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HomeMy WebLinkAboutApproved Minutes - January 23, 2025Finance Committee Regular Meeting Minutes January 23, 2025 Page 1 of 10 I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Civic Center Community Room, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Mayor/Chair Joe Stapleton Councilmember Sara Weber Committee Member Allen Cashion Committee Member William Collopy ABSENT: Councilmember Robyn Grant (excused) STAFF PRESENT: City Manager Grace K. Leung Finance Director/Treasurer Jason Al-Imam Deputy Finance Director Shelby Burguan Assistant Management Analyst Vicky Nguyen Accounting Manager Trevor Power Budget Manager Jessica Nguyen Budget Analyst Abigail Marin Budget Analyst Anthony Alannouf Buyer Marlene Burns Administrative Manager Raymund Reyes Assistant Management Analyst Lili Banuelos Chief of Fire Jeff Boyles Senior Management Analyst Trevor Smouse Utilities Director Mark Vukojevic Superintendent Casey Parks Water Operations Superintendent Steffen Catron Senior Management Analyst Joshua Rosenbaum OTHER ENTITIES: None MEMBERS OF THE PUBLIC: Jim Mosher Nancy Scarbrough III. PLEDGE OF ALLEGIANCE Councilmember Weber led the Pledge of Allegiance IV. PUBLIC COMMENTS Chair Stapleton opened public comments. Nancy Scarbrough expressed her gratitude for the opportunity to serve on the committee, stating that it had been a deeply rewarding experience. She commended the professionalism and organization of the committee and extended her thanks to its members. She indicated her intention to remain engaged with City matters and attend future meetings as a member of the public. She concluded by saying she would occasionally contribute from the gallery, usually with a smile. The Finance Committee thanked her for her service and welcomed her continued involvement. Jim Mosher, a resident, recommended amendments to the meeting minutes. He apologized for not submitting his comments in writing beforehand and provided several minor corrections. On page 3 Finance Committee Regular Meeting Minutes January 23, 2025 Page 2 of 10 of 7 in the minutes (page 6 in the packet), he suggested amending "Chair filed and received report" to "received and filed." He recommended that on Page 6 of 7 (page 9 in the packet), he noted an incomplete sentence, suggesting "Feb will have FFP and March bill begin the budget" should read "February will have FFP, and March will begin the budget." Lastly, on the final page, he recommended changing "the Chair opened public comments" to "the Chair invited additional comments," as public comments had already been opened. Noting there were no other members of the public who elected to speak, Chair Stapleton closed public comments. V. CONSENT CALENDAR A. MINUTES OF NOVEMBER 14, 2024 Recommended Action: Approve and file. MOTION: Chair Stapleton moved to approve the minutes of November 14, 2024, as amended, seconded by Committee Member Collopy. The motion carried as follows: AYES: Weber, Cashion, Collopy, Stapleton NOES: None ABSENT: Grant (excused) VI. CURRENT BUSINESS A. REVIEW FINANCIAL STATEMENT AUDIT RESULTS AND RELATED COMMUNICATION FOR THE FISCAL YEAR ENDING JUNE 30, 2024 Recommended Action: Receive and file. Finance Director/Treasurer Jason Al-Imam reported that the City finalized its financial statement audit in December, receiving an unmodified ("clean") opinion. Audit partner Mark Davis (Davis Farr) confirmed the audit's scope remained consistent, covering financial statements, federal expenditures, and Gann limitation compliance. Committee Member Collopy asked about the Gann limit, which restricts revenue collection under Proposition 13. Mr. Al-Imam clarified that the Gann limit applies to all proceeds of taxes, including property tax, sales tax, and the Transient Occupancy Tax (TOT). He explained that if voters approve a transaction and use tax for a municipality, the City must ensure compliance with the Gann Appropriations limit. However, most agencies operate well below this threshold. Mr. Davis emphasized that management is responsible for overseeing the preparation of the financial statements. Additionally, management must maintain an internal control system, while the auditor is responsible for conducting the audit in accordance with generally accepted auditing standards and Government Auditing Standards. He also noted the timing of the audit and reiterated that the auditor issued an unmodified, or "clean," opinion. Mr. Davis reported the City’s assets and deferred inflows increased by $83 million, liabilities by $18 million, and net position by $66 million. He noted that revenues rose by $65 million, while expenses increased by $61 million. He advised that key risks identified included a $38 million increase in capital