirees as it does to active employees. Ms. Gorczyca inquired regarding the City’s latitude as to the structure of the program. Jones affirmed that the City must make the minimum contribution as a CalPERS condition of participation in the program. Ms. Jones stated the City’s only obligation is to the year-to-year payment into the account. Employees also have a minimum contribution. Ms. Giangrande stated the employee’s contribution is 1% of base pay for all full-time employees. The City’s contribution is more complex and includes $2.50 per month based on for age plus years of service as of December 31 of each year. The amount goes up $5.00 a month every year. In addition, each bargaining unit can elect to participate by determining a percentage of flex leave or vacation buyout to be contributed. The IRS issued a private side letter ruling the City’s plan meets IRS guidelines. Ms. Jones reported there are currently 591 employees in the current program. 539 are “grandfathered-in” and have an ability to receive the defined benefit. They receive a $400 - $450 per month contribution. She responded the City’s current program is very common among cities and eliminates liabilities related to retiree medical in the long run. Mr. Kiff affirmed the CalPERS medical program is negotiated with the employee unions and would require negotiation for the City to opt out. Ms. Jones displayed a chart related to premiums for various employee Medical plan options. The liability the City pays is based upon the expected costs for retirees. Finance Committee Meeting Minutes November 9, 2017 Page 3 of 11 Mr. Matusiewicz commented that since the plan has been closed, there are not many decisions the Finance Committee needs to make. The City’s obligations are minimal. Mr. O’Neill noted there was a past question that came before the Committee as to whether the City should change the discount rate. He reviewed some of the options presented at that time regarding the impacts of various interest rates. Chair Dixon noted today’s presentation was just informational related to the valuation report; however, there was merit to potentially reviewing, at a future meeting, whether the Finance Committee has a “point of view” on whether the City should continue to offer the retiree health benefit program. Mr. Matusiewicz commented that the City can change the defined contribution plan through the negotiation process, but it cannot change the defined benefit. Mr. Kiff inquired whether the California Rule applies to this matter. Ms. Gorczyca described the renegotiation of the defined benefit that occurred at the County, where the program was structured to encourage employees to defer retirement until after the ages of between 50 and 65. The City does have negotiating ability. Mr. Kiff explained he is in not in the hybrid plan. If he retires before Medicare eligibility he receives $133 a month from the City which he can apply to offset the cost of the medical health insurance amount he wants. He believes it is one of the most flexible plans in terms from the employer’s point of view. Chair Dixon commenced in the private sector there is typically no benefit after the age of 65, apart from certain instances of supplemental executive benefits. Most private sector employees receive no benefit after age 65. Mr. Kiff stated the City could negotiate with the employee bargaining units to opt out of CalPERS medical. The City would then not be obligated to pay the PEMCHA minimum. The California Rule may apply in regard to change of the benefit; however, it may be able to be done for new employees. However, the City either participates in the CalPERS medical plan overall, or not. There is no hybrid plan. Mr. Collopy inquired regarding the 6.5% discount rate. The Finance Committee spent considerable time reviewing the $9 million additional contribution toward the pension unfunded liability. He inquired whether the $9 million is in a Section 115 Trust and how it is invested. Mr. O’Neill stated the City controls the discount rate and it sets the amount the City can contribute every year. Mr. Matusiewicz stated the City pension program is already a trust and those monies are invested in equities. Since the City is administering the OPEB plan, if the City held the monies and did not participate in a trust, it would be subject to the California Government Code section limiting investments to fixed income securities only. In a trust, the City can invest the funds the same way CalPERS does and currently, the City’s OPEB investment agent is CalPERS. Mr. Matusiewicz affirmed the 6.5% discount rate applied to OPEB plan and stated that 6.5% is more appropriate than 7% because it is a “closed plan” with only 88 active employees remaining eligible for a defined benefit. In the pension program, which is ongoing, a higher rate of return can be expected because of the longer investment horizon. The City wants to have the OPEB trust fully funded by the time the 88th employee leaves the City. Finance Committee Meeting Minutes November 9, 2017 Page 4 of 11 Mr. Collopy inquired whether a projection could be provided displaying the City’s contribution obligation under a 7% scenario. Ms. Gorczyca stated that the City’s current earnings are close to CalPERS earnings as the City chose the