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HomeMy WebLinkAboutApproved Minutes - May 8, 2025Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 1 of 10 CITY OF NEWPORT BEACH FINANCE COMMITTEE MAY 8, 2025 MEETING MINUTES 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 Robyn Grant, Councilmember Sara Weber, Committee Member Allen Cashion, Committee Member William Collopy, Committee Member William Kenney, Committee Member Kory Kramer ABSENT: None STAFF PRESENT: City Manager Grace K. Leung, Finance Director/Treasurer Jason Al- Imam, Deputy Finance Director Shelby Burguan , Assistant Management Analyst Vicky Nguyen, Finance Manager Jessica Nguyen, Finance Manager Trevor Power, Purchasing and Contracts Administrator Jennifer Anderson, Budget Analyst Abigail Marin, Budget Analyst Anthony Alannouf, Budget Analyst Courtney Buck, Buyer Jackqueline Nguyen, Fire Chief Jeff Boyles, Utilities Director Mark Vukojevic, Harbormaster Paul Blank, Public Works Director David Webb, Senior Management Analyst Trevor Smouse, Administrative Manager Chris Miller, Administrative Manager Raymund Reyes, Assistant Management Analyst Lili Banuelos, Library Services Manager Rebecca Lightfoot, Administrative Assistant Errica Garrett, Management Fellow Sabrina Mesropian, Management Analyst Lorig Yaghsezian OTHER ENTITIES: Jonathan Foster, Davis Farr MEMBERS OF THE PUBLIC: Jim Mosher, Nancy Scarbrough III. PLEDGE OF ALLEGIANCE Committee Member Collopy led the Pledge of Allegiance IV. PUBLIC COMMENTS Chair Stapleton opened public comments. Hearing none, Chair Stapleton closed public comments. V. CONSENT CALENDAR A. MINUTES OF APRIL 10, 2025 Recommended Action: Approve and file. MOTION: Committee Member Collopy moved to approve the minutes of April 10, 2025, as amended, seconded by Committee Member Cashion. The motion carried as follows: Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 2 of 10 AYES: Cashion, Collopy, Kenney, Kramer, Grant, Weber, Stapleton NOES: None ABSTAIN: None ABSENT: 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. Finance Director/Treasurer Al-Imam introduced the item, noting that the City undergoes an independent annual audit of its financial statements. Davis Farr LLP, the City’s independent auditor, will begin fieldwork for the FY 2024–25 audit in the coming weeks. Interim procedures are scheduled between May and July, with final testing in October. The audit is expected to conclude in December, and results will be presented to the Finance Committee in January. Jonathan Foster, a partner with Davis Farr LLP, presented on behalf of Marc Davis. He outlined the scope of the audit, which primarily covers the City’s Annual Comprehensive Financial Report (ACFR), agreed-upon procedures on the Gann Limit, and, if applicable, a Single Audit when federal expenditures exceed $750,000 (rising to $1 million in FY 2026). He emphasized that the engagement is not a fraud audit, though procedures include fraud-risk assessments and questionnaires. Mr. Foster explained that the auditors’ responsibilities include ongoing communication with the Finance Committee, which serves as the City’s audit committee. The audit will be conducted in accordance with Generally Accepted Auditing Standards (GAAS) and Generally Accepted Government Auditing Standards (GAGAS), with the objective of issuing an opinion on the City’s financial statements. Interim fieldwork is scheduled for June and July, focusing on risk assessment and walkthroughs of internal controls. While not intended to provide an opinion on controls, any deficiencies or noncompliance identified will be communicated separately. Final fieldwork will occur in October, with a Single Audit, if required, scheduled for January 2026. Mr. Foster also highlighted the implementation of GASB Statement No. 101 on compensated absences, requiring enhanced reporting of sick and vacation leave liabilities. He noted that this may be referenced in the audit opinion, though such language should not be cause for concern. He explained that upon completion, results will be presented in January 2026, accompanied by a letter disclosing any violations of laws, audit difficulties, disagreements with management, or unusual transactions—or affirmatively stating if none are found. During discussion, Committee Member Collopy asked about the committee’s role and potential liability. Al-Imam clarified that the Finance Committee functions as the City’s audit committee, responsible for receiving communications and providing input on audit planning. Committee Member Collopy raised concerns about fiduciary responsibilities and Directors and Officers (D&O) liability insurance coverage. Committee Member Kramer noted that City officials are generally covered under the City’s liability program but recommended confirmation. Al-Imam stated that he would confirm with the City Attorney and/or the City’s Risk Manager whether members of the Finance Committee are covered under the City’s insurance policy for actions taken while serving in their capacity as the City’s Audit Committee. Committee Member Kenney asked whether