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HomeMy WebLinkAbout2024-39 - Amending Council Policy F-2 (Reserve Policy)RESOLUTION NO. 2024-39 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH, CALIFORNIA, AMENDING COUNCIL POLICY F-2 (RESERVE POLICY) WHEREAS, the City of Newport Beach ("City") is governed, in part, by its Charter, Municipal Code, and adopted City Council Policies; WHEREAS, the City Council has a long and established history of being good guardians and stewards of the public's money; WHEREAS, appropriations, expenditures and other budgetary matters are a primary concern of the City Council; WHEREAS, the City Council has adopted various policies regarding financial matters; WHEREAS, the City Council adopted City Council Policy F-2 (Reserve Policy) ("Council Policy F-2") on January 24,1994, to administer reserve funds in accordance with governmental accounting standards and prudent financial management practices; WHEREAS, the City Council adopted the Water and Sewer Rate Studies on September 26, 2023, which recommend reserve levels in the Water and Sewer funds; WHEREAS, the Finance Director/City Treasurer recommends revisions to Council Policy F-2 to align the reserve strategy with the Water and Sewer Rate Studies and other minor changes to this policy for clarity, consistency, or to conform to current governmental accounting guidance; and WHEREAS, the City Manager has reviewed the recommended revisions suggested by the Finance Director/City Treasurer and recommends the City Council amend Council Policy F-2 as provided in this resolution. NOW, THEREFORE, the City Council of the City of Newport Beach resolves as follows: Section 1: The City Council does hereby amend Council Policy F-2 and replace it with the version attached hereto as Exhibit "A" and incorporated herein by this reference. Resolution No. 2024-39 Page 2 of 3 Section 2: All prior versions of Council Policy F-2 that conflict with the revisions adopted by this resolution are hereby repealed. Section 3: The recitals provided in this resolution are true and correct and are incorporated into the operative part of this resolution. Section 4: If any section, subsection, sentence, clause or phrase of this resolution is, for any reason, held to be invalid or unconstitutional, such decision shall not affect the validity or constitutionality of the remaining portions of this resolution. The City Council hereby declares that it would have passed this resolution, and each section, subsection, sentence, clause or phrase hereof, irrespective of the fact that any one or more sections, subsections, sentences, clauses or phrases be declared invalid or unconstitutional. Section 5: Except as expressly modified in this resolution, all other City Council policies, sections, subsections, terms, clauses, and phrases set forth in the Council Policy Manual shall remain unchanged and shall be in full force and effect. Section 6: The City Council finds the adoption of this resolution is not subject to the California Environmental Quality Act ("CEQA") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Division 6, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. Resolution No. 2024-39 Page 3 of 3 Section 7: This resolution shall take effect immediately upon its adoption by the City Council, and the City Clerk shall certify the vote adopting the resolution. ADOPTED this 11th day of June, 2024. Will O'Neill Mayor ATTEST: Leilani I. Brown City Clerk APPROVED AS TO FORM: CITY ATTORNEY'S OFFICE Aaro)Harp City Attorney Attachment: Exhibit A — Council Policy F-2 (Reserve Policy) F-2 RESERVE POLICY PURPOSE To establish City Council policy for the administration of Reserves defined as fund balances in governmental funds and net working capital in proprietary funds. BACKGROUND Prudent financial management dictates that some portion of the funds available to the City be reserved for future use. As a general budget principle concerning the use of reserves, the City Council decides whether to appropriate funds from Reserve accounts. Even though a project or other expenditure qualifies as a proper use of Reserves, the Council may decide that it is more beneficial to use current year operating revenues or bond proceeds instead, thereby retaining the Reserve funds for future use. Reserve funds will not be spent for any function other than the specific purpose of the Reserve account from which they are drawn without specific direction in the annual budget or by a separate City Council action. Information regarding Annual Budget Adoption and Administration is contained in City Council Policy F-3. GOVERNMENTAL FUNDS AND FUND BALANCE DEFINED Governmental Funds including the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds have a short-term or current flow of financial resources, measurement focus, and basis of accounting, and therefore exclude long-term assets and long-term liabilities. The term Fund Balance, used to describe the resources that accumulate in these funds, is the difference between the fund assets and fund liabilities of these funds. Fund Balance is similar to the measure of net working capital that is used in private sector accounting. By definition, both