most aggressive option out of the three which were offered. Chair Dixon inquired whether the Finance Committee has interest in a future discussion regarding the structure of the ongoing OPEB program. Mr. Kiff stated this item is placed on the Finance Committee’s agenda annually for general information purposes. Mr. Matusiewicz commented that the City’s contribution obligation is $3.8 million per year for the next 10 years and then drops to $500,000 per year thereafter. He inquired about the level of interest by the Finance Committee in addressing OPEB obligation further. Mr. O’Neill stated the Finance Committee’s role in regard to OPEB should focus on how much to be budgeted for the City’s obligations and how fast should the City pay down the liability. Mr. Tucker commented the current obligation is for the next ten years and that the obligation is nominal. Mr. Collopy inquired as to the assumptions behind the $3.5 million contribution. Ms. Gorczyca commented the Finance Committee should focus on the discount rate and review the actuarial, and not particularly, on whether the City should offer the program, which is a matter of negotiations with the bargaining units. Ms. Jones commented that the 6.5% project is the “best guess” at this point in time. Ms. Gorczyca inquired whether the revenues invested include employee contributions. Ms. Jones affirmed the revenues are coming from earnings on the investments and the City’s contributions. Chair Dixon opened public comments. Jim Mosher inquired whether the $450 a month contribution for the employees in the previous version of the retiree medical plan includes the $133 PEHMHA mandatory minimum contribution or is the $133 paid in addition to that amount. Ms. Jones confirmed the $133 is included in the $450 total payment. There were no further public comments and there was no further discussion on this item. B. LONG-TERM FINANCIAL FORECAST Summary: The item is reserved for a review and discussion of budget decisions that need to be considered in conjunction with the development of the budget and revision to the Long-Term Financial Forecast. This discussion will include proposed revenue estimate revisions, the funded status of worker’s compensation and general liability reserves and other forecast scenarios. Recommended Action: Receive and file. Chair Dixon stated this is a carry-over item from a previous meeting. Finance Committee Meeting Minutes November 9, 2017 Page 5 of 11 Mr. Matusiewicz summarized a few of the plans and options that will be reviewed by the Finance Committee in the upcoming months. First, he highlighted the City’s pension plan funding options and noted the Finance Committee can recommend the minimum payment of $25.6 million, the same amount as last year ($33.8 million), or a slightly higher payment which would provide a “margin of comfort” in paying off the entire liability. Mr. Matusiewicz stated there will be a decision required in the spring because when the City pays down the unfunded liability in 15/16 years, it will still have “dangling” credits from investment gains that are being amortized over 30 years. If the City does nothing, he suggested the potential of developing assets in excess of the pension obligation after the 15th or 16th year. He did note there would still be a final clarification from CalPERS as to whether the City can proceed with such an option; however, such a plan would allow the City to bring credits forward in the next 15 years when the City needs them the most. Chair Dixon confirmed today’s presentation is for education purposes only and that no final decisions would be required at this time. Mr. Matusiewicz confirmed the Finance Committee reviewed the OPEB actuarial and displayed a slide reviewing the contribution for the next 5 years. Longer term, beginning in Year 11, the net OPEB contribution drops down to $700,000 per year including an “implicit” subsidy; the City is providing active employees a benefit that is actually deemed a retiree medical cost. Once the unfunded liability is paid off, the City can reimburse itself if it pays full “ADC” (Actuarially Determined Contribution) from the trust. From an accounting point of view, the implied subsidy is simply reclassifying a part of the active employee health allowance to a retiree medical cost. Mr. Matusiewicz noted that other funds (Worker’s Compensation and General Liability) are not looked at in detail, rather just a review of the funding status is conducted. In addition, the City will review where it is at relative to the recommended contribution levels. This review is currently conducted every two years. During the recent period of time, there has been higher safety worker’s compensation claim experience. The City’s Risk Manager will need to review the claims and provide recommendations as to cause and what can be prevented. At this time, the funds are being reviewed only from an actuarial point of view. Mr. Collopy noted the line item recommended ultimately by the City Manager during the budget process will be reviewed by City Council as too high or too low based upon the City’s projected needs. Mr. Matusiewicz stated there will be a drastic increase if the City follows the actuary’s recommendation. However, in terms of Workers Compensation, it will be a long