auditors actively test for fraud. Mr. Foster confirmed that auditors are required to consider the risk of fraud and design audit procedures to address it. For example, this may include asking staff about potential fraud, testing journal entries, and reviewing unusual or high-risk transactions. Additional procedures are performed Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 3 of 10 if any red flags arise. Committee Member Kenney also noted that the prior year’s audit received an unmodified opinion. Chair Stapleton opened public comments. Hearing none, Chair Stapleton closed public comments. Chair Stapleton received and filed the item. B. FOLLOW UP DISCUSSION OF PROPOSED FY 2025-26 BUDGET Recommended Action: Review and discuss the proposed budget and provide any recommendations for consideration by the City Manager and City Council. Budget Manager Jessica Nguyen reviewed updates made to the proposed budget since the committee's last discussion in April. She highlighted changes to projected revenues and called specific attention to the $8.4 million increase in expected grant funding. She acknowledged that this amount was inadvertently omitted from the figure listed under Account 43, Intergovernmental Revenues, on page 19 of the proposed budget book. She apologized for the oversight and confirmed that the correction will be reflected in the final printed version of the adopted budget book. Budget Manager Nguyen reported that the $8.4 million in expected grant funds is related to planned infrastructure and environmental projects, including street improvements along Old Newport Boulevard and West Coast Highway, the Newport Dunes Infiltration Basin, and the Big Canyon Restoration Project. Funding is anticipated to come from external sources such as the Orange County Transportation Authority (OCTA), OC Parks, and the Orange County Sanitation District (OCSan). Committee Member Cashion inquired whether the $8.4 million in anticipated grant revenue would be offset by a corresponding expense or if it would result in a net increase. Budget Manager Nguyen responded that the revenue is offset by the budget for the related Capital Improvement Projects (CIP). She noted that each of the projects associated with the grant funding has been budgeted for the same amount as the expected revenue, resulting in a balanced impact on the budget. She also explained that staff needed to remove $1.3 million of opioid settlement funds from the proposed budget. She explained that the City has already received the settlement funds and is carrying over the remaining balance as a revised budget entry, rather than listing it as part of the original new budget. Finance Director/Treasurer Al-Imam clarified that this carryover amount should be removed from the original proposed budget and reflected appropriately in the revised budget documentation. Councilmember Weber sought clarification on the $8.4 million increase in grant revenue and asked whether it would result in a revision to the budget total. Budget Manager Nguyen confirmed that the total on Line 43, Intergovernmental Revenues, will increase from $13.8 million to $22.2 million to reflect the anticipated grant funding. She noted that as a result, the total proposed budget will increase by $8.4 million, bringing it to approximately $537 million. Budget Manager Nguyen reported that updates have also been made to the Capital Improvement Program (CIP) Master Plan since the April Finance Committee meeting. She advised that at that time, the CIP was budgeted at $66.1 million. She noted that the updated figure is now $66.7 million, reflecting an increase of $638,000. She explained that this increase Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 4 of 10 is attributed to adjustments in projects funded by the Tidelands Fund and the Gas Tax Fund. She further explained that the additional funds are related to the Beach and Bay Sand Management Project and the Old Newport Boulevard/West Coast Highway modifications. Committee Member Collopy asked for clarification regarding the change in the budgeted amount for the sand management project, specifically referencing a line item that increased from $60,000 to $600,000. He questioned whether the original lower figure had simply been an oversight and whether this adjustment represented an update to the Capital Improvement Plan (CIP). Finance Director/Treasurer Al-Imam confirmed that the original April presentation included a $60,000 estimate, but the revised budget reflects an updated amount of $600,000. Committee Member Collopy noted his surprise at the increase, especially given that $500,000 had been allocated to West Newport in the prior year. Finance Director/Treasurer Al-Imam clarified that this is a new project, and the $60,000 shown in April was the preliminary figure at the time. He explained that the revised amount reflects updated estimates based on more complete information. City Manager Grace Leung advised that as actual expenditures are assessed, adjustments are made to determine how much funding will carry over and how much new funding is needed. Budget