Fund Balance and Net Working Capital exclude long-term assets and long-term liabilities. PROPRIETARY FUNDS AND NET WORKING CAPITAL DEFINED Proprietary Funds including Enterprise Funds and Internal Service Funds have a long- term or economic resources measurement focus and basis of accounting, and therefore include long-term assets and liabilities. This basis of accounting is very similar to that used in private sector. However, instead of Retained Earnings, the term Net Assets is 1 F-2 used to describe the difference between fund assets and fund liabilities. Since Net Assets include both long-term assets and liabilities, the most comparable measure of proprietary fund financial resources to governmental Fund Balance is Net Working Capital, which is the difference between current assets and current liabilities. Net Working Capital, like Fund Balance, excludes long-term assets and long-term liabilities. GOVERNMENTAL FUND RESERVES (FUND BALANCE) For Governmental Funds, the Governmental Accounting Standards Board ("GASB") Statement No. 54 defines five specific classifications of fund balance. The five classifications are intended to identify whether the specific components of fund balance are available for appropriation and are therefore "Spendable." The classifications also are intended to identify the extent to which fund balance is constrained by special restrictions, if any. Applicable only to governmental funds, the five classifications of fund balance are as follows: CLASSIFICATIONS NATURE OF RESTRICTION Non -spendable Cannot be readily converted to cash Restricted Externally imposed restrictions Committed City Council imposed commitment Assigned City Manager assigned purpose/intent Unassigned Residual balance not otherwise restricted A. Non -spendable fund balance: That portion of fund balance that includes amounts that are either (a) not in a spendable form, or (b) legally or contractually required to be maintained intact. Examples of Non -spendable fund balance include: 1. Reserve for Inventories: The value of inventories purchased by the City but not yet issued to the operating Departments is reflected in this account. 2. Reserve for Long Term Receivables and Advances: This Reserve is used to identify and segregate that portion of the City's financial assets which are not due to be received for an extended period, so are not available 2 F-2 for appropriation during the budget year. 3. Reserve for Prepaid Assets: This Reserve represents resources that have been paid to another entity in advance of the accounting period in which the resource is deducted from fund balance. A common example is an insurance premium, which is typically payable in advance of the coverage period. Although prepaid assets have yet to be deducted from fund balance, they are no longer available for appropriation. 4. Reserve for Permanent Endowment - Bay Dredging: The endowment specifies that the principal amount will not be depleted and represents the asset amounts to be held in the Bay Dredging Fund. 5. Reserve for Permanent Endowment - Ackerman Fund: The endowment specifies that the principal amount will not be depleted and represents the asset amount to be held in the Ackerman Fund. B. Restricted fund balance: The portion of fund balance that reflects constraints placed on the use of resources (other than non -spendable items) that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. Examples of restricted fund balance are: 1. Reserve for Debt Service: Funds are placed in this Reserve at the time debt is issued. The provisions governing the Reserve, if established, are in the Bond Indenture and the Reserve itself is typically controlled by the Trustee. 2. Affordable Housing: A principal provision of the Newport Beach Housing Element requires developers to provide housing units for lower income households, the number of which is to be negotiated for each development project. In lieu of constructing affordable housing, developers have paid into this reserve which is used at the City Council's discretion to provide alternate methods for the delivery of affordable housing for lower income households. 3. Park In Lieu: Per Newport Beach Municipal Code (NBMC) Chapter 19.52 3 F-2 and California Government Code Section 664777 (The 1975 "Quimby Act"), a dedication of land or payment of fees for park or recreational purposes in conjunction with residential development is required. The fees collected can only be used for specific park or recreation purposes as outlined in NBMC Sections 19.52.030 and 19.52.070. 4. Upper Newport Bay Restoration Reserve: This Reserve is the repository for funds mandated by SB573, as well as special fees charged to permit holders as an alternative to meeting certain specified mitigation criteria. In addition to the mitigation fees, ten percent (10%) of Beacon Bay lease revenue is placed in this Reserve. Funds in the Reserve are restricted for Upper Newport Bay restoration projects. 5. Permanent Endowment for Bay Dredging: The endowment also specifies that the interest earnings on the principal amount can only be used for dredging projects in the Newport Bay. 6. Permanent Endowment for Ackerman Fund: The endowment also specifies that the interest earnings on the principal amount can only be used for scholarships provided by the City and high-tech library equipment. 