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HomeMy WebLinkAboutApproved Minutes - May 30, 2024Finance Committee Regular Meeting Minutes May 30, 2024 Page 1 of 6 CITY OF NEWPORT BEACH FINANCE COMMITTEE COMMUNITY ROOM – 100 CIVIC CENTER DRIVE, NEWPORT BEACH MAY 30, 2024 REGULAR MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:01 p.m. by Mayor O’Neill. II. ROLL CALL PRESENT: Will O’Neill, Mayor/Chair Joe Stapleton, Mayor Pro Tem Noah Blom, Councilmember (arrived at 3:08 p.m.) Allen Cashion, Committee Member Nancy Scarbrough, Committee Member ABSENT: William Collopy, Committee Member (excused) Keith Curry, Committee Member (excused) STAFF PRESENT: Grace K. Leung, City Manager Jason Al-Imam, Finance Director/Treasurer Shelby Burguan, Acting Deputy Finance Director Brittany Cleberg, Assistant Management Analyst Steven Anderson, Department Assistant Jessica Nguyen, Budget Analyst Abigail Marin, Budget Analyst Anthony Alannouf, Budget Analyst Trevor Power – Accounting Manager Jessica Kan, Revenue Manager Jennifer Anderson, Purchasing & Contracts Administrator Theresa Schweitzer, Public Works Finance Administrative Manager Raymund Reyes, Fire Administrative Manager MEMBERS OF THE PUBLIC: Jim Mosher Charles Klobe III. PLEDGE OF ALLEGIANCE The Pledge of Allegiance was led by Mayor Pro Tem Stapleton. IV. PUBLIC COMMENTS A. ADDITIONAL MATERIALS RECEIVED Mayor/Chair O’Neill opened public comments. Jim Mosher commented on contracting transparency and the City’s internal audit program. He commended the City for providing public access to contract documents and requested further transparency into “on-call” types of contractual agreements. He requested the City follow the procedure for posting related letter proposals for “on-call” services over $10,000. He noted his recent public records request related to the City’s noise consultant for the General Plan update. He requested status updates on internal audit program projects that remain pending for which the City Council approved four contractual agreements. He expressed concern that the subject contractors were sent letters of termination and inquired as to the status of the internal audit program. Finance Committee Regular Meeting Minutes May 30, 2024 Page 2 of 6 Seeing no others, Mayor/Chair O’Neill closed public comments. V. CONSENT CALENDAR A. MINUTES OF MAY 9, 2024 Recommended Action: Approve and file. Mayor/Chair O’Neill requested the motion incorporate the amendments submitted by Jim Mosher. MOTION: Committee Member Scarbrough moved to approve the minutes of May 9, 2024, as amended seconded by Committee Member Cashion. The motion carried as follows: AYES: Cashion, Scarbrough, Blom, Stapleton, O’Neill NOES: None ABSENT: Collopy (excused), Curry (excused) ABSTAIN: None VI. CURRENT BUSINESS A. FINANCIAL STATEMENT AUDITOR’S COMMUNICATION WITH THE FINANCE COMMITTEE ACTING AS THE CITY’S AUDIT COMMITTEE Recommended Action: Receive and file. Marc Davis, partner with Davis Farr LLP discussed the planned scope and timing of the audit for the Fiscal Year Ending June 30, 2024. The presentation noted the audit process will remain the same as previous years. Their firm will review the annual financial statements, perform procedures related to the City’s Gann limitation worksheets and conduct a single audit. He stated the audit procedures are not for the purpose of identifying fraud, however if such activity is spotted, it will be appropriately reported. Mr. Davis continued by reporting the firm’s responsibility as external auditors is to open lines of communication with the Audit Committee. Auditing standards require at least two points of communication with the Audit Committee each year, the first being for the upcoming audit, and the second to communicate the audit results, once completed. Any material findings in the interim will be communicated to the Audit Committee. The audit will be conducted in compliance with Generally Accepted Auditing Standards. The audit will be conducted in two phases, commencing in July with procedures related to risk assessment of the organization. This involves a review of internal controls for financial reporting and work related to the Gann limit. The interim portion of the audit drives the final audit procedures, which are based upon the various facts and circumstances established for the City from a financial reporting perspective over the past fiscal year. Questionnaires will be distributed selectively throughout the City, to employees in management and throughout the organization, to gain input related to any activities which may appear or indicate actual fraud or suspected fraud. This will assist in developing the risk assessment procedures. The audit must contain elements of unpredictability to increase the ability for the process to identify activities which may be increasing the City’s financial risk exposure. Mr. Davis continued by detailing the audit timelines. He reported the final audit is scheduled for October and will feature a deep dive into all key financial reporting activities. The single audit is scheduled for January 2025 after all financial statements are compiled in December 2024. His firm will return in January 2025 to present the results of the audits, which will include mandated reporting of certain audit elements, including violation of laws or regulations, the firm’s views of accounting practices including policies, estimates and disclosures, significant Finance Committee Regular Meeting Minutes May 30, 2024 Page 3 of 6 difficulties, disagreements with management, significant unusual transactions, potential