Manager Nguyen referred to page 53 of the proposed budget book, which outlines transfer activity between funds. She advised that a specific adjustment was made to the transfers out of the Facilities Financing Plan Fund, which increased by $10.7 million. Budget Manager Nguyen provided an updated overview of the revised General Fund sources and uses. She reported that when projected revenues and proposed expenditures are combined, the fiscal year 2026 proposed budget reflects a surplus of $15.3 million. Finance Director/Treasurer Al-Imam provided an overview of the City's annual budget process. He explained that each year, a high-level summary of the proposed budget is presented to the Finance Committee in April. He further explained that this is followed by a more detailed review of the full proposed budget document, which ultimately goes to the City Council for adoption in June. He explained that because the budget development process begins early in the calendar year, typically in March or April, there are often adjustments that must be incorporated between the initial presentation and final adoption. He noted that these updates may reflect actions taken by the City Council after the April or May committee meetings. Finance Director/Treasurer Al-Imam reported that in order to manage these updates, staff maintains a "budget checklist" of proposed revisions. He explained that this checklist tracks changes and ensures they are accurately reflected in the final adopted budget and noted that the complete checklist will be presented to the committee later this month, following the joint meeting with the City Council. Finance Director/Treasurer Al-Imam reported that to date, seven checklist items have been identified. He noted that two of these are related to recently approved Memoranda of Understanding (MOUs): one with the Fire Department and the other with the Association of Newport Beach Ocean Lifeguards (ANBOL), and went before the City Council two weeks ago. He explained that, as required, these MOUs will be presented to the Council for approval a second time. He noted that the combined fiscal impact of the seven proposed budget revisions is estimated at $3.1 million. He explained that these are General Fund costs and will need to be added to the final adopted budget. Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 5 of 10 Finance Director/Treasurer Al-Imam reported that some of the proposed budget revisions include $91,000 for Beach Enforcement by the Police Department and a $100,000 annual reimbursement for tow operator services, as previously approved by the City Council. He explained that combined with the MOUs, these items result in an approximate $3.1 million increase to the proposed budget. He noted that all of these changes will be incorporated into the adopted budget, scheduled for City Council approval in June. He emphasized that staff maintains a continuously updated budget checklist and that the current list of changes will be shared with the committee later this month. City Manager Grace Leung emphasized that, at present, the City is actively engaged in negotiations with all of its bargaining groups. She noted that as a result, the figures currently included in the proposed budget represent only a baseline. She explained that any new Memoranda of Understanding (MOUs) that are finalized before the adoption of the budget will be added through the budget checklist process. She noted that if an agreement is not finalized by the June 10 deadline for budget adoption, any related costs will be incorporated later through a formal budget amendment to the already adopted budget. Committee Member Cashion asked for clarification on the figures discussed and whether the detailed budget adjustments would be presented at the next meeting. He recapped the preliminary numbers, referencing $90,000 for police beach enforcement and $100,000 for tow operation reimbursements. He noted that these amounts alone do not total $3.1 million and sought confirmation. City Manager Grace Leung clarified that a majority of the $3.1 million figure relates specifically to the salary and benefit adjustments associated with the two recently negotiated Memoranda of Understanding (MOUs). Finance Director/Treasurer Al-Imam noted that approximately $2.2 million is related to the Fire Department, with the remaining $600,000 associated with the lifeguard agreement. City Manager Leung also advised caution in relying too heavily on the currently projected $15 million surplus, noting that pending labor agreements and other budgetary adjustments could significantly affect that figure. Committee Member Kenney raised a question regarding potential declines in revenue. He asked what the City's response would be if there were a significant economic downturn at either the federal or local level. Finance Director/Treasurer Al-Imam explained that in such a scenario, the likely course of action would be to scale back capital expenditures to maintain fiscal stability. He elaborated on the City’s approach to maintaining a balanced budget in the event of