time before claims are paid out (10 to 20 years). It is not necessary to rush to fully fund that program. There is a potential $16 - $19 million in reserve to pay the claims that have a long pay out period, and that fund may be a good candidate for a longer-term investment strategy. Mr. Collopy inquired whether there was a Workers Compensation trust set up for this purpose or are claims paid out of current funds. Mr. Matusiewicz described the process that each Department is assessed an annual amount for Workers Compensation. The goal is to set sufficient money aside in an Internal Service, reserve fund so that there would be enough funds available to pay remaining claims over the next 20 years, should the City cease service. Mr. Collopy inquired whether the Internal Service reserve yield is approximately 1%. Mr. Matusiewicz stated the City has elected to stay in a 1 to 5 year fixed income strategy but with the City Council’s permission, it could invest in treasuries and agencies as far out as 10 years. Finance Committee Meeting Minutes November 9, 2017 Page 6 of 11 Mr. Collopy inquired whether a Section 115 Trust is a better method for funding the Workers Compensation program. Mr. O’Neill inquired as to the “ISF” in the context of a Section 115 Trust, as it appears to be an enormous number for such a mechanism. Typically, an “ISF” is a restricted fund set aside for a future purpose. Mr. Matusiewicz agreed to follow-up with legal research to this question. Mr. Kiff explained that with Workers Compensation claims, there may be an initial large liability, such as $300,000; however, it is paid out, via doctor’s visits and treatment, over a longer period of time. Mr. Matusiewicz explained General Liability claims are typically paid within 3 years of the occurrence. At this time, the General Liability account would appear to be overfunded; however, clarified there are claims to be paid that were not included by the actuary valuation, but are known to the City. Staff recommends moving to an annual valuation to stay on top of this fund. Currently, the General Liability is overfunded approximately $1.2 million over target; however, there are some anticipated expenses that will impact that amount. The Workers Compensation account is short approximately $3.5 million; however, staff is projecting to fully fund the program over 3 years. Chair Dixon inquired whether the required funding was related to actual cases or projections of worker injury. Mr. Matusiewicz stated the actual valuation is based upon current case patterns and projections. The “Expected liability” is lower than the funding target because in practice it is widely understood the estimate is likely wrong. In order to achieve the 75% confidence rate, an additional margin is added to the reserve target so there is sufficient money to pay down the existing claims. Funding at the 90% rate would require more money. The recommended practice is closer to 80%. The previous Finance Committee was not interested in committing the reserve funds to achieve a higher confidence level. The current Finance Committee could make changes. Mr. Matusiewicz recommended the Finance Committee review the shortfall. Staff is recommending a $6.2 million per year contribution for General Liability as the annual set-aside. Chair Dixon commented that the prior Council made the determination to fund at the 75% confidence level. Discussion ensued regarding the actual “catch-up” amount and what would be required to remain at a 75% confidence level for funding these accounts. Mr. Matusiewicz stated that in reviewing the valuation, there were issues with the high projections. There were unallocated costs that were not included in the rate given. For example, the biggest portion of the unallocated cost was approximately $2 million dollars of insurance coverage, which was not attributable to a specific loss; it was in suspense. Staff “plugged” the General Liability hole, because the rate was not allocating the insurance costs. He is not as concerned with catching up as quickly with the Worker’s Compensation. Ultimately, staff’s recommendation will be to increase the annual ongoing Department charges consistent with the valuation and new cost allocation. Chair Dixon stated that the Finance Committee can review the confidence levels when reviewing the Reserve Policy. Finance Committee Meeting Minutes November 9, 2017 Page 7 of 11 Mr. Matusiewicz expressed support for having an annual valuation done annually, as well as scheduling a discussion with the City’s Risk Manager to review the claims and possibly consider taking actions for preventable incidents. Mr. Kiff states that all Department General Liability charges flow into the reserve fund. The overall fund is used to pay settlement, damages, attorney fees, and related costs for claims. This policy prevents any specific Department being “hit” with the total costs for a claim. Ms. Gorczyca inquired whether there was a trend related to an increase in claims. Mr. Matusiewicz stated there was a dramatic increase in the amount of claims during the past year, particularly related to public safety. This was the most volatility we have seen in this account in many years. Mr. Matusiewicz stated that there is very detailed information that informs staff’s