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HomeMy WebLinkAboutApproved Minutes - January 17, 2019Finance Committee Meeting Minutes January 17, 2019 Page 1 of 9 CITY OF NEWPORT BEACH FINANCE COMMITTEE JANUARY 17, 2019 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:Mayor Pro Tem/Chair Will O’Neill, Mayor Diane Dixon, Council Member Joy Brenner, Committee Member William Collopy, Committee Member Joe Stapleton and Committee Member Larry Tucker ABSENT:Committee Member (VACANT POSITION) STAFF PRESENT: City Manager Grace K. Leung, Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve Montano, Real Property Administrator/Community Development Lauren Wooding-Whitlinger, Senior Accountant/Finance Theresa Schweitzer, Senior Accountant/Finance Trevor Power, Accountant/Finance, Jeremiah Lim, Administrative Specialist to the Finance Director Marlene Burns, Administrative Manager/PW Finance Jamie Copeland, Budget Manager/Finance Susan Giangrande, Accounting Manager/Finance Rukshana Virany, and Budget Analyst/Finance Jason Loya OTHER ENTITIES: Ellen Clark, Multi-Asset Class Specialist, PFM Asset Management LLC and Kerry Worgan, Supervising Pension Actuary, CalPERS MEMBERS OF THE PUBLIC: Jim Mosher and Carl Cassidy III.PUBLIC COMMENTS Chair O’Neill opened public comments. Jim Mosher addressed the Committee regarding City Council Policy F-14 and noted it still has not gone to City Council for their final approval. He clarified while the City Manager has the authority to approve contracts up to $120,000; City Charter Section 1110 states contracts for public works that exceed $120,000 in total expenditures must be awarded through a formal bidding process. Mr. Mosher also advised that City Charter updates have changed the amount over the years, noted state limits have changed to $200,000 and feels that the City Charter is out-of-step with the state. He also clarified the dollar amount of $120,000 for the City Manager and City Council, respectively, to enter into contracts are not tied to one another. Mr. Mosher expressed concerns about previous discussion of authorizing the Human Resources Director to settle claims up to $75,000. He referenced the claims procedure in the City Charter states all claims will be filed according to state law and that they are settled by ordinance and noted that he could not find a procedure for settling claims. He referenced state law and noted it states claim settlement lies with the City Council. He expressed concern with having staff settle claims without City Council oversight. Lastly, Mr. Mosher noted that many City policies rely on administrative policies to flesh out details and requests transparency for the public, so they have an opportunity to review administrative policies. Finance Committee Meeting Minutes January 17, 2019 Page 2 of 9 Committee Member Tucker expressed concern regarding the scope and budget amount of the General Plan update. He questioned how much of the General Plan requires updating and hopes that the process is bifurcated so the initial focus can be on what the public feels needs updating in order for the update to be strategic. Noting there were no other members of the public who elected to speak on this item, Chair O’Neill closed public comments. IV.CONSENT CALENDAR A.MINUTES OF DECEMBER 13, 2018 Recommended Action: Approve and file. MOTION: Committee Member Stapleton moved, and Mayor Dixon seconded, to approve the minutes. The motion carried 5 ayes – 0 noes, 1 abstention (Brenner) and 1 Committee Member position vacant. V. CURRENT BUSINESS A.COUNCIL POLICY F-7, INCOME PROPERTY, REVIEW Summary: A subcommittee of the Finance Committee was appointed to review and recommend changes if deemed necessary to select financial policies. In continuation from the December 13, 2018, meeting, the subcommittee working with staff has made additional edits to Council Policy F-7, Income Property, in order to align policy with current practice. Recommended Action: Review the draft changes to Council Policy F-7, Income Property, and recommend further changes as needed for submission to the City Council for final approval. Chair O’Neill introduced this matter. There were no inquiries from members of the Committee. Chair O’Neill opened public comments. Jim Mosher found the title confusing and suggested the title of “Income from City Property.” Noting there were no other members of the public who elected to speak on this item, Chair O’Neill closed public comments. Chair O’Neill thanked Committee Members Stapleton and Tucker for their work on this item. MOTION: Chair O’Neill moved, and Committee Member Stapleton seconded, to recommend approval for submission to City Council. The motion carried 5 ayes – 0 noes and 1 Committee Member position vacant. Chair O’Neill noted that this item would likely be on the February 12, 2019, City Council meeting agenda and the subcommittee would be disbanded at this time. B. PENSION ACCRUED LIABILITY BASICS Summary: The City’s CalPERS actuary, Kerry Worgan, will present the major components, assumptions and plan experience considered during the development of the pension-accrued liability. Recommended Action: Receive and file. Finance Director/Treasurer Dan Matusiewicz introduced Kerry Worgan, Supervising Pension Actuary, CalPERS. Finance Committee Meeting Minutes January 17, 2019 Page 3 of 9 Mr. Worgan presented on the topic of Pension Accrued Liability. He advised accrued funding liability is calculated based on the present value of projected benefits payment and based on a number of assumptions, which can include salary