revenue declines. He noted that, if necessary, the City would consider reducing certain capital expenditures to preserve budget stability. He explained that a cascading series of cost-saving measures was implemented during the early years of the pandemic when there was considerable uncertainty concerning revenue declines. He noted that these measures included the suspension of some capital projects and a hiring freeze for vacant positions. He emphasized that the City continues to apply conservative revenue forecasting as a safeguard. Finance Director/Treasurer Al-Imam provided an overview of how staff are monitoring revenue trends, particularly about Transient Occupancy Tax (TOT) and sales tax, which he identified as the two most vulnerable revenue sources given current economic conditions. He noted that these revenue streams are subject to fluctuations stemming from factors such as tariffs, immigration policy, and tourism activity. He informed the committee that TOT data for March is Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 6 of 10 expected to be available later this month. He noted that, if necessary, adjustments to the TOT revenue forecast can be incorporated during the next budget review meeting, if necessary. Finance Director/Treasurer Al-Imam explained that the City receives data from the State approximately 60 days after the close of each quarter for sales tax. He noted that as of this meeting, the most recent available data covers the quarter ending in December. He reported that this quarter showed strong performance, with sales tax revenue up 5.7% on an adjusted basis and approximately 17% higher on a cash basis. He explained that the data for the March quarter is not expected to be available until just before the budget is adopted. He noted that staff will continue to closely monitor revenue trends and adjust as needed through the City's quarterly budget update process. Committee Member Collopy inquired why investment income is separated by fund rather than presented as a single consolidated line item under revenues. Finance Director/Treasurer Al-Imam responded that investment earnings are allocated to individual funds due to legal restrictions. He explained that, for example, funds such as the Gas Tax Fund are subject to specific regulatory requirements that mandate the segregation and appropriate allocation of any interest earned. Committee Member Collopy then referenced the "Donations and Contributions" line item (Line 56) under revenues. He noted that for fiscal year 2025, the actual amount received was approximately $9.5 million, while the proposed amount for fiscal year 2026 is listed as $379,000. He asked for clarification on how that change reflects only a 7.45% decrease when compared to a prior adopted budget amount of $410,000. Finance Director/Treasurer Al-Imam explained that the significant difference between the adopted budget and the actual amount realized in fiscal year 2025 was due to a large, one- time contribution received by the Library Lecture Hall. Committee Member Collopy inquired about the Newport Dunes concession fees and where those are reflected in the budget. Budget Manager Nguyen directed Committee Member Collopy to Account 551010 under Property Income on page 24 of the budget book, which lists lease revenue associated with Newport Dunes. Committee Member Collopy noted that the lease revenue was shown as approximately $1,800 per year, which he noted was surprisingly low. He expressed concern about the revenue arrangement, especially given the scale of the concession operations at Newport Dunes. Deputy Finance Director Shelby Burguan clarified that the property is not owned by the City, but rather by the County of Orange, and that any concession-related revenue is likely collected by the County, not the City. Committee Member Collopy also asked about Fund 511, identified as the Civic Center Fund, which was originally established for the redevelopment of the former City Hall site on the Peninsula. He noted that although that project has long since been completed, the fund still contains a balance of approximately $485,365. He questioned the purpose of retaining the funds and suggested that the balance be reallocated or absorbed into another appropriate fund. Finance Director/Treasurer Al-Imam noted that it could go into the Facilities Financing Plan (FFP) or Equipment and Property Lease (EPL) Fund. Committee Member Collopy provided comments on the Utilities Department section located near the end of the budget document. He expressed appreciation for the inclusion of Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 7 of 10 departmental cover sheets summarizing accomplishments, budget highlights, and key metrics, noting that some departments had done an exceptional job while others were less detailed. He acknowledged that the inclusion of these summaries represented a meaningful improvement overall. He then directed attention to the performance measures for Utilities, specifically the metrics tracking waterfront and sewer fund cash reserves as a percentage of their respective