7. Oceanfront Encroachment Reserve: In the early 1990's, it was discovered by survey that improvements to several ocean front parcels were encroaching onto the public beach. The encroachment was relatively minor. The negotiated solution was for the property owners to pay a permit fee each year to the City. Revenue thus generated may only be used for ocean front restoration projects and incidental costs of improvements and maintenance to enhance public access and use of ocean beaches as approved by the City Council. This Reserve is the repository for those funds. Appendix C of NBMC Title 21 (Local Coastal Program Implementation Plan) contains additional background and details about the encroachment issue. The external restriction on this balance is imposed by the Local Coastal Program (LCP). C. Committed fund balance: That portion of a fund balance that includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action by the government's highest level of decision making authority, and remain binding unless removed in the same manner. The City considers a resolution to constitute a formal action for the purposes V F-2 of establishing committed fund balance. The action to constrain resources must occur within the fiscal reporting period; however, the amount can be determined subsequently. City Council imposed Commitments are as follows: 1. Facilities Financial Planning(FFP) Program: In conjunction with the Ciiy's Facilities Financial Plan, a sinking fund has been established to amortize the cost of critical City facilities such as, but not limited to, the Civic Center, Police Department buildings, Fire Stations, Library Branches, and otherFacility Improvement Projects. The Facilities Financial Planning Program establishes a level charge to the General Fund that will perpetually replenish the cash flows necessary to finance the construction of critical City facilities. This plan will be updated annually as part of the budget process, or as conditions change. Specific requirements for annual funding and minimum reserve balance for the FFP Program can be found in City Council Policy F-28. The eligible uses of this reserve include the cash funding of public facility improvements or the servicing of related debt. 2. Off Street Parkin: Per NBMC Section 12.44.025 the City Council may direct revenues into the Off -Street Parking Facilities Fund for purposes of the acquisition, development, and improvement of off street parking facilities, and for any expenditures necessary or convenient to accomplish such purposes. 3. In Lieu Parking: Per NBMC Section 12.44.125 the City requires commercial businesses to provide adequate off-street parking or where this is not possible, businesses are afforded the opportunity to pay an annual fee and use parking spaces in a municipal lot, providing such a lot is located within specified proximity to the business. These funds can only be used to provide additional parking. 4. Neighborhood Enhancement - A: Funds previously accumulated to Neighborhood Enhancement Area "A" pursuant to a prior version of NBMC Section 12.44.027 shall continue to be used only for the purpose of enhancing and supplementing services to the West Newport area. Both the nature of the supplemental services and the definition of the area served are set forth in NBMC Section 12.44.027. G'" F-2 5. Neighborhood Enhancement - B: Funds previously accumulated to Neighborhood Enhancement Area "B" pursuant to a prior version of NBMC Section 12.44.027 shall continue to be used only for the purpose of enhancing and supplementing services in the Balboa Peninsula. Both the nature of the supplemental services and the definition of the area served are set forth in NBMC Section 12.44.027. 6. Cable Franchise: Pursuant to the provisions of the Newport Beach Municipal Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in return for the use of the City's streets and public ways for the purpose of installing, operating, maintaining, or reconstructing a cable system to provide cable service, fees are collected by the City from cable providers. Those fees are to be used by the City for support of Public, Education, and Government access programming only. 7. Oil and Gas Reserve: These funds generated by an annual amount being set aside from oil and gas field production revenues are to be used to fund abandonment of wells and facilities as they go out of service. 8. Capital Reappropriation: This Reserve recognizes a portion of fund balance that is not readily available to fund new appropriations because it has been reappropriated through the budget adoption process or amendment process for programs or projects authorized in a prior fiscal year that are not yet complete. D. Assigned fund balance: That portion of a fund balance that includes amounts that are constrained by the City's intent to be used for specific purposes but that are not restricted or committed. This policy hereby delegates the authority to the City Manager or designee to modify or create new assignments of fund balance. Constraints imposed on the use of assigned amounts may be changed by the City Manager or his designee. Appropriations of balances are subject to Council Policy F-3 concerning budget adoption and administration. E. Unassigned fund balance: 1. Contingency Reserve: The Contingency Reserve shall have a target balance of twenty five percent (25 %) of General Fund "Operating Budget" as originally adopted. Operating Budget for this purpose shall include current expenditure appropriations and shall exclude Capital Improvement Projects, Transfers Out, and additional discretionary payments to the City's unfunded pension liability. 