decisions regarding the recommendations for reserve contribution amounts. To get at the root problem of the higher claims, staff will need to meet with Risk Manager, Human Resources, and possibly work with state legislature to evaluate “presumptive” risk areas. It was stated that a majority of the spike in claims has come from the Police Department. Staff stated that there is a General Liability matter which will be discussed in Closed Session. Mr. O’Neill inquired whether a particular Department, if claims are larger or increasing in quantity, is charged at a higher rate than others. Mr. Matusiewicz explained the cost allocation process, which includes review of Department experience (claims) and overall payroll. Mr. Matusiewicz stated staff is also reviewing the Facilities Financial Plan as well as the Harbor and Beach Master Plan and these projects will come before the Council sometime in March. There may be priorities which will require funding changes. The Finance Committee does not focus on the prioritization of particular projects; however, it will review the funding mechanisms for the priorities. Mr. Tucker expressed concern with areas where there is a bigger obligation or liability that may result out of failure of the City to perform or complete an action it had set out as a priority. He stated it is the City Council’s prerogative to determine where funds are spent. Mr. Matusiewicz commented staff will review the Annual Workplan and bring forth recommendations to the Finance Committee. Mr. Montano provided the historical context of the City’s top three revenue generators. Documentation was provided and referenced throughout the discussion. The budget process will begin in November and revenue projections for the next year will come in over the next month. Mr. Collopy requested, through the Chair, when the Finance Committee starts a new topic if staff can provide context and expectations of the Finance Committee prior to commencing the discussion. Mr. Kiff responded the item today is a just a briefing. Chair Dixon commented that from a planning process, this matter will be preparatory for the Finance Committee’s review of the annual budget. Finance Committee Meeting Minutes November 9, 2017 Page 8 of 11 Mr. Montano reviewed the Property Tax tables and comparisons were given between historical and action revenues. In 2017, $91.6 million was project and $94.3 million was realized. The year-over-year growth is $5.5 million. In 2018, $97.1 million is budget and the City’s property tax advisor, HdL, has informed staff that the projection will likely be $99 million, representing a 5% year-over-year growth. There is a consistent growth projection of 5% over the next 3 years (through 2020). This is the strongest projection of the top three. Valuations are strong in the City. Mr. Montano referred to the long-range forecast and noted the City previously instituted a conservative growth projection of 4%. Ms. Gorczyca inquired as to the type of increases actually realized during the 2008-2009 decline so as to determine the City’s vulnerability during a potential recession. Mr. Montano reported even at the height of the recession, the City’s valuations never fell below zero, as most cities’ valuations did. Mr. Kiff stated it takes some time for the impacts of a recession to impact property taxes. Mr. Montano reviewed the Sales Tax and noted in 2018 the City budgeted $35 million. There is some variability in the auto dealership revenue stream as there is a trend toward leasing versus buying. There are also impacts related to online sales. Currently, staff is projecting the City will be $1 million under from the initial budgeted amount. Chair Dixon inquired whether the City has had this experience in previous years. Mr. Kiff responded affirmatively that when consumer confidence drops there is a corresponding decrease in sales tax revenues. Mr. Montano continued by stating the forecast for the next two years indicates a “plateauing” of sales tax revenues, rather than an increase or decrease. We are not growing as aggressively as in past years. Chair Dixon stated there is some discretionary influence in sales tax generators, particularly from impacts of the state legislature and community action. She referenced the auto dealership that was proposed on Coast Highway that ultimately located to Irvine. Mr. Montano described the impact in 2017 of the “triple-flip.” There was a “true-up” and reconciliation which made the 2017 number artificially appear worse. Mr. Collopy inquired if staff could provide hard numbers related to specific industry projections, such as auto dealerships and restaurants, rather than use percentage variances, as industry forecasts tend to be very specific. Mr. Montano stated today’s presentation is an aggregate, high level summary. Industry forecasts can be provided to the Finance Committee in the future. Ms. Gorczyca requested a presentation by the City’s sales tax consultant, HdL, at a future meeting. Mr. Montano reported the Transportation Occupancy Tax (TOT) was budgeted at $24.3 million and is projected at $23 million. This is the result of an unprecedented number of hotels closing rooms for renovations. In addition, there has been a downward trend in conferences and events at the hotels