assets, the transfer of the Other Post-Employment Benefits (OPEB) Trust, and federal compliance, which will be reviewed in the upcoming single audit. Committee Member Collopy asked why grant requirements pose a risk. Mr. Davis explained that federal grants come with complex compliance obligations, including reporting, eligibility criteria, and allowable expenses. He reported that some agencies fail to Finance Committee Regular Meeting Minutes January 23, 2025 Page 3 of 10 meet these compliance requirements due to a lack of understanding. He noted that federal audits apply unless grant funding remains below $750,000. Mr. Davis confirmed that financial estimates, including asset lifespans, pension liabilities, and OPEB obligations, were consistent with prior years and deemed reasonable. No significant unusual transactions were found, with only one minor audit adjustment of $61,000 related to unbilled receivables. He referenced one housekeeping issue regarding the City's purchasing card policy, last updated in 2011, which needs revision to reflect current practices. He advised that no uncorrected misstatements or difficulties were encountered during the audit, and commended management’s cooperation. Chair Stapleton opened public comments. Jim Mosher, resident, referenced the Annual Comprehensive Financial Reports (ACFRs), and addressed discrepancies in the ACFR, such as the reported size of the harbor and the number of boats in the harbor. Committee Member Collopy referenced the ACFR and highlighted a notable trend in arrest data. He explained that arrest numbers from 2015 through 2019 were steady but by 2024, arrests had dropped significantly. He questioned whether this reflected a safer city or a shift in arrest policies and noted fluctuations in fire response data. It was pointed out that footnotes attributed these variations to changes in how incidents, including fires, hazardous materials, and medical emergencies, were counted. He expressed surprise at the decline in arrest numbers and requested further clarification. Chair Stapleton closed public comments. The item was received and filed. B. OVERVIEW OF UTILITIES DEPARTMENT BUDGET Recommended Action: Receive and file. Utilities Director Mark Vukojevic provided an overview of the department’s three main functions: the Water Production Group, which manages wells, reservoirs, pumps, and disinfection; the Maintenance and Repair Group, responsible for fire hydrants, meters, and emergency repairs; and the Water Meter Division, which oversees billing, leak detection, and underground utility marking. He noted that recent high rainfall has reduced water usage, lowering revenue. Committee Member Collopy questioned a 60% increase in contract services. Mr. Vukojevic did not have details readily available but agreed to provide them later. Mr. Vukojevic explained that groundwater pumping costs include payments to the Orange County Water District, annexation fees, and electricity. He advised that groundwater costs approximately $900 per acre-foot compared to $1,395 for imported water, resulting in significant savings. He noted that the City can pump up to 85% of its water from groundwater, with incentives allowing up to 100%, but actual capacity depends on infrastructure. He reported that three of four wells are currently operational, with additional rehabilitation projects planned to maintain efficiency. Committee Member Cashion questioned discrepancies in the groundwater use target, which was listed as both 77% and 85%. Mr. Vukojevic clarified that the Orange County Water District increased the allowable percentage due to expanded wastewater recycling, with a long-term goal of reaching full groundwater independence, pending infrastructure capacity. Finance Committee Regular Meeting Minutes January 23, 2025 Page 4 of 10 Councilmember Weber inquired about rising water expenses. Mr. Vukojevic noted that although groundwater reliance has increased, costs continue to rise. He explained that three years ago, 14,000 acre-feet cost $10 million, while last year, 12,000 acre-feet cost $12 million. He noted that groundwater costs are rising about 10% annually, and imported water costs, which typically increase by 5-6% per year, rose by 12% this year. He advised that groundwater costs are expected to stabilize at 4% annual increases, while imported water will likely continue to rise at double-digit rates. Committee Member Collopy referenced 2021 when 95% of the City’s 15,070 acre-feet came from groundwater and asked why that was an optimal year. Mr. Vukojevic attributed it to peak system performance and reaffirmed that maximizing available resources remains a priority. Committee Member Cashion asked about the City's role in groundwater replenishment. Mr. Vukojevic