0 F-2 Appropriation and/ or access to these funds are generally reserved for emergency or unforeseen situations but may be accessed by Council by simple budget appropriation. Examples may include but are not limited to the following: a. A catastrophic loss of critical infrastructure. b. AState or Federally declared state of emergency. c. Any settlement arising from a claim or judgment. d. Deviation from budgeted revenue projections. e. Any action by another government that eliminates or shifts revenues from the City. f. Inability of the City to meet its debt service obligations in any given year. g. Other circumstances deemed necessary by City Council to meet the claims and obligations of the City. Should the Contingency Reserve be used, the City Manager shall present a plan to City Council to replenish the reserve within five years. 2. Residual Fund Balance: The residual portion of available fund balance that is not otherwise restricted, committed, or assigned and is above and beyond the Contingency Reserve target reserve balance. 7 F-2 PROPRIETARY FUND RESERVES (NET WORKING CAPITAL) In the case of Proprietary Funds (Enterprise and Internal Service Funds), Generally Accepted Accounting Principles ("GAAP") do not permit the reporting of reserves on the face of City financial statements. However, this does not preclude the City from setting policies to accumulate financial resources for prudent financial management of its proprietary fund operations. Since proprietary funds may include both long-term capital assets and long-term liabilities, the most comparable measure of liquid financial resources that is similar to fund balance in proprietary funds is net working capital, which is the difference between current assets and current liabilities. For all further references to reserves in Proprietary Funds, Net Working Capital is the intended meaning. A. Water Enterprise Fund: The Water Enterprise Fund Reserves are established to cover shortfalls in operating revenues, maintain strong bond ratings, cover day-to-day operating costs, and ease the burden on ratepayers associated with large rate increases. Appropriate reserve levels help the Water Enterprise Fund with liquidity, provide operational flexibility, and demonstrate fiscal responsibility to the rating agencies. The Water Enterprise Fund will maintain the following three reserves: 1. Operating Reserve: The Water Enterprise Fund Operating Reserve represents working capital maintained by the Water Enterprise Fund to cover day-to-day expenses and maintain sufficient funds to cover accounts receivables, periods of lower than expected water sales, or unforeseen cost increases such as the cost of importing additional water if groundwater becomes unavailable. The Water Enterprise Fund Operating Reserve will maintain a minimum balance of 120 days of operating expenses once fully funded. The City Council must approve the use of these funds, based on the City Manager's recommendation. Water Enterprise Funds collected in excess of the Water Enterprise Fund Operating Reserve targets would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the infrastructure system occur, the Water Enterprise Fund Operating Reserve may be called upon to avoid disruption to water distribution. 2. Rate Stabilization Reserve: The Water Enterprise Fund Rate Stabilization Reserve represents funds used to absorb lower than expected revenue due to short-term decreases in water sales. The Rate Stabilization Reserve mitigates wide swings in rates charged to customers over time. The Water Enterprise Fund Rate Stabilization Reserve will maintain a minimum balance of thirty percent (30%) of 8 F-2 water use reduction once fully funded. The City Council must approve the use of these funds, based on the City Manager's recommendation. Water Enterprise Funds collected in excess of the Rate Stabilization Reserve target would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the infrastructure system occur, the Water Enterprise Fund Rate Stabilization Reserve may be called upon to avoid disruption in water distribution. 