effects of uncorrected misstatements, and any other necessary matters. Committee Member Scarbrough requested clarification as to the process for contacting employees for transmission of the questionnaires. Mr. Davis responded that a complete list of City employees is provided to the firm, they evaluate who has received them in the past, and select individuals from every Department. City management sends an informational email to all employees to notify them they may be receiving a questionnaire. Committee Member Scarbrough inquired as to the firm’s process for developing trust with employees in order to reduce fear of retaliation for reporting suspicious financial activity. Mr. Davis responded their firm’s experience is that most employees feel comfortable talking about the organization. The firm has a process by which they conduct one-on-one meetings if an employee wants to report without transmitting information in writing. Committee Member Cashion requested clarification concerning the audit processes which may indicate weaknesses or gaps in controls which could result in fraudulent activity or that could result in improvements to internal controls or procedures. Mr. Davis responded the firm reviews the City’s various financial management processes and policies, such as those for cash disbursements, cash receipts, and grants management, as they have a direct impact on the preparation of the financial statements. The controls for those processes will be tested, including pulling a number of transactions to ensure the City is complying with its own policies and that the controls are effective. The firm will communicate any minor instances of ineffective controls or opportunities to institute best practices with Finance Director/Treasurer Al-Imam and his team. If any of the audit test findings are significant or material, the firm will issue a management letter comment and transmit that information to the Audit Committee in January to discuss opportunities for improvement. Committee Member Cashion inquired if the audit is strictly accounting-related or would include review of items such as contract management or capital projects. Mr. Davis responded the audit is generally focused on accounting related matters, however, deep dives into other areas, including capital projects, could occur as a result of the auditor’s risk assessment process if certain areas are determined to have a material impact on the financial statements. Mayor/Chair O’Neill opened public comments. Jim Mosher stated the Charter originally called for the auditor to be appointed at the beginning of the fiscal year, rather than at the end. He requested confirmation that the audit is actually performed on the City’s financial statement, the ACFR, which is prepared independently by the City’s financial team or another consultant. He also requested confirmation that the audit performed as described in this agenda item is not a substitute for the internal audit tasks which the City had contracted for previously. He inquired whether a written report is prepared for public presentation as to the audit work actually completed to provide a better understanding of the audit’s scope. Finance Director/Treasurer Al-Imam responded the audit is of the financial statements and its primary purpose is to ensure the amounts reflected in the ACFR are materially correct. There is consideration for fraud, which is required under the audit standards, but not for the purpose of expressing an opinion on internal control, but in order to ensure that the amounts reflected in the financial statements or the ACFR are materially correct. The Finance Committee will receive a letter upon completion of the audit, typically in January, with required auditor communications which outlines a summary of significant accounting estimates and other required disclosures and communications as part of the audit process. Mr. Davis responded to Mr. Mosher’s comments noting the communication at the end of the audit will include the auditor’s opinion on the City’s financial statements, the scope of the Finance Committee Regular Meeting Minutes May 30, 2024 Page 4 of 6 auditor’s responsibilities related to the audit, and the basis for the auditor’s opinion on the financial statements. Seeing no others, Mayor/Chair O’Neill closed public comments. This item was received and filed and there was no further action taken. B. FINANCE COMMITTEE RECOMMENDATION TO THE CITY COUNCIL FOR THE FISCAL YEAR 2024-25 OPERATING BUDGET Recommended Action: Make final recommendations to the City Council concerning the City Manager’s Fiscal Year 2024-25 Proposed Budget. Chair O’Neill expressed appreciation for the follow-up information provided on his previous inquiries and confirmed his understanding of the variances. Acting Deputy Finance Director Shelby Burguan presented a summary of the proposed budget revisions for the upcoming fiscal year, which will be reviewed by the City Council at their meeting on June 11th. One of the Finance Committee’s key responsibilities is to provide recommendations to the City Council on the City Manager’s proposed budget. Acting Deputy Finance Director Shelby Burguan continued by stating that the operating budget’s growth in expenditures is primarily attributable to personnel. The growth in transfers out is primarily attributable to transfers to capital funds. The growth in the CIP expenditures is largely due to the Balboa Library, Fire Station No. 1, and Big Canyon Restoration projects. There is a General Fund projected preliminary operating surplus of $5.3 million, of which