confirmed that replenishment is managed by the Orange County Water District, which recycles wastewater and imports state water. He reported that recent recycling expansions have significantly boosted groundwater supplies. Councilmember Weber inquired about declining water usage. Mr. Vukojevic reported a two-year decline, reducing revenue. He noted that projections estimate an increase to 13,100 acre-feet, but conservation efforts continue to impact revenue. He clarified that the City is adjusting its rate structure to better align costs with billing. He noted that the latest study aimed to recover 60% of costs through a balanced fixed-variable fee structure. Committee Member Collopy inquired if rate studies should occur more frequently. Mr. Vukojevic stated that studies will now be conducted every four years instead of five to maintain financial stability while preventing sudden rate increases. He noted that some agencies conduct annual studies, but frequent adjustments can create instability. Committee Member Collopy questioned whether the escalation rate in the study was adequate. Mr. Vukojevic assured that it was, emphasizing the ongoing need to balance inflationary pressures with long-term financial planning. He clarified that additional rate studies could be conducted outside the four-year cycle if needed. Mr. Vukojevic explained that conservation was a key factor in the previous rate study. He reported that water conservation funding is budgeted at $200,000 annually for drought response, though actual spending is often lower. He noted that other budget components, such as consultant fees and federal compliance costs, are included in contract services. Inflation also impacts expenses. Councilmember Weber inquired whether inflation has increased supply costs. Mr. Vukojevic confirmed rising costs due to inflation and water price increases. He also reported that reserves remain a key performance measure. He explained that the City aims to maintain reserves between $18 million and $21 million over the next five years, covering 120 days of expenses, 75% of the Capital Improvement Program (CIP), and a 30% water use reduction contingency. He noted that major expenditures and claims payments will lower reserves to $14 Finance Committee Regular Meeting Minutes January 23, 2025 Page 5 of 10 million by 2027-28. He emphasized that the department is focused on rebuilding reserves while advancing capital improvements. Committee Member Collopy inquired about how reserve goals are determined. Mr. Vukojevic explained they are based on industry standards, American Water Works Association guidelines, and practices from other agencies. He noted that factors include billing cash flow, revenue generation, and capital improvement needs. He explained that a 30% reduction in water usage was incorporated into the reserve methodology, reflecting a long-term decline in consumption. He further explained that historically, the City produced 20,000 acre-feet annually, while current production is around 13,000-14,000 acre-feet. Committee Member Collopy questioned whether a $21 million reserve target, over 50% of annual revenue, was excessive. Mr. Vukojevic stated that total expenses for the year are projected at $40.5 million, with annual increases of $2-$3 million. He explained that by 2027-28, revenue is expected to reach $47-$48 million, reducing the reserve ratio over time. He noted that though reserves are below target, the City remains confident in supporting capital projects and financial obligations. He emphasized that revenue stability remains a challenge due to weather fluctuations. Councilmember Weber asked about how claims are valued. Finance Director Jason Al-Imam explained that claims are valued as part of an annual actuarial valuation. He also noted that claims expenses are allocated through internal service fund charges. Mr. Vukojevic announced the largest upcoming investment: a joint water well project with Laguna Beach in Fountain Valley. He reported that the City will cover two-thirds of the $17 million cost, receiving two-thirds of the water. He advised that financing options include bonds or a low-interest loan from the Orange County Water District. He explained that while the City has historically avoided debt, financing this project may be justified given its long-term benefits. Chair Stapleton noted that the City Council and financial experts will determine the best approach. Committee Member Collopy called for a thorough review of the debt proposition. Councilmember Weber inquired whether the 4.45% interest rate was fixed over 20-30 years and if prepayment penalties applied. Mr. Al-Imam estimated the financing rate would cost between 3.8% and 4.3%, depending on the loan term, and noted that bond