3. Capital Reserve: The Water Enterprise Fund Capital Reserve represents funds to cover a portion of upcoming annual capital expenditures, smooth out the amount of capital infusion needed each year, and mitigate unexpected capital costs. The Water Enterprise Capital Reserve will maintain a minimum balance of seventy five percent (75%) of the annual planned CIP once fully funded. B. Wastewater Enterprise Fund: The Wastewater Enterprise Fund Reserves are established to cover shortfalls in operating revenues, maintain strong bond ratings, cover day-to-day operating costs, and ease the burden on ratepayers associated with large rate increases. Per the reserve level recommendations, the Wastewater Enterprise Fund will maintain the following two reserves: I. Operating Reserve: The Wastewater Enterprise Fund Operating Reserve represents the working capital the Wastewater Enterprise Fund maintains to cover day-to-day expenses and maintain sufficient funds to cover accounts receivables in the event of supplier issues, lower than expected sewer sales, or unforeseen cost increases. The Wastewater Enterprise Fund Operating Reserve will maintain a minimum balance of 90 days of operating expenses once fully funded. The City Council must approve the use of these funds based on City Manager's recommendation. Wastewater Enterprise Funds collected in excess of the Wastewater Enterprise Fund Operating Reserve targets would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the infrastructure system occur, the Wastewater Enterprise Fund Operating Reserve may be called upon to avoid disruption in water distribution. 2. Capital Reserve: The Capital Reserve represents funds to cover a portion of upcoming annual capital expenditures, smooth out the amount of capital infusion needed each year, and help mitigate unexpected capital costs. The Wastewater Enterprise Fund Capital Reserve will maintain a minimum balance of one hundred percent (100%) of the annual planned CIP once fully funded. X F-2 C. Internal Service Funds Background. Internal Service Funds are used to centrally manage and account for specific program activity in a centralized cost center. Their revenue generally comes from internal charges to departmental operating budgets rather than external revenue sources. They have several functions. --They work well in normalizing departmental budgeting for programs that have life - cycles greater than one year, thereby facilitating level budgeting for expenditures that will, by their nature, be erratic from year to year. This also facilitates easier identification of long term trends. --They act as a strategic savings plan for long-term assets and liabilities. --From an analytical standpoint, they enable appropriate distribution of city-wide costs to individual departments, thereby more readily establishing true costs of various operations. Since departmental charges to the internal service fund duplicate the ultimate expenditure from the internal service fund, they are eliminated when consolidating entity -wide totals. The measurement criteria, cash flow patterns, funding horizon and acceptable funding levels are unique to each program being funded. Policy regarding target balance and/ or contribution policy, gain/loss amortization assumptions, source data, and governance for each of the City's Internal Service Funds is set forth as follows: l . For all Internal Service Funds: The Finance Director may transfer part or all of any unencumbered fund balance between the Internal Service Funds provided that the withdrawal of funds from the transferred fund would not cause insufficient reserve levels or insufficient resources to carry out its intended purpose. This action is appropriate when the decline in cash balance in any fund is precipitated by an off - trend non -recurring event. The Finance Director will make such recommendations as part of the annual budget adoption or through separate Council action. 2. Equipment Maintenance Fund and Equipment Replacement Fund: The Equipment Maintenance and Replacement Funds receive operating money from the Departments to provide equipment maintenance and to fund the regular replacement of major pieces of equipment (mostly vehicles) at their economic obsolescence. 10 F-2 a. Equipment Maintenance Fund: The Equipment Maintenance Fund acts solely as a cost allocation center (vs. a pre -funding center) and is funded on a pay-as- you-go basis by departmental maintenance charges by vehicle type and usage requirement. Because of this limited function, the target year-end balance is zero. Contribution rates (departmental charges) are set to include the direct costs associated with maintaining the City vehicle fleet, including fleet maintenance employee salaries and benefits, operating expenses, and maintenance related capital outlay. Administrative overhead and maintenance facility improvements and replacement costs are to be provided outside of this cost unit. Governance is achieved through annual management adjustment of contribution rates on the basis of maintenance cost by vehicle and distribution of costs based on fleet use by department. b. Equipment Replacement Fund: Operating Departments are charged annual amounts sufficient to accumulate funds for the replacement of vehicles, communications equipment, parking equipment, and other equipment replacement determined to be appropriate by the Finance Director. The City Manager recommends annual rate adjustments as part of the budget preparation process. These adjustments are based on pricing, future replacement schedules, and other variables. The age and needs of the equipment inventory vary from year to year. Therefore, the year-end fund