growth, termination, death, retirement age, mortality and inflation. In addition to the present value of all the project benefit payments, CalPERS also reviews the projected value of the employer and employee contributions. The discount rate is set to be representative of the expected future investment return and is based on short-term capital market assumptions over the next ten years derived from forecasts from the eight to ten financial advisors that CalPERS uses. Mr. Worgan clarified the future investment return is set equal to the discount rate in response to Committee Member Tucker’s inquiry. He also advised the 7% discount rate is split slightly because the short-term capital market assumption was 6.2% and the long-term was 8.3% that gives a present value of a 7% per year discount rate. Mr. Worgan clarified CalPERS goes through an asset liability review every four years to determine the discount rate per Committee Member Collopy’s inquiry. He also noted it takes 9 to 10 months to go through the review to determine the number so determining the discount rate annually would be difficult but did advise a mid-cycle review happens every two years they will look at the market to determine if the rate is significantly different than when the initial review was completed. Lastly, he noted if a significant difference is found, the board can recommend a change, as was most recently changed from 7.5% to 7% because of this mid-cycle review. Finance Director/Treasurer Matusiewicz advised that in November 2015 CalPERS put an additional risk mitigation policy in place for “if and when” CalPERS beats the expected rate of return by a certain percentage, they will continue to reduce the discount rate further to a target rate all the way down to 6%. However, the policy can be implemented at the CalPERS Board’s discretion. He also noted regardless of whether CalPERS lowers the discount rate, CalPERS consultants believe the returns will average only 6.2% and the City may see losses, which will disrupt the funding plan a bit. Mr. Worgan believes the discount rate will stay tied to 7% and there could be an adjustment in June 30, 2019, but he believes it will stay at 7%. Mr. Worgan presented examples of benefit payments based on different assumptions to the Committee. He also noted these are estimates and there can be gains or losses yearly. Mr. Worgan spoke about recent change of the discount rate from 7.5% to 7% and noted the June 30, 2019, valuation will generate the City’s expense for fiscal year 2020. Committee Member Collopy inquired if the discount rate is an arithmetically derived number to which Mr. Worgan responded it is initially. Mr. Worgan referred to the risk mitigation policy and advised in a risk mitigation event, the rate should be lowered by five basis points that is subject to CalPERS Board (Board) approval on a yearly basis. Committee Member Collopy stated it feels like the stakeholders have no rights and the Board should be doing what is right. Mr. Worgan stated that historically, the Board would do what is right as their fiduciary responsibility is to the system. Finance Director/Treasurer Matusiewicz noted that there are 15 members of the CalPERS Board and some are elected officials. Chair O’Neill opened public comments. Carl Cassidy inquired about the assumptions related to the mortality rate. Mr. Worgan advised it is a calculation based on the last historical mortality rates of every age and gender and they do a comparison against the national mortality improvement scale to determine the rate. He also stated that the most recent mortality table used was from 2016. There have been two that have been released since then; however, the mortality improvement is much lower. He advised it is continually monitored and evaluated. Finance Committee Meeting Minutes January 17, 2019 Page 4 of 9 Mr. Cassidy noted there are two numbers from the City’s financial statements, one of which is the CalPERS valuation and one that is the Governmental Accounting Standards Board (GASB) and asked Mr. Worgan to elaborate further. Mr. Worgan advised that GASB has slightly different reporting and has a fifteen-point difference based on the way expenses are handled which accounts for the slightly different number. Chair O’Neill noted it takes about two years to go from the valuation to the actual bill and the City ends up paying interest on the two-year lag. The City is now paying a discretionary amount in order to avoid interest and inquired how many other agencies also utilize that practice. Mr. Worgan advised that 260 agencies are employing this practice out of 1800. In response to Committee Member Collopy’s inquiry, Finance Director/Treasurer Matusiewicz advised agencies may include organizations other than cities and they may be making discretionary payments for different reasons. He elaborated other agencies may make discretionary payments instead of just paying the minimum payment as they may not know what their bill amount may be, unlike the City of Newport Beach. Mr. Worgan advised an experience study was completed in 2017 and a new one would be completed in 2021. He also noted that because of the lag, it was reflected in the June 30, 2017, valuation that the City would start paying in 2019-2020. Mr. Worgan provided an update on the amortization schedule impact, which is an additional $11 million on the miscellaneous side and an additional $15 million on the safety side. This was reflected in the June 30, 2018, valuation. Finance Director/Treasurer Matusiewicz advised the required contributions growth payment