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HomeMy WebLinkAboutApproved Minutes - February 14, 2019Finance Committee Meeting Minutes February 14, 2019 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE FEBRUARY 14, 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, Committee Member William Collopy, Committee Member Joe Stapleton, Committee Member Larry Tucker ABSENT: Committee Member (VACANT POSITION), Council Member Joy Brenner (EXCUSED) STAFF PRESENT: Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve Montano, Senior Accountant/Finance Theresa Schweitzer, Administrative Manager/PW Finance Jamie Copeland, Budget Manager/Finance Susan Giangrande, Accounting Manager/Finance Rukshana Virany, Administrative Manager/Fire Angela Crespi, Fire Assistant Chief Jeff Boyles, Fire Chief Chip Duncan, Public Works Director Dave Webb, Administrative Manager/Public Works Chris Miller, and Administrative Specialist to the Finance Director Marlene Burns OTHER ENTITIES: None MEMBERS OF THE PUBLIC: Jim Mosher, Jennifer McDonald, and Allen Cashion Prior to public comments, Chair O’Neill reported attendance at the Government Finance Officers Association (GFOA) conference in Newport Beach where he spoke on financial policies. He further reported all of the financial policies that have been formed by the Finance Committee were adopted by the City Council. III.PUBLIC COMMENTS Chair O’Neill opened public comments. Jim Mosher addressed the Committee regarding the update to the General Plan and noted the requirement the City develop and maintain a Strategic Plan for Fiscal and Economic Sustainability. He commented the Strategic Plan was originally adopted in 2007 and has not been updated since although it is required to be updated annually. Mr. Mosher addressed the Committee regarding the recently adopted financial policies, noted contracts with former employees must go to City Council for approval, and reported he does not believe that process is being followed as it was intended. 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 JANUARY 17, 2019 Recommended Action: Finance Committee Meeting Minutes February 14, 2019 Page 2 of 8 Approve and file. MOTION: Committee Member Tucker moved, and Committee Member Collopy seconded, to approve the minutes. The motion carried 5 ayes – 0 noes, 1 absence (Brenner) and 1 Committee Member position vacant. V.CURRENT BUSINESS A.HARBOR AND BEACHES MASTER PLAN UPDATE Summary: The Finance Committee is charged with a variety of tasks including, but not limited to, reviewing with staff on an annual basis the timing, means of financing, and fiscal impacts associated with funding the high-priority projects designated in the Facilities Financing Plan (FFP) and the Harbor and Beaches Master Plan (HBMP). Staff welcomes input and recommends that the Committee receive and file the attached HBMP update and provide staff any input regarding its financial solvency. Recommended Action: Staff welcomes input and recommends that the Committee receive and file the attached HBMP update and provide staff with any input regarding its financial solvency. Chair O’Neill introduced this matter and reported the Harbor Commission thoroughly reviewed the master plan update and has determined proper harbor upkeep and maintenance. The Finance Committee’s role is to ensure proper funding sources and ask any questions about maintenance, replacement, and installations. Mayor Diane Dixon noted there are no external funding sources for harbor-related capital expenses and inquired if it is possible to consider external funding sources when negotiating development agreements. Public Works Director Dave Webb responded that federal contributions are expected, and those grants are typically “pay as you go.” Finance Director/Treasurer Dan Matusiewicz explained that if there is a development agreement that impacts the harbor, or has a recreational element, then a “park-in-lieu” agreement is a possibility. Mayor Dixon stated she would like the City to consider all external funding sources for resiliency and noted there are federal funds available for preventative measures. She inquired whether the City should pursue those funding sources. Public Works Director Webb advised there are mitigation grants the City has applied for in the past and the sea wall may qualify for some grant funding. Committee Member Collopy noted that in 2026 there would be $40 million available at the end of the year to be spent in future years. Finance Director/Treasurer Matusiewicz explained those funds are net of the project expenditures. He also noted there is no target minimum balance set on this fund as it is a fairly new plan. Finance Director/Treasurer Matusiewicz reported the General Fund loaned the Harbor Capital Fund $15 million to complete the initial dredging. The loan will be repaid as a “zero-interest loan” over 15 years. Finance Director/Treasurer Matusiewicz explained the City has two tideland funds. He