balance will fluctuate in direct correlation to accumulated depreciation. In general, it will increase in the years preceding the scheduled replacement of relatively large percentage of the equipment, on a dollar value basis. However, rising equipment costs, dissimilar future needs, replacing equipment faster than their expected life, or maintaining equipment longer than its expected life all contribute to variation from the projected schedule. Target funding levels shall be determined by the Finance Director after considering the age, expected life, and cash flow anticipated by the replacement equipment being funded. If departmental replacement charges for equipment prove to be excessive or insufficient with regard to this target funding level, new rates established during the next budget cycle will be adjusted with a view toward bringing the balance back to the target level. 3. Insurance Reserve Funds: The Insurance Reserve funds account for the activities of general liability, workers' compensation, property, and other insurance claims. 11 F-2 General liability and workers' compensation claims are self -insured up to an established amount, with excess insurance policies procured to address larger claims. Property and other insurance policies are procured with appropriate deductibles, and related claims payments are not funded from the City's self-insurance program. Background. The City employs an actuary to estimate the liabilities associated with the general liability and workers compensation activities. The costs typically associated with these programs include claims administration, legal defense, insurance premiums, self -insured retention, and the establishment of appropriate loss reserves including "incurred -but -not reported" (IBNR) claims. In a prescribed measurement methodology, the Actuary estimates the liabilities in conformity with Generally Accepted Accounting Principles (GAAP). The Actuary refers to this measurement level in their report as the "Expected Level." However, because actuarial estimates are subject to significant uncertainties, actuaries typically recommend that a target funding level be set at an amount in excess of expected liability as a margin to cover contingencies. A typical target funding level would be set to obtain a specified confidence level (the percent chance that resources set -aside will be sufficient to cover existing claims). Full funding of the Actuary's "Target Funding Level" establishes a seventy- five percent (75 %) confidence there will be sufficient resources (including projected interest) to pay the full amount of existing claims without future contributions. Funding at the "Expected Level" produces a confidence level of only fifty percent to sixty-five percent (50%-65%). Therefore, the target funding of insurance reserves should exceed the "Expected Level" to account for adverse estimate deviation. Policy & Practice. The City should target funding of its risk management obligations at not less than the Expected Level, described above; and not more than an amount sufficient to establish an eighty percent (80 %) Confidence Level. Actuarial gains and losses should be amortized through rates over an appropriate period of time. As part of the operating budget, each department will be charged a rate equal to its proportionate share of the total "revenue" required 12 F-2 to fund the Insurance Reserve Fund at this level. To lessen the impact of short-term annual rate change fluctuation, City management may implement one-time fund transfers (rather than department rate increases) when funding shortfalls appear to be due to unusually sharp and non -recurring factors. Excess reserves in other areas may be transferred to the internal service fund in these instances but such transfers should not exceed the funding necessary to reach an eighty percent (80%) confidence level interval. 4. Compensated Absences Fund: Background. The primary purpose of flex leave, vacation leave, and sick leave is to provide compensated time off as appropriate and approved. However, under certain circumstances, typically at separation from service, some employees have the option of receiving cash -out payments for some accumulated leave balances. The Compensated Absences Fund is utilized primarily as a budget smoothing technique for any such leave bank liquidations. The primary purpose of the Compensated Absences Fund is to maintain a balance sufficient to facilitate this smoothing. Policy and Practice. The contribution rate will be set to cover estimated annual cash flows based on a three-year trailing average. The minimum cash reserve should not fall below that three-year average. The maximum cash reserve should not exceed fifty percent (50 %) of the long term liability. The target cash reserve shall be the median difference between the minimum and maximum figures. Each department will make contributions to the Compensated Absences Fund through its operating budget as a specified percentage of salary. The Finance Director will review and recommend adjustments to the percentage of salary required during the annual budget development process. This percentage will be set so as to maintain the reserve within the parameters established above. 