reserve goals. He noted that both targets were set at 100%, with the sewer fund having achieved 9% in the prior fiscal year but estimated to rise to 12% in FY 2024–2025. Committee Member Collopy recalled that this decrease in reserves was expected and appropriate, as the City had recently approved a rate adjustment and strategically used reserves in the interim. He commended staff for managing that process effectively and reaffirmed his general support for using reserves when necessary. He raised a concern about setting the reserve target at 100%, suggesting that such a target may unintentionally imply that reserves should never be used. He acknowledged that 100% might serve as an aspirational benchmark, but he questioned whether that figure should be represented as the default target in performance reporting. Deputy Finance Director Burguan responded that the 100% target is based on recommendations from the City’s reserve study and rate study. Finance Director/Treasurer Al-Imam advised that the reserve target was reviewed and accepted by the Finance Committee. He noted that the goal represents the fully funded reserve level needed to meet long-term capital and operational needs. He clarified that the target is aspirational and not intended to suggest that reserves should never be drawn upon. He explained that, rather, the approved rate structure was designed to gradually restore the reserves to that targeted level over time. Committee Member Collopy concluded his remarks with a final observation related to the Fire Department section of the budget. He commended Fire Chief Jeff Boyles for the progress made over the past several years in developing and tracking meaningful performance metrics, noting that the department has done an excellent job in measuring and reporting on its key operational indicators. He noted the absence of a metric for the number of callouts, which he felt would be valuable in evaluating year-over-year efficiency. He acknowledged that it is difficult to benchmark one fire or police department against another, but emphasized that internal comparisons, such as call volume trends and response times, can provide meaningful insights into departmental performance. Committee Member Collopy recalled a prior discussion where Chief Boyles had highlighted the high number of calls received by the department, and he reiterated the importance of sharing that information as part of the narrative. He encouraged the department to "blow its own horn" by showcasing those call volume figures, which help illustrate the growing service demand. Chair Stapleton opened public comments. Nancy Scarborough inquired about an item listed on page 24, account 551120, labeled as "West Newport Community Center – Pacifica." She noted that in previous years, the recorded rental revenue for this location had been as high as $300,000, but in the current proposed budget, the amount appears to have dropped to $2,300. She asked whether the funding had been moved to another line item and what the current designation for that revenue might be. Finance Director/Treasurer Al-Imam clarified that the funding in question is related to Community Development Block Grant (CDBG) revenues and has been relocated. He directed Ms. Scarborough to page 2 of the budget document, where the revenue now appears under a different category. Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 8 of 10 Jim Mosher referenced page 153 of the budget book, which outlines the budget for the City’s Cultural and Arts function under Library Services. He raised a concern about a discrepancy between the budget figures listed in the document and the amount the City Arts Commission believes it has available to spend. He noted that the City Arts Commission, which was scheduled to meet at 5:00 p.m. that same day, routinely reviews its available budget, but continues to see inconsistencies between its understanding and the published figures. He specifically cited line items for Maintenance and Repair of Art, which shows an allocation of $4,248, and Publications and Dues, listed at $1,000. He explained that the City Arts Commission is not informed that either of these items is part of its operating budget. He asked whether the $4,248 allocated for maintenance could be used for maintaining public art or whether it is reserved for other purposes. He also questioned why the City Arts Commission is not made aware of these funds as part of its usable budget. Finance Director/Treasurer Al-Imam clarified that these funds are part of a larger allocation within the Library Services budget and that the Library Director has discretion to move funds within the department as needed. City Manager Leung explained that the $4,248 is part of the overall facilities and maintenance allocation distributed across various divisions, not specifically earmarked for public art maintenance. Councilmember Grant, drawing from prior experience serving on the City Arts Commission, recalled that maintenance of public art was once handled directly by the commission through in-house or contracted services. She noted