further explained if revenue is allocated to the operating fund and there is more revenue than expenditures, the money will need to be returned to the State Lands Commission. However, Finance Committee Meeting Minutes February 14, 2019 Page 3 of 8 the funding does not have to be returned on the Capital Fund, as it does not have the same requirement to show expenses in excess of revenue. In response to Committee Member Collopy’s inquiry, Finance Director/Treasurer Matusiewicz clarified the 2019 $12.5 million General Fund one-time transfer was from surplus funds earned in 2017. Deputy Finance Director Steve Montano clarified that $1.5 million was allocated to seawalls. Finance Director/Treasurer Matusiewicz reported 50% of surplus funds can be used to “pay down” debt and fund one-time current needs. Committee Member Tucker noted the expenditure would be taken out of the General Fund. Committee Member Collopy noted that he is struggling with the numbers in the plan, specifically expenditures by chart by type and that the values are not adding up. Deputy Finance Director Montano clarified that grant funding is not included in the pie chart. Finance Director/Treasurer Matusiewicz reported project expenditures in 2020 are spread over three years based on a formulated determination and there is a “lag” assumed. Committee Member Collopy believes there will be a surplus if there is not much in the way of expenditures happening in 2020. Public Works Director Webb stated there are harbor projects of varying degrees and they tend to come in big chunks. Committee Member Collopy expressed concern the plan is not exact as a budget needs to be built around it. Deputy Finance Director Montano advised there is more detail on the last page that shows project expenditures. In response to Committee Member Tucker’s inquiry, Finance Director/Treasurer Matusiewicz clarified it is at the City’s discretion as to what revenues are applied to either fund and determinations are based on the City’s needs, per the City Attorney, according to Finance Director/Treasurer Matusiewicz. Finance Director/Treasurer Matusiewicz clarified that former Council Member Henn wanted to give people some assurance that the 2010 dock and mooring rent increases benefitted the harbor. The City adopted several resolutions which were then forwarded to the State Lands Commission. He advised this can be further reviewed and staff can come up with a better formula for funding. In response to Committee Member Stapleton’s inquiry, Finance Director/Treasurer Matusiewicz advised that sea walls for Balboa Island were included in the plan. Public Works Director Webb hoped to have funding to cover replacement for the sea walls in 25 years, but even at 15 years, the sea walls will need to be replaced. In response to Mayor Dixon’s inquiry, Public Works Director Webb advised repair and maintenance have been completed on the Balboa Island sea walls. He further advised that expected grants would offset the cost of dredging of the lower harbor. The City has a high probability of receiving the grant. Finance Director/Treasurer Matusiewicz advised the amounts are “locked in” and are based on when a developer chooses to enter into an agreement. Mayor Dixon expressed concern regarding obtaining funding for sea wall replacement through a grant especially since they cannot be applied for in ten years. She requested a footnote in the project showing which grants are guaranteed. Public Works Director Webb advised grant funding not be programmed too far in advance as there is no guarantee if the grant will be received. Committee Member Collopy inquired about the viability of the 2030, 2031, 2032, 2022 and 2023 grants. Finance Director/Treasurer Matusiewicz advised none of the grants are Finance Committee Meeting Minutes February 14, 2019 Page 4 of 8 guaranteed except for the identified $800,000. Public Works Director Webb advised that federal grants will not be funded at 100% and the City will be more successful in obtaining the grants if they contribute matching funds. The funding model is showing the City pays 25% and the federal grant will fund 75% of the project, with the hopes of moving the City liability closer to 20%. He feels the County has a mechanism in place to fund that model and should have the funding available in 2030 to pay for the dredging. Committee Member Collopy noted it appears the City needs to have a plan for dredging which would be 100% funded by the General Fund. If the City needs to use reserves, it should be replenished with a grant. Chair O’Neill believes it is a question of how fast the Capital Fund reserve can be built up and feels the dredging operation will need to be pushed back 3-5 years. Committee Member Collopy noted in 2023, $10 million is needed to complete the dredging. A decision needs to be made to determine if $10 million will be taken out of the General Fund and if grant funds will be available to replenish the funding. Chair O’Neill noted General Fund money is being put into the plan and City Council could still fund the dredging. Committee Member Collopy stated the dredging plan is almost as complex as the dredging itself. Finance Director/Treasurer Matusiewicz reported the Tidelands Capital Fund balance is $13.3 million as of June 30, 2018, in response to Mayor Dixon’s inquiry. Chair O’Neill clarified that this item is a receive and file, however the discussion is important as it factors into the City’s budget. 