financing typically includes a 10-year call period before early repayment. Mr. Vukojevic reported that the Orange County Water District is developing a loan program to encourage well construction and increase groundwater pumping capacity. He explained that the City is not yet ready to utilize this program but will consider it alongside bond market options when financing is needed. He noted that several financial changes are expected to impact planning, including the introduction of a credit card convenience fee to offset $600,000 in annual transaction costs. Committee Member Collopy inquired if this was discussed in the fee study. Mr. Vukojevic confirmed it was. Finance Committee Regular Meeting Minutes January 23, 2025 Page 6 of 10 Committee Member Collopy questioned why water rates remain unchanged while a new fee is introduced, noting that credit card costs were factored into the original rate study. Mr. Vukojevic confirmed that these costs were included but emphasized that recovering them through a fee would free up funds for infrastructure. Ms. Leung added that rising expenses have increased financial pressures, and recovering some transaction costs allows for more capital investment. Mr. Vukojevic also reported that development impact fees are expected to contribute new revenue. He explained that monthly billing, beginning in March, will improve revenue predictability and enhance leak detection. He noted that the Wastewater Division, responsible for sewer maintenance, is in the second year of a five-year rate increase plan. Councilmember Weber inquired about projected revenue from development impact fees. Mr. Vukojevic stated there is no precise estimate yet, as fees apply only to new projects still in early planning stages. Shifting to General Fund items, Mr. Vukojevic reported that the storm drain division maintains catch basins and stormwater systems. He advised that the City operates 90 tide valves, with some automation but heavy reliance on manual pumping during storms. He explained that staffing increases from seven to 35 workers during significant rainfall. He reported that plans are underway for a master stormwater pump station on Balboa Island, though confined spaces and infrastructure challenges complicate permanent pump installations. Mr. Vukojevic reported that street sweeping and graffiti removal remain priorities, though costs have risen due to prevailing wage contracts. He noted that the City manages 7,000 streetlights, with LED conversions helping reduce electricity use despite rising costs. Mr. Vukojevic reported that the City operates 16 aging oil wells, though declining oil prices and regulatory constraints make profitability difficult. He noted that all oil revenue goes to the Tidelands Fund, but new laws limit rehabilitation efforts. He explained that the long-term plan is to decommission the wells through a self-funded process. Committee Member Collopy supported a self-funded decommissioning plan and inquired if wells could be shut down before decommissioning. Mr. Vukojevic confirmed that all oil revenue is directed toward an abandonment fund, allowing gradual decommissioning. Mr. Vukojevic reported that the Newport Terrace landfill, located near Costa Mesa but under Newport Beach jurisdiction, is managed through a cost-sharing agreement with the homeowners association. He noted that the site includes a gas extraction system that complies with state regulations. Chair Stapleton opened public comments. Ms. Scarbrough referenced the cost associated with the Water Enterprise Fund and the transition from bi-monthly to monthly billing was addressed. She inquired if the additional expenses for printing, postage, and processing, were considered. Mr. Al-Imam reported that those expenses were factored into the fiscal year 2024-2025 budget. Ms. Scarbrough inquired if the monthly fee for late payment, previously set at $40 for bi-monthly billing had been addressed. Finance Committee Regular Meeting Minutes January 23, 2025 Page 7 of 10 Mr. Al-Imam clarified that it will remain unchanged for now, as no adjustments have been made to that fee structure. Ms. Scarbrough referenced the recent wildfires and inquired if evaluations for fire safety improvements, particularly for hydrants, have been conducted. Mr. Vukojevic reported that discussions have occurred. He referenced a major CIP project, currently in the design phase, that involves Zone 3 and Zone 4 system upgrades which will enhance overall system capacity. He noted that a comprehensive analysis of backup systems, generators, and emergency connections has also been completed, and no additional infrastructure improvements are currently deemed necessary. Ms. Scarbrough inquired about the timeline for realizing revenue when bringing