that over time, responsibility for overseeing maintenance of art installations—such as plaques, statues, and public memorials—was shifted to the Cultural Arts Division. Deputy Finance Director Burguan explained that certain public art pieces, such as the Ben Carlson statue and the Sunset Ridge Park commemorative bench, have been maintained using funds from the Maintenance and Repair line item. She confirmed that these funds are being used for art maintenance and that those specific projects were charged to that account. Ms. Scarborough raised a question regarding an item on page 25, specifically account 551305 related to 1201 Dove Street under Property Management Revenue. She observed that the projected lease revenue for the property had decreased from $2,700 to $2,300 and asked whether this reduction was due to a loss of tenants or a decrease in rental rates. Finance Director/Treasurer Al-Iman responded that the budget forecast for that property is managed by the Community Development Department, and that department would be best positioned to explain the reason for the change. Chair Stapleton closed public comments. Committee Member Collopy raised a separate observation regarding Contract Services on page 40 of the expenses section. He noted that the budget for Contract Services increased steadily over the past several years—rising from $24 million in FY 2022, to $26 million in FY 2023, $27 million in FY 2024, and now projected at $29 million in FY 2025, with an expected increase to $41 million the following year. He inquired about the reason behind this significant $8 million increase. Budget Manager Nguyen explained that the increase is primarily due to the reclassification of the residential refuse contract, valued at approximately $6 million, which was previously categorized under Maintenance and Repair and has now been moved to Contract Services for reporting clarity. Finance Director/Treasurer Al-Iman noted that there is a corresponding reduction in the Maintenance and Repair category to reflect this adjustment. Finance Committee Meeting Minutes May 8, 2025 Agenda Item No. 5A Page 9 of 10 Chair Stapleton noted that Committee Member Cashion would be submitting additional comments in the following week. There was no further discussion on the item. C. DEPARTMENTAL OVERVIEWS Recommended Action: Provide feedback on which departments to be studied in the Fall and Winter of the upcoming year. Finance Director/Treasurer Al-Iman provided a brief overview of a discussion held during the April 10 Finance Committee meeting regarding potential departments to be reviewed in future deep-dive sessions. He advised that staff prepare a report summarizing all departmental deep- dive reviews conducted over the past five to six years. He noted that the report includes a visual breakdown of the City’s overall budget by department in the form of a pie chart, illustrating the relative size of each department’s budget. Finance Director/Treasurer Al-Iman reported that the Police Department was identified as the largest departmental budget, followed by Fire, Public Works, and Utilities. He emphasized that the choice of which departments to review is open for discussion and input from the Finance Committee. He explained that the Finance Committee has conducted two departmental deep dives each fiscal year—one in the fall (typically October or November), and another in January. He invited committee members to provide feedback on which departments they would like to examine in upcoming sessions. Committee Member Collopy suggested that Community Development and Recreation and Senior Services would be appropriate departments to prioritize next. He noted that these departments are among the larger operations that have not been reviewed in several years— or potentially not at all—and were identified as candidates for the upcoming deep-dive sessions. Chair Stapleton suggested that a future review of the Police Department may be warranted in fiscal year 2026 or 2027. Committee Member Collopy agreed that allowing time for initiatives to be operational before conducting a review would provide a more meaningful assessment. Chair Stapleton opened public comments. Hearing none, Chair Stapleton closed public comments. There was no further discussion on the item. D. WORK PLAN REVIEW Recommended action: Receive and file. Chair Stapleton confirmed that the next meeting is scheduled for May 27th at 4:00 p.m. in the City Council Chambers. He noted that all committee members were encouraged to attend. He advised that during that meeting, staff will present the full proposed budget for fiscal year 2025– 2026. He advised that following that, the committee will reconvene on May 29th at 3:00 p.m. for its regularly scheduled session. He explained that at that meeting, the committee will have the opportunity to make formal recommendations to the City Council regarding the proposed budget and to review the third-quarter budget report. Chair Stapleton opened public comments. Hearing none, Chair Stapleton closed public comments. Chair Stapleton received and filed the item.