it is recommended that $5 million be allocated to the City’s pension liability by the City Council at the time of budget adoption. If the City Council approves the additional $5 million allocation to the City’s pension liability at the time of adoption of the budget, it will bring the total paid towards the unfunded pension liability to $45 million in Fiscal Year 2024-25, which is approximately $14 million more than what is required to be paid. The final two budget revision items which were not presented at the last Finance Committee meeting are associated with the Peninsula Point Habitat Restoration and the Trash Wheel Habitat Restoration projects. The proposals from the selected lowest bids required additional funding for the projects. The proposed budget revisions reflect the proposed use of restricted funds, not General Funds, to fully fund the projects. Committee Member Cashion requested clarification concerning the Peninsula Point Habitat Restoration project and whether the costs are for a multi-year project. Public Works Finance Administrative Manager Theresa Schweitzer responded the Coastal Commission requires cleanup of the extra encroachments and continuous monitoring is required. A contractor performs the monitoring and ensures compliance. The site currently features special native landscaping. City Manager Leung confirmed the restoration costs are proposed for a multi-year project. Mayor/Chair O’Neill opened public comments. Jim Mosher commented that it appeared that some material expenses may have not been adjusted for inflation such as the budgeted cost for library materials. He also expressed confusion and requested clarification concerning internal service charges, how they are accrued and reported, and the process for identifying which items have internal service charges applied. City Manager Leung expressed appreciation for Mr. Mosher’s careful review of the City’s proposed budget and confirmed City staff conducts a similar thorough review of each line item. Budget line items are not automatically increased to account for inflation. For items such as library materials, budgeted at over $500,000, actual historical expenditures are reviewed, including donations from the Friends of the Library organization which provides supplemental Finance Committee Regular Meeting Minutes May 30, 2024 Page 5 of 6 materials. The budget is prepared to meet service levels rather than automatically adjusted on an inflation factor. A similar process is conducted throughout the City’s budget preparation process to ensure the appropriate funds are proposed and allocated to meet service level needs. Finance Director/Treasurer Al-Imam confirmed City staff conducts the types of review outlined by City Manager Leung. He provided an example from the Library to explain the City’s internal service fund charges, as reflected in the Library’s budget includes $1.85 million in internal service fund charges. Approximately 78% of those costs are related to IT services to support Library computer-related services and maintenance, which is why the Library’s budget is charged for those services provided by another Department. Seeing no others, Mayor/Chair O’Neill closed public comments. Mayor/Chair O’Neill stated that traditionally, a non-elected member of the Finance Committee makes the motion and second on the recommendation concerning the proposed budget, as the City Council members of the Finance Committee will vote on adoption of the final proposed budget. He acknowledged this was his last budget and meeting as Chair and thanked the City Manager, who is obligated by the Charter to provide the budget proposal, for her work in presenting a non-controversial budget. He reflected on historical actions related to the budget and his desire to be part of this Committee when contemplating his interest in running for City Council. He acknowledged the importance of developing a strong City-wide budget which did not use General Fund money to subsidize other funds and the Committee’s extensive work to address matters such as the pension liability and capital projects for the City’s benefit. He expressed his sincere gratitude to the members of the Finance Committee for their work. He concluded by acknowledging his pride in the proposed budget and its plan to address the services desired by the community. Mayor Pro Tem Stapleton echoed Mayor/Chair O’Neill’s comments and thanked him for his leadership and service. Committee Member Scarbrough also thanked Mayor/Chair O’Neill, Finance Director/Treasurer Al-Imam and all City staff who were involved in the budget preparation process. Councilmember Blom acknowledged the excellent work of staff to mitigate difficult financial situations and that his financial expertise was not needed. MOTION: Committee Member Scarbrough moved to recommend the Fiscal Year 2024-25 Operating Budget, as presented, to the City Council for approval, seconded by Committee Member Cashion. The motion carried as follows: AYES: Cashion, Scarbrough, Blom, Stapleton, O’Neill NOES: None ABSENT: Collopy (excused), Curry (excused) ABSTAIN: None C. WORK PLAN REVIEW Recommended Action: Receive and file. A summary of items scheduled for upcoming Finance Committee meetings was provided as listed in the publicly noticed agenda report, including upcoming joint meetings with the City Council for budget review and the fall meeting schedule. He noted that the Public Works Department will be reviewed in-depth in October and requested staff provide information at the September meeting as to which Department will be reviewed in January.