the new water well into operation. Mr. Vukojevic explained that the project is expected to take approximately three years, accounting for entitlement approvals, design, bidding, and a one-year construction period. He explained that once completed, the well will not generate direct revenue but will result in expenditure savings, as the City will be able to reduce reliance on purchased state water. Mr. Mosher inquired if fire hydrants operate on a separate system from residential water lines. Mr. Vukojevic clarified that fire hydrants are connected to the same main water system that serves residential meters, but they utilize larger pipes capable of flowing thousands of gallons per minute. He emphasized that fire hydrants undergo annual testing and inspection, during which water flows from every hydrant to ensure functionality. He noted of the approximately 2,300 fire hydrants in the system, only two hydrants are currently out of service due to active construction projects. He noted that these hydrants are covered and marked, with notifications provided to the fire department and the affected community. Mr. Mosher inquired about the water flow capacity if all fire hydrants were activated simultaneously. He assumed that the total output would be less than the optimal capacity under such conditions. He also sought clarification regarding whether the two referenced pressure zones would affect overall water production if all hydrants were in use at the same time. Mr. Vukojevic explained that a study was conducted to model fire flow capacity and system performance under emergency conditions. He noted that while it is unlikely that all hydrants would be in use simultaneously, the modeled flow capacity is approximately 100 cubic feet per second, which equates to 40,000 to 50,000 gallons per minute. Chair Stapleton inquired about the capacity of the City’s reservoir. Mr. Vukojevic reported that the City's reservoir system has a total capacity of 200 million gallons, with current levels at approximately 100 million gallons. Mr. Mosher inquired about the leak detection program, which was a key feature of the transition to automated metering systems, and inquired if the system had a minimum detectable leak threshold and, if so, what that threshold was in terms of gallons per day. He also questioned whether residents with detected leaks were actively notified or if they needed to opt in to receive notifications. Water Operations Superintendent Steffen Catron reported that the minimum detectable leak is one cubic foot per hour. Mr. Vukojevic reported that the City monitors water usage and notifies 12 to 24 residents per week when anomalies are detected. He explained that the primary indicator of a potential leak Finance Committee Regular Meeting Minutes January 23, 2025 Page 8 of 10 is continuous water usage that does not stop overnight or throughout the following day. He further explained that when such anomalies are identified, notifications are sent, and the City attempts to contact affected residents. Chair Stapleton closed public comments. The item was received and filed. Prior to the next item being heard, Committee Member Collopy inquired if Newport Beach provided mutual aid to Pacific Palisades during the recent wildfires. Fire Chief Boyles reported that two units along with eight firefighters were dispatched to support fire suppression efforts. He explained that the City would be reimbursed by CalFire at the fully benefited rate. C. GENERAL FUND AND TIDELANDS FUND LONG RANGE FINANCIAL FORECAST UPDATE Recommended Action: Receive and file. Deputy Finance Director Shelby Burguan presented an overview of the Long-Range Financial Forecast (LRFF), a 20-year projection of the City's financial outlook beyond the 2025-2026 budget. She described the LRFF as a planning and monitoring tool to ensure long-term financial sustainability. Ms. Burguan explained that the LRFF is based on the current year’s budget, excluding one-time expenses, and incorporates projected year-end revenues. She explained that growth factors are applied to individual accounts, and scenario analyses assess financial impacts under different economic conditions, including potential recessions. She reported that the current budget, adjusted for one-time items, serves as the foundation of the model. She noted that General Fund transfers include $15.3 million allocated to the Facilities Financing Plan (FFP), $6.5 million to the General Fund Capital Improvement Program (CIP), and $2.5 million to the Facilities Maintenance Plan Fund. She advised that the Tidelands Harbor Capital Fund is projected to receive $6 million in 2025-2026, increasing by 2.5% annually until 2032-2033, when it will be reduced to $4.5 million. She reported that the Parks