to CalPERS is close to $50 million, less employee contributions. Mr. Worgan demonstrated a prototype tool to the Committee and advised it gives the City the ability to project for the next thirty years and see the impact on rates and funding status. He provided an example using the miscellaneous plan in which it was fully funded by 2033 or 2034 based on different investment scenarios. Committee Member Collopy asked for a demonstration of the tool that projects the next three years for budgetary purposes. Mr. Worgan advised there are many scenarios, which can be explored; however, they cannot predict what the market will do. He advised typically, the market trends go up and down and then the market corrects itself. Mr. Worgan advised that he also built Additional Discretionary Payments (ADP) into the tool to show what an ADP can do to lower contributions. He noted that modeling can be completed with the tool and only one-payment is currently built in; however, it can be changed based on multiple payments in response to City Manager Leung’s inquiry. Finance Director/Treasurer Matusiewicz pointed out this model keeps the discount rate the same and keeps incurring losses less than the expected return. He noted, as an example, if the City wants to fund at 6% return it would mean that the pensions would be underfunded by $20 million per year for at least the first 20 years because the City would first need to pay-off the $150 million of unfunded liability associated with the reduction of the discount rate plus the increase of normal costs. Mr. Worgan pointed out that the City is in a unique position due to its participation in the “Fresh Start” plan and has credits sitting on the amortization sheet. He ran the tool through the example of what the plan would need to earn in order to be fully funded in the next 20 years. According to the tool, the plan would need to earn 6.86% without ADP in order to fully fund in 20 years. Mr. Worgan advised he could add additional ADP payments to the tool. Finance Committee Meeting Minutes January 17, 2019 Page 5 of 9 Committee Member Collopy stated according to the tool, the plan could suffer a ½ point degradation in the investment return and City would not lose any money because of the ADP payment. In response to Mayor Dixon’s inquiry, Mr. Worgan advised he liked what the City was doing in regard to ADP and advised the cities of Stockton and Santa Monica were as aggressive in their approach. Committee Member Tucker inquired why the City would not use the overall discount number calculated based on a scientific approach and ignore what the Board is using based on agencies’ complaints. Mr. Worgan responded they recommend different sets of portfolio allocations with the investment office and showed them the level of risk in conjunction with the discounted rate. He advised the plan needs to weigh risk versus cost and, as an example, CalPERS could lower the discounted rate to 5% but many cities would go into bankruptcy, so the Board needs to do what is best for the system. Committee Member Tucker stated that the Committee’s primary focus is the City and they are trying to right-size the number to be used. He would like to know what number would be more realistic. Mr. Worgan noted this is an unusual economic time period and bond yields and interest rates are down and the assumptions are that this will continue for 10 years. However, he believes it will normalize in somewhere between 6 and 7 years. If CalPERS set the discount rate to 6% and the plan earns 7% or 8%, the money could not be refunded, and the employees would have overpaid. He stated it is a delicate balance between conservative and aggressive approaches. Mr. Worgan advised the former Chief Actuary wanted to de-risk the portfolio to a 50/50 (equity vs. bonds) or 40/60 blend. Mr. Worgan further noted if the plan were to be around for 100 to 200 years, he would fund with a focus on an equity base that is sustainable for the long-term. Finance Director/Treasurer Matusiewicz stated that the goal is to determine how to fund the plan for the next 10 years. He believes the City may want to look at funding at a lower assumed investment return rate. Committee Member Collopy stated it is a slippery slope and the City needs to stay with CalPERS and look at additional budget contribution levels. Mr. Worgan continued with his presentation and expressed confidence in a 7% return on investment for the long-term. Committee Member Stapleton affirmed this approach makes sense. Committee Member Collopy stated that he felt the tool was very powerful and hoped that it could be made available as soon as possible. Committee Member Tucker inquired as to how the numbers are derived for employee salary growth assumptions. Mr. Worgan advised they run the numbers based on past employee history and those assumptions can be wrong. He also advised 80% to 90% of the number for experienced gains and losses come from the investment side and 10% is from the demographic side. He also advised gains and losses tend to offset each other. Finance Director/Treasurer Matusiewicz advised two years lie between each valuation and a 5-year ramp up for smoothing to soften the impact on the budget; however, the City is subject to higher interest cost during ramp up periods. Finance Committee Meeting Minutes January 17, 2019 Page 6 of 9 In response to Mayor Dixon’s inquiry regarding the two-year lag time, Mr. Worgan advised it takes a certain amount of time to prepare for the next valuation for 3,000 to 4,000 plans. Chair O’Neill opened public comments. Jim