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. B.FACILITIES FINANCIAL PLAN UPDATE Summary: The Finance Committee is charged with a variety of tasks including, but not limited to, reviewing with staff on an annual basis the timing, means of financing, and fiscal impacts associated with funding the high-priority projects designated in the Facilities Financing Plan (FFP). Staff welcomes input and recommends that the Committee receive and file the attached FFP update and provide staff any input regarding its financial solvency. Recommended Action: Staff welcomes input and recommends that the Committee receive and file the attached FFP update and provide staff with any input regarding its financial solvency. Chair O’Neill introduced this matter. Mayor Dixon inquired if the Newport Junior Guard Building numbers should be entered even though the funding will be arranged. Chair O’Neill noted $3.5 million and $4 million should be entered and a 50/50 funding model should be noted for planning purposes. Mayor Dixon inquired as to why the Boys & Girls Club (Eastbluff Park) is listed, as it is privately funded. Public Works Director Web advised it has been historically on the list as the facility is on City property and the City may assist with the parking lot project. Mayor Dixon noted for the record that Development Agreement funding sources are significantly diminishing moving forward. Committee Member Stapleton inquired regarding the $30 million in 2030 from Uptown Newport. Finance Director/Treasurer Matusiewicz advised the building slated for phase 2 is presently being leased so the costs have not been projected. Finance Committee Meeting Minutes February 14, 2019 Page 5 of 8 Public Works Director Webb reported on the Balboa Yacht Basin which consists of three wood buildings containing three apartments, 34 garages, office space, and a restaurant. He recommends the Finance Committee complete a financial analysis on the property which includes the best use for this building and determine if it needs to be added to the plan. Finance Director/Treasurer Matusiewicz advised this asset is a single revenue stream shared between tidelands and uplands revenue. Harbor Resources Manager Chris Miller believes the marina has been there since 1986-1987 and should be replaced in less than 10 years. Mayor Dixon stated this is a general plan opportunity and recommends a working group with City Council should be held for discussion. Committee Member Tucker noted if this is tied to the general plan update there is no guarantee the update will be adopted. Chair O’Neill stated this is not a Finance Committee decision and will require a decision by the City Council. 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. C.LONG-RANGE FINANCIAL FORECAST (LRFF) Summary: Staff will provide an update to the latest version of the LRFF. Recommended Action: Receive and file. Deputy Finance Director Montano introduced the discussion of the City’s long range financial forecast for the General Fund. He reported the City is using Whitebirch, a “Software as a Service” (SaaS) based financial modeling platform which allows multi-user simultaneous access and is more stable than Excel. The annual subscription fee is $12,500 which would be paid out of the IT Internal service fund. Deputy Finance Director Montano explained the baseline scenario is established based on the FY19 original budget, stripped of any “one-time” line items. The second step is to add the projected revenue and expenditure impacts. The final step consists of “marrying” the selected baseline assumptions with any combination of impacts to create scenarios. Deputy Finance Director Montano discussed the historical and future projected growth rates of the major General Fund revenue and expenditure categories. Deputy Finance Director Montano provided an average historical 14-year growth for property tax and the selected future projected baseline growth for each revenue and expenditure category. He noted a one-time $5.4 million payment resulting from the dissolution of the redevelopment agency in 2013. Deputy Finance Director Montano reported sales tax revenue increased $3.9 million, or 12 percent, from the prior year and there is a current lull in automobile sales. Deputy Finance Director Montano reported on the Transient Occupancy Tax (TOT) and stated “Visit Newport Beach” (VNB) reported visitor spending in Newport Beach is keeping pace with that of the