Maintenance Fund will receive $2.3 million annually. She noted that the forecast assumes full expenditure of budgets each year without accounting for year-end surpluses. Discussing revenue projections, Ms. Burguan reported that property tax, the City’s largest and most stable revenue source, has grown at an average annual rate of 5.9% over the past 19 years. She reported that the projected growth rate for 2025-2026 is 4%, with a long-term average of 3.8%. She noted that sales tax, the second-largest revenue source, has historically been more volatile, growing at an average of 3.1% annually. She advised that the next fiscal year’s projection reflects a 6.9% increase due to market recovery and the reopening of the Porsche dealership. She reported that over 20 years, sales tax growth is expected to average 2.6%. Committee Member Collopy questioned the 6.9% projection. Ms. Burguan clarified that the increase reflects dealership operations resuming and market adjustments. She indicated that further details would be provided in the second-quarter update and the March budget presentation. Ms. Burguan reported that Transient Occupancy Tax (TOT), the third-largest revenue source, has grown by an average of 6.7% annually over the past 19 years. She noted the projected growth rate for 2025-2026 is 3.2%, with a long-term average of 2.9%. She explained that these Finance Committee Regular Meeting Minutes January 23, 2025 Page 9 of 10 estimates account for recently renegotiated agreements with Visit Newport Beach (VNB), which increased hotel-based TOT allocations from 18% to 23% as of January, resulting in several hundred thousand dollars in additional annual revenue. She advised that the remaining 25% of General Fund revenues are projected to grow at an average rate of 3% annually, with service fees increasing by 2% and property income, including leases and parking revenues, growing between 3% and 4% per year. On the expenditure side, Ms. Burguan noted that salaries and benefits are expected to grow at 2% annually, with no new positions beyond the current budget. She reported that the City plans to allocate $40 million annually toward its California Public Employees’ Retirement System (CalPERS) unfunded liability, with full repayment expected by 2032-2033, assuming an additional $5 million is allocated each year from the year-end surplus. She advised that non-personnel expenditures are projected to grow by 5.2% annually over the next two decades. Ms. Burguan referenced the Tidelands Fund Long-Range Financial Forecast, developed in response to internal audit recommendations. She noted that this forecast provides insight into General Fund obligations to the Tidelands Fund, including transfers and revenue-sharing agreements. Ms. Burguan reported that the General Fund surplus is expected to grow gradually until 2032-2033 when the City eliminates its CalPERS unfunded liability. She advised that a $10 million surplus is projected for 2025-2026. Councilmember Weber asked whether actual year-end surpluses tend to exceed estimates. Ms. Burguan clarified that the forecasted surplus represents the difference between total revenues and expenses, primarily influenced by vacancy savings. Mr. Al-Imam added that year-end surpluses are crucial for funding capital projects, the Facilities Financing Plan, and additional pension payments. He explained that the City budgets $40 million annually for pension contributions but allocates an extra $5 million from surplus funds to accelerate liability reduction. Councilmember Weber inquired why the City continues making additional CalPERS payments even when investment performance declines. Mr. Al-Imam explained that the City follows a dollar-cost averaging approach, ensuring consistent contributions regardless of market conditions. He noted that CalPERS’ historical returns have exceeded 6.8%, supporting the expectation that the City will eliminate its unfunded liability by 2032-2033. He explained that if returns fall below projections, the repayment timeline may be extended, but maintaining a steady payment schedule helps mitigate financial volatility. Ms. Burguan concluded that the General Fund is projected to remain strong over the next 20 years, though the City will continue to face rising costs, pension obligations, and major capital needs. While recessionary events could impact revenue projections, she emphasized that short-term deficits can likely be managed without relying on contingency reserves. Committee Member Collopy inquired if the LRFF remains a useful tool. Ms. Leung affirmed its importance in providing insight into the City’s long-term financial position. Chair Stapleton opened public comments. Hearing none, public comments were closed. The item was received and filed.