Mosher stated this complicated conversation could be avoided if the City participated in defined-contribution plans. Carl Cassidy stated it would be helpful if the public knew what the real internal rate of return is in comparison to the City’s growth from property tax and sales tax. Finance Director/Treasurer Matusiewicz responded it is the comparison the City is looking for and it would be great if CalPERS actually earns 7%. He also advised that the primary focus for the City is liquidity; however, the interest rates have been terrible. New money interest rates are looking better. Noting there were no other members of the public who elected to speak on this item, Chair O’Neill closed public comments. There was no further action taken on this item. C.SECTION 115 DISCUSSION Summary: An investment advisor and major provider of Section 115 pension prefunding trusts, PFM, will discuss the pros and cons; risks and benefits; and other considerations when considering the establishment of a Section 115 pension benefit trust. Recommended Action: Recommend a subcommittee further investigate the merits of a Section 115 prefunding trust and or receive and file. Ellen Clark, Multi-Asset Class Specialist, PFM Asset Management LLC, introduced herself to the Committee and advised that she works primarily with pension plans and Other Post- Employment Benefits (OPEB) trusts and endowment foundations and they have a full universe of investments to choose from to structure a portfolio. Ms. Clark compared an operating portfolio versus the opportunity to invest as CalPERS does. She indicated that with an operating portfolio, the City is restricted by California Government Code 53601, which is short-term, high-quality fixed income. Ms. Clark indicated that with the operating cash, the City would need to earn a real rate of return higher than 2% to have real buying power and that has not been possible the last 8 years. The money is designed for short- term funds to be available for operating expenses in the near future and the total return potential is limited to what those securities provide. Ms. Clark indicated that with a Section 115 Trust, the City would not be limited to short-term, high-quality fixed-income investments and the portfolio could be diversified with stocks and longer-term bonds that would give the portfolio a better return. If the City needed money to address a problem, the example being able to mitigate the volatility or the increase that the City would experience in its CalPERS contribution, the money could be set aside in an in-service fund within the operating portfolio; however, it can be repurposed at any time and its only investment opportunity is that of short-term fixed income. Ms. Clark noted with a Section 115 Trust established, the City would be dedicating those funds to a particular problem such as pension, OPEB, etc., and the City is obligated to use those assets for that specific purpose. Ms. Clark stated the only reason to invest in a Section 115 Trust is if the City has the ability to take on a long-term time horizon approach. Finance Committee Meeting Minutes January 17, 2019 Page 7 of 9 Ms. Clark advised the reason to consider a Section 115 Trust is to have access to a universe of investments that provides the City with diversification benefits and the potential for higher returns. However, there is always the risk of lower returns. She advised the return on the Section 115 Trust for OPEB are down to 5-6% over the calendar year and last year was not a great year. She further advised a Section 115 Trust allows the City an opportunity for a budgetary control tool, which allows it to earn more than cash. She did confirm there are higher management fees to invest in a Section 115 Trust. Ms. Clark advised over time a diversified portfolio is going to give the City a lot more return and provided examples of investments. In the last three years, there have been significantly positive returns exceeding the operating portfolio. Ms. Clark presented the five-year rolling returns and advised CalPERS is managing money for the long-term and noted there is risk in the equity markets. She advised Domestic Equity has given a return of 9.78%, Aggregate Fixed Income a return of 5.11%, and the U.S. Inflation has been at 3.04% over the last five years. She feels a broad mixed-use portfolio should give a 2.8% rate of return and the stock market portfolio should give a 5-6% rate of return. Lastly, Ms. Clark spoke about the Fixed Income market and feels that it will not sustain where it is today. She suggests Fixed Income will have modest returns moving forward. Ms. Clark suggested the City have an oversight committee, should it choose to invest in a Section 115 Trust, and suggested the City have fiduciary partners within the structure. PFM only interacts with the trustee bank to advise on the investment and they never touch the assets. Ms. Clark advised they typically see a three-member staff committee providing oversight and making decisions for the benefit of the entity. She feels what is important is there is some type of oversight committee that communicates the strategy to PFM. PFM typically prepares an Investment Policy Statement in collaboration with the City and it is effectively their job description. Ms. Clark prepared an example using PFM’s 5-year projection portfolio and advised that they are renewed annually. Ms. Clark also presented three diversified portfolios and explained what the expected return on the portfolio would be for each. Committee Member Collopy inquired why Government Code