State, but trailing Orange County overall. He reported the total TOT tax rate is 13% compared to 15% for the City of Anaheim. Chair O’Neill reminded the Committee an increase in the TOT requires a public vote. Finance Committee Meeting Minutes February 14, 2019 Page 6 of 8 Deputy Finance Director Montano reported on Salaries and Benefits and projects future growth to be 3.8%, which includes overtime pay and health benefits. Chair O’Neill inquired if this number is based on historical trends of City Council and their negotiations with public associations. Deputy Finance Director Montano advised the projection included employees receiving step increases, plus cost of living. Finance Director/Treasurer Matusiewicz advised salaries are 40% of this category and it includes overtime pay and health benefits. Deputy Finance Director Montano reported on the pension expenditure and noted the “fresh start” in 2014 and the accelerated pension payments distort the historical growth average. He advised moving forward, if the City implements pension Option 3A, there will be a “steady- state” growth and the City would be able to pay off the unfunded pension liability. Committee Member Tucker assumes the future return is equal to the discount rate. Finance Director/Treasurer Matusiewicz confirmed this assumes all actuarial functions are paid down in this scenario. Mayor Dixon questioned why pension costs remain at $10 million when the unfunded liability is paid off and Finance Director/Treasurer Matusiewicz clarified this amount represents the normal ongoing pension costs. Chair O’Neill reaffirmed the Finance Committee recommended Option 3A, but it has not been adopted by the City Council. Deputy Finance Director Montano discussed the maintenance and operations category and stated the future annual projected growth is 5.3%. Abrupt historical changes in the chart are due to outsourcing and changes to the cost allocation plan back in 2011. Finance Director/Treasurer Matusiewicz advised the City has cut back 100 employees with those costs shifting to maintenance and operations (M&O). He also advised a concerted effort was underway to reduce the General Fund costs which were being allocated to the Tideland funds which, fortunately, included reducing public safety costs. Deputy Finance Director Montano presented four forecast scenarios. Scenario 1 includes pension UAL contribution Option 3A which is set at a level $35 million dollar payment plan over 15 years. Scenario 2 is the same as Scenario 1, except assuming higher annual salary growth than Scenario 1. Scenario 3 shows CalPERS assets underperforming by 1% (6% return) for 10 years. Scenario 4 shows CalPERS’ change in actuarial assumption, reducing the discount rate permanently to a 6% return for the entire forecast period (20 years) and beyond. In response to Chair O’Neill’s and Committee Member Collopy’s inquiries, Deputy Finance Director Montano advised Scenario 2 included a salary growth rate of 4%. Chair O’Neill explained the City Council has spent the last year negotiating with every bargaining association in the City and they have not seen numbers like those presented in the model. Deputy Finance Director Montano stated all projections are based on the FY19 original budget and this model assumes 100% of revenues and expenditures are realized as forecasted each year. He noted the model assumes the General Fund maintains its commitment to important program such as FFP, CIP, Facilities Maintenance, 800 MHz Radio, Tidelands and the Contingency Reserve. Deputy Finance Director Montano presented Scenario 1 with a high-level aggregated view on the twenty year projection. The model is doing what it should, which is to indicate the impact of certain revenue and expenditure assumptions that may ultimately vary from actual results. While deficits are apparent, they are not of a magnitude that is indicative of a structural imbalance that would require a shift in the City’s service delivery model. Finally, management would not present an “out of balance” budget for consideration. In response to Mayor Dixon’s inquiry Finance Director/Treasurer Matusiewicz noted these numbers are based on revenue and expenses’ compound annual growth rate (CAGRs). Finance Committee Meeting Minutes February 14, 2019 Page 7 of 8 Committee Member Collopy noted the near term is interesting information, but the “out years” are very important in determining if a structural change is necessary. He stated he is not criticizing the model because the team has done a fantastic job developing it. Deputy Finance Director Montano stated he has a slide that will show how this is corrected. Finance Director/Treasurer Matusiewicz presented Scenario 2, which assumes a 4% salary growth as opposed to 3%. It shows a bleaker scenario and he presented a new amortization basis which solved some of the losses from 2015 and 2016. He advised since 2010, the City has increased its contribution to mitigate