5. Post Retirement Funding Policies: 13 F-2 a. Pension Funding: (i) California Public Employees Retirement System (Ca1PERS): The City's principal Defined Benefit Pension program is provided through contract with Ca1PERS. The City's contributions to the plan include an actuarially determined employer contribution that fluctuates each year based on an annual actuarial plan valuation. This variable rate employer contribution includes the normal cost of providing the contracted benefits plus or minus an amortization of plan changes and net actuarial gains and losses since the last valuation period. It is the City's policy to make contributions to the plan equaling at least one hundred percent (100%) of the actuarially determined contribution. Any unfunded actuarial liability (UAL) is amortized and paid in accordance with the actuary's funding recommendations. The City will strive to maintain its UAL within a range that is considered acceptable to actuarial standards. The City Council shall consider increasing the annual Ca1PERS contribution should the UAL status fall below acceptable actuarial standards. (ii) Laborer's International Union of North America (LIUNA): The City provides a supplemental pension plan for some employee associations through contract with LIUNA. This is funded via employee contributions of a fixed percentage of total compensation on a pay-as- you-go basis. The City is not contractually required to guarantee the level of the ultimate LIUNA benefit to retirees, nor does it do so. Therefore, the City's liability for this program is fully funded each year. b. Other Post Employment Benefits (OPEB Funding): BackgI ound. The City's OPEB funding obligations consists of two retiree medical plans. New Plan. Effective January 2006, the City and its employee associations agreed to major changes to the Post Employment Healthcare Plan. New employees and all current employees participate in a program that requires certain defined employee and employer contributions while the employee is in active service. However, once the contributions have been made to the employee's account, the City has transferred a substantial portion of the 14 F-2 funding risk to the employee. Old Plan. Eligible employees who retired prior to the "New Plan" and certain active employees were eligible to continue to receive post -retirement medical benefits (a defined benefit plan). The cost was divided among the City, current employees, and retirees. In the past, this program was largely funded on a pay-as-you-go basis, so there was a significant unfunded liability. Recognizing this problem, the City began contributing to this obligation in 2001. In 2008, these assets were placed in a pre -funding trust. The City's intention is to amortize the remaining unfunded liability within 20 years. Policy & Practice. New Plan. Consistent with agreements between the City and Employee Associations, the new defined contribution plan will be one hundred percent (100 %) funded, on an ongoing basis, as part of the annual budget process. Funds to cover this expenditure will be contained within the salary section of each department's annual operating budget. Old Plan. The City's policy is to pre fund the explicit (cash subsidy) portion of the Actuarial Accrued Liability (AAL) of the remnants of the old plan over a 20-year amortization period, or less. This amount will be based on the Annual Required Contribution (ARC) determined by a biennial actuarial review, subject to review and analysis by the City. The City will strive to maintain a funded status that will be within a range that is considered acceptable to actuarial standards. The City Council shall consider increasing the annual OPEB contribution should the funded status fall below acceptable actuarial standards. Adopted - January 24,1994 Amended - April 10,1995 Amended - February 26,1996 Amended - April 27,1998 Amended - March 14, 2000 Amended - May 8, 2001 Amended - April 23, 2002 Amended - June 10, 2003 Amended - April 13, 2004 Amended - September 13, 2005 15 F-2 Amended - September 15, 2008 Amended - November 12, 2008 Amended - May 24, 2011 Amended - September 27, 2011 Amended - May 14, 2013 Amended - June 10, 2014 Amended - May 12, 2015 Amended - September 25, 2018 Amended - June 14, 2022 Amended - June 11, 2024 16 STATE OF CALIFORNIA } COUNTY OF ORANGE } ss. CITY OF NEWPORT BEACH } I, Leilani I. Brown, City Clerk of the City of Newport Beach, California, do hereby certify that the whole number of members of the City Council is seven; the foregoing resolution, being Resolution No. 2024-39 was duly introduced before and adopted by the City Council of said City at a regular meeting of said Council held on the 11th day of June, 2024; and the same was so passed and adopted by the following vote, to wit: AYES: Mayor Will O'Neill, Mayor Pro Tern Joe Stapleton, Councilmember Brad Avery, Councilmember Noah Blom, Councilmember Robyn Grant, Councilmember Lauren Kleiman, Councilmember Erik Weigand NAYS: None IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the official seal of said City this 12th day of June, 2024. Leilani I. Brown City Clerk Newport Beach, California