due to the number of rooms available. There is not a specific downward trend in revenues, rather, it is a plateauing of revenues and growing at a slower rate. Finance Committee Meeting Minutes November 9, 2017 Page 9 of 11 Mr. O’Neill stated a possible means for addressing a decrease in revenues was to decrease the discretionary payments to CalPERS. Discussion ensued among the Committee regarding projections by organizations, including Visit Newport Beach, which projected increases in TOT due to conferences and events they anticipated. That was one of the reasons a projected increase to the TOT was built in. Chair Dixon affirmed that more attractive rooms will result in increased TOT revenues and attract more conferences and events. She reiterated the need to continue to prioritize high-quality maintenance of properties and infrastructure, as it is the annual property tax revenues that continue to “save” the City when other revenue sources have downward trends. Ms. Gorczyca mentioned the smaller areas of the City, such as Lido and Corona del Mar, they continue to be impacted by parking limitations. Mr. Montano summarized the near-term forecast is showing between 3 – 5% in growth and it seems to be plateauing. Mr. Collopy inquired whether there was interest to entertain increasing the TOT rate. Mr. Kiff noted any proposed increase to the TOT would require voter approval. Ms. Gorczyca stated the increase to the TOT benefits residents but is usually paid by non-residents staying in hotels. Chair Dixon stated the City’s TOT charge is about in the middle of what other local cities are charging. Mr. Tucker commented on the influence the General Plan update will have on revenue streams in the City and noted the City’s requirement to provide housing under state law. Newport Beach housing, land, and buildings are very valuable and he inquired if certain commercial properties, if converted into mixed-used projects, could provide additional revenue streams. Discussion ensued regarding interest and viability of mixed-used developments as a solution to the crowding out of small, service-based businesses. Chair Dixon inquired how the state has determined the allocation of sales tax from online sales. In summary, Mr. Montano stated the General Fund in 2018 is still projected to have a $2.1 million surplus and may likely be higher, especially due to other sources, such as building permit activity. There were no public comments on this item. C. RESERVE STUDY STATUS UPDATE Summary: Staff will provide a brief oral update on the status of consulting engagement to perform a risk-based analysis of General Fund reserves. Recommended Action: Receive and file. Mr. Matusiewicz provided a status update. The item was “signed” yesterday, with the first team meeting conducted today. A kick-off meeting will be scheduled with the consultant next week and homework assignments have been issued. Staff will continue to update the Finance Committee with the findings and recommendations. Finance Committee Meeting Minutes November 9, 2017 Page 10 of 11 Ms. Gorczyca inquired whether the team will be focusing on infrastructure vulnerabilities as well. Mr. Matusiewicz stated they will be focusing primarily on revenues; however, vulnerabilities will also be addressed (earthquakes, etc.) which will have an impact on infrastructure. Mr. Collopy requested a monthly presentation, possibly a simple chart, which displays the regularly “calendared,” or major revenue and expenditure items, so the Finance Committee can understand the context of the annual variations. Mr. Kiff stated staff monitors very closely the monthly and finite variations impacting the budget and it may not be beneficial or productive for the Finance Committee or the public to review items which may cause confusion without explanation in detail. He would prefer an annual report; however pursuant to discussion with the Finance Committee membership, it was determined that a twice yearly report would be feasible. There were no public comments on this item. D. WORK PLAN REVIEW Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the Fiscal Year. Recommended Action: Receive and file. Discussion ensued among the Finance Committee regarding agenda topics and meeting dates for the upcoming months. Ms. Gorczyca requested a presentation from another organization, such as the City of Sunnyvale, which excels in long-term financial forecasting. The presentation could be via conference call or the provision of documentation as to their process. It was determined there would not be a joint Study Session with the City Council on January 9, 2018; however, Committee members could attend as individuals. Mr. Matusiewicz will review last year’s Finance Committee calendar and recommend dates for 2018. It was determined there would likely be two meetings per month commencing in March for budget planning purposes and May 24 and May 30 were reserve for extra meeting dates prior to the City Council’s meeting of June 12. Chair Dixon opened public comments. Jim Mosher inquired when the CAFR would be available. Ms. Virany stated the final audit is being completed and the CAFR is expected the third week of December. There were no further public comments on this item. 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