the risk. He also noted there is a risk mitigation policy in place with CalPERS that may further reduce the discount rate down to 6% over a period of time. He advised CalPERS’ current plan whereby in the years where they beat the expected return of 7%, there will be minor reductions in the discount rate over a period of time. Finance Director/Treasurer Matusiewicz reported on Scenario 3, noting changing the discount rate over a period of time is fundamentally different than incurring losses over a ten-year period. He explained the amortization schedule. If the City only incurred the ten year losses, it would pay more with the principal going up. This would show up on a payment stream as an additional cost. The expectation by professional advisors and others is that CalPERS will earn 6.2%, on average. Finance Director/Treasurer Matusiewicz reported on Scenario 4, which models CalPERS going down to a discounted rate of 6% which will create an unfunded liability of an additional $129 million. This would increase the normal costs going forward. Committee Member Tucker noted if CalPERS changed its rate from 7.5% to 7%, the change in the unfunded liability would go from $7 million to $58 million. He is not surprised to see the $129 million number in the worst case scenario. Finance Director/Treasurer Matusiewicz noted going forward, the City could consider setting money aside to mitigate the problem should it happen. He reported he asked the CIO of CalPERS what her “gut feeling” is on the risk mitigation policy, and if she thought the Board would continue to lower to 6% and she felt it was very possible. Deputy Finance Director Montano presented fiscal strategies to show how the City might align its budget should there be an economic downfall. He advised the average length of recession over a 50-year period for Newport Beach was 4 and 1/3 quarters. He noted during the Great Recession from March 2008 to January 2010, the moving average of City revenues declined 14.7%, which is not likely to be seen again. He also reported during the “Dot-Bomb” Recession from February 2001 to May 2002, the moving average for revenues only declined 4.4%. Deputy Finance Director Montano reported on fiscal strategies to address economic or other short-term financial impacts. He reported the City can temporarily cut about 2-3% of its budget in order to absorb unexpected financial impacts in a given year. The cut could be accomplished by deferring maintenance of existing city assets, deferring purchases of new assets, cutting back on some operating transfers out of the General Fund, and smaller cuts in the City’s operating expenditures. This equates to approximately $7 million dollars. Deputy Finance Director Montano reported the City could also use part of its Contingency Reserve to be used in lieu, or in concert with, spending cuts in the event of an extreme event. He also noted much of the City’s expenditure budget is contractually committed and cannot be cut unilaterally. Last, he presented an example of what a 3% reduction in General Fund expenditure would look like during 2020. Deputy Finance Director Montano concluded the General Fund is projected to be in a financially sound position over the next 20-year period. He noted any projected deficit in the model is not reflective of likely and typical budget performance. He asserted short-term deficits can be Finance Committee Meeting Minutes February 14, 2019 absorbed without long-term reliance on the Contingency Reserve if the City needed to go that route. Chair O'Neill opened public comments. Allen Cashion inquired why the City was projecting 7% if the experts predicted 6.2%. Finance Director/Treasurer Matusiewicz responded the reason they use 7% is they have a very long investment horizon and the City's plan in the short term is to expect 6.2% in earnings, however, in the years beyond ten, they are expecting to earn 8%. 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.WORK PLAN REVIEWSummary:Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year.Recommended Action: Receive and file. Chair O'Neill reported that the Harbor Department will be the next department scheduled forthe work plan review. There was no further action taken on this item. Attest: VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MA TIERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON­ DISCUSSION ITEM) Chair O'Neill reported the City Council would be the appropriate body to form a subcommittee to analyze the Beacon Bay revenue model and its potential appraisal. Also, the annual meeting with the auditors need to be scheduled. Committee Member Tucker suggested a meeting be held on May 30, 2019, as the Finance Committee needs to formally make a recommendation to City Council. VII.ADJOURNMENT The Finance Committee adjourned at 4:55 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 February 8, 2019, at 2:10 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 8 of 8