standards are not required for a Section 115 Trust. Ms. Clark advised it is because the City is putting the money in for an essential governmental purpose that is funding a long-term obligation. It gives the City the flexibility to go outside of Government Code Section 53601. In response to Committee Member Tucker’s inquiry, Ms. Clark advised these portfolio projections were gross of management fees. Ms. Clark also presented three diversified portfolios and what the expected return on the portfolio would be for each. For the short-term portfolio, PFM is expecting a 3% rate of return over the next five years. If a portfolio runs with 20% stock and 80% broad fixed income, PFM expects a rate of return of 4% over the next five years. If a portfolio runs at a 40% stock and 60% broad fixed income, they would expect a 5% rate of return over the next five years. Ms. Clark advised that entering into a Section 115 Trust is like using a budgetary control tool similar to over-paying on a long-term mortgage payment. If the City is not worried about making the payments, then making the payments to CalPERS may be the right option. Chair O’Neill advised the City has $50 million as a reserve. He advised the City recently completed a reserve study to determine if it is an appropriate reserve. He noted part of the analysis was to determine if a certain amount of money, for example, $10 million, was placed in a trust, how long would it take to earn enough to have enough money to fund CalPERS. Ms. Clark advised it would take a while to turn $10 million into $50 million. Finance Committee Meeting Minutes January 17, 2019 Page 8 of 9 Committee Member Collopy advised the City is taking $9 million and adding it to the CalPERS contribution. He advised the City has $50 million in unencumbered reserves. He wants to take $10 million of the reserve and place it in a Section 115 Trust and in three to four years the City could exhaust it and use that as the additional payment to CalPERS. He is concerned that the portfolio lost 5% last year and does not feel the City Council could tolerate the backlash from the public. Chair O’Neill advised one of the recommended actions on this item could be to create a subcommittee to further review and make recommendations. Committee Collopy suggested the City Manager and staff review the item and make recommendations to the Committee for their review. Committee Member Dixon thanked Ms. Clark for making the presentation and believes this can be a good repository for monies the City does not need immediately, and it can be a backup for bad economic times; however, notes it needs further review by staff in the context of the City of Newport Beach investment strategies. Committee Member Tucker explained that the City has a Section 115 Trust for OPEB because there is not another mechanism to set aside money that will be due for post-employment benefits. He also noted that while other agencies have chosen to create 115 Trusts, they may not have a similar level of unfunded liabilities as Newport Beach has. Accordingly, at this point, Committee Member Tucker does not see a compelling reason to establish a Section 115 Trust, but is willing to hear more about the topic later. Committee Member Collopy believes the City has a disciplined City Council that is transparent enough and does not feel the money needs to be set aside unnecessarily. Ms. Clark did note that she is a fan of dollar cost averaging and asked the Committee to keep that in mind. She also noted it is a tool to have more of the City’s money work for the City. Chair O’Neill opened public comments. Carl Cassidy thanked Ms. Clark for an excellent presentation. Noting there were no other members of the public who elected to speak on this item, Chair O’Neill closed public comments. There was no further action taken on this item. D.BUDGET AMENDMENTS (QUARTER ENDED DECEMBER 31, 2018) Summary: Receive and file a staff report on the budget amendments for the prior quarter. Recommended Action: Receive and file. In reference to the revised name for the budget “checklist,” Deputy Director/Finance Steve Montano inquired whether the Committee preferred “Proposed Budget Revision (PBR)” or “Proposed Budget Modification (PBM).” The Committee selected, by consensus, the title “Proposed Budget Revision (PBR).” Chair O’Neill opened public comments. Noting there were no members of the public who elected to speak on this item, Chair O’Neill closed public comments. There was no further action taken on this item. E.WORK PLAN REVIEW Summary: Finance Committee Meeting Minutes January 17, 2019 Staff will review with the Committee the agenda topics scheduled for the remainder of thecalendar year.Recommended Action: Receive and file. Chair O'Neill opened public comments. Noting there were no members of the public whoelected to speak on this item, Chair O'Neill closed public comments. There was no further action taken on this item. VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MA TIERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON­DISCUSSION ITEM) Chair O'Neill reminded the Committee that Beacon Economics will provide a high-level economic outlook and local revenue forecast for the City at the next City Council meeting on January 22,2019. VII. ADJOURNMENT Attest: The Finance Committee adjourned at 5:03 p.m. to the next regular meeting of the Finance Committee. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on January 11, 2019, at 12:44 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. Will O'Neill, Chair Finance Committee Date Page 9 of 9