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HomeMy WebLinkAboutApproved Minutes - May 29, 2025Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 1 of 10 CITY OF NEWPORT BEACH FINANCE COMMITTEE MAY 29, 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, Council Member Robyn Grant, Council Member Sara Weber, Committee Member Allen Cashion, Committee Member William Kenney, Committee Member Kory Kramer ABSENT: Committee Member William Collopy 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 Jessica Kan, Budget Analyst Abigail Marin, Budget Analyst Anthony Alannouf, Budget Analyst Courtney Buck, Public Works Director David Webb, Administrative Manager Raymund Reyes, Senior Management Analyst Trevor Smouse, Library Services Manager Rebecca Lightfoot , Management Analyst Katie Vu OTHER ENTITIES: MEMBERS OF THE PUBLIC: Jim Mosher, Nancy Scarbrough III. PLEDGE OF ALLEGIANCE Chair Stapleton led the Pledge of Allegiance IV. PUBLIC COMMENTS Chair Stapleton opened public comments. Hearing none, Chair Stapleton closed public comments. V. CONSENT CALENDAR A. COMMITTEE RECOMMENDATION TO COUNCIL FOR THE FY 2025-26 BUDGET Recommended Action: Make final recommendations to the City Council concerning the City Manager’s Fiscal Year 2025-26 Proposed Budget. Finance Manager Jessica Nguyen provided an overview of proposed budget revisions to the General Fund budget, which includes seven adjustments to expenditures that amount to approximately $3.1 million. She noted that two of the largest adjustments relate to salary and benefit adjustments associated with recently approved Memoranda of Understanding (MOUs) associated with the Firefighters’ Association and the Association of Newport Beach Ocean Lifeguards. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 2 of 10 Finance Manager Nguyen stated that, in addition to General Fund expenditures, adjustments have been made to Capital Improvement Program (CIP) appropriations since the Joint Committee meeting held earlier in the week. She noted that the affected projects are highlighted, resulting in a $2.1 million increase to the overall CIP plan. She further stated that the revised total for new CIP appropriations is now $68.9 million, reflecting an increase of $2.1 million from the originally proposed amount. She reported that the total proposed budget for Fiscal Year 2025–26 is $532.7 million, representing a 7.7% increase over the adopted budget for Fiscal Year 2024–25. She concluded by stating that, when revenues and expenditures are combined, the preliminary ending unrestricted fund balance for the General Fund is projected to be $12.2 million. Committee Member Kramer inquired about the origin of the six additional projects. Senior Management Analyst Trevor Smouse advised that the projects in question are already included in the project detail pages of the proposed budget book. However, he explained that there was a discrepancy between those pages and the summary pages located at the end of the document. He noted that the summary pages are the basis for the figures included in the proposed adopted budget. He clarified that this is not a matter of erroneous project inclusion, but rather a presentation inconsistency between the detailed and summary pages. Committee Member Kramer requested clarification on whether the six items were in error and being corrected. Senior Management Analyst Smouse clarified that the six items in question are correctly listed in the project pages, and the discrepancy lies only in the summary tables. Finance Director/Treasurer Jason Al-Imam explained that the issue resulted from a breakdown in communication between the Public Works and Finance departments. He further explained that typically, coordination between the departments is handled by a key staff member who is currently on maternity leave and, as a result, certain updates were not communicated as usual, leading to the misalignment. Senior Management Analyst Smouse explained that the $2.1 million being added to the budget corrects a discrepancy to ensure consistency between the budget document and the Capital Improvement Plan (CIP). Staff emphasized that this issue is not expected to recur and that the goal is to release the proposed budget and CIP in early May with full alignment and no subsequent revisions. Finance Director/Treasurer Al-Imam explained that these discrepancies were identified while preparing the budget adoption staff report. He noted that during that process, they compared the figures in the proposed budget against those in the CIP, which brought the inconsistencies to light. Committee Member Kramer inquired whether any further modifications to the budget are anticipated. Finance Director/Treasurer Al-Imam advised that no additional changes are expected at this time. Committee Member Kramer inquired if the Measure M funding allocated for the Newport Dunes Infiltration and Big Canyon Restoration Project was a one-time lump sum or if it would be distributed over multiple years. Public Works Director David Webb explained that the $8.4 million is associated with Measure M funding from the County and is structured as a cost-reimbursement grant. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 3 of 10 Finance Director/Treasurer Al-Imam further explained that the Newport Dunes project is a multi-year effort, and the City will receive reimbursements from the County as project expenditures occur. Committee Member Kramer inquired if there would be additional funding annually. Public Works Director Webb explained that while this year’s allocation is significant, future amounts may vary. He noted that the City must competitively apply for Measure M funding each year. He further explained that funding availability depends on various factors, including County revenues generated through sales tax. He noted that it is not guaranteed that an equivalent amount will be awarded in future years. Committee Member Kramer inquired if any further review or action by City Council or staff was needed regarding project expenditures since the Finance Committee’s last meeting. Finance Director/Treasurer Al-Imam clarified that the only changes made thus far are on the expenditure side, reflecting items previously approved by the City Council since May. For example, the Council recently approved Memoranda of Understanding (MOUs) with the Firefighters’ Association and the Association of Newport Beach Ocean Lifeguards, and the costs associated with these agreements affect both the current and upcoming fiscal years and must be incorporated into the budget. He added that the proposed agreement with the Police Association was presented to the City Council for a first reading on Tuesday, May 27, and is scheduled for a second reading on June 10. The financial impacts of that agreement will also need to be included in the final budget. He noted that it is not uncommon to amend the budget at the time of adoption. For example, it was explained that once the Police Association agreement is brought forward on June 10, staff will present a formal budget amendment to update the newly adopted budget accordingly. Committee Member Kramer referenced the $3.1 million in General Fund expenditure revisions and inquired if it remains a fluid figure. Finance Director/Treasurer Al-Imam explained that after the budget is adopted on June 10, it is expected that the budget will be amended throughout the year. For example, as other labor agreements come forward, it will require amendments to the newly adopted budget. Committee Member Kramer inquired about the anticipated financial impact of the Police Association (PA) and other bargaining unit agreements. Finance Director/Treasurer Al-Imam noted that the City currently has a $12 million surplus and expects that most, if not all, of that surplus will be used to fund the finalized contracts. Committee Member Kramer suggested including the potential $9 million figure in the budget expenditure line item for transparency. Finance Director/Treasurer Al-Imam advised against doing so, citing the fact that negotiations with multiple bargaining units are still ongoing. City Manager Grace Leung explained that specifying a placeholder amount could risk telegraphing the City’s negotiating position, which is not advisable during active labor discussions. Finance Director/Treasurer Al-Imam explained that this is an unusual year in terms of labor agreements. He noted that typically, large-scale contract renewals occur every three to four years when most Memoranda of Understanding (MOUs) expire. He noted that this cycle has Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 4 of 10 led to the convergence of several significant agreements requiring incorporation into the FY 2025-26 budget. Committee Member Kramer inquired if the City Council could make changes, depending on the status of ongoing negotiations and the timing of contract approvals. Finance Director/Treasurer Al-Imam noted that the City Council retains the discretion to make further changes to the budget if necessary. He advised that the City typically processes 40 to 50 budget amendments over the course of a fiscal year. He explained that some of these fall within the City Manager's delegated authority, while others require formal City Council approval depending on the dollar amount and funding source. Committee Member Kramer inquired about the approval threshold; staff clarified that the City Manager may approve amendments of up to $10,000 or grants up to $30,000 that are offset by revenue. Committee Member Cashion inquired about the sequencing of budget revisions, particularly why certain adjustments, such as Measure M funding and other known revisions, were not incorporated into the proposed budget before the most recent City Council presentation. Finance Director/Treasurer Al-Imam acknowledged that the issue stemmed from a timing and reconciliation delay with the preparation of the budget adoption staff report. He noted that the process revealed discrepancies that ideally would have been identified earlier. He explained that one such discrepancy involved approximately $8 million in revenue that was initially missing but had already been allocated to specific projects. City Manager Leung explained that the proposed budget document must be finalized and sent to print by the end of April in order to meet publishing deadlines. She noted that as a result, any information received after that date, such as updated grant details or project funding, was not reflected in the initial version of the document. Finance Director/Treasurer Al-Imam emphasized that the Public Works and Finance departments are working closely to prevent similar issues in future budget cycles. Public Works Director Webb provided additional clarification on the composition of the $8 million in newly identified revenue. He noted that $467,000 is associated with Measure M funding, while the remaining balance relates to the Upper Bay Conservancy’s Big Canyon project, which is supported by three separate grant sources. He further explained that because the Conservancy does not have the capacity to manage construction, the City will act as the lead agency and manage project delivery, and, as such, the grant revenues must be included in the City's budget. Committee Member Cashion inquired if staff are unaware of any other unincorporated revenue channels. Public Works Director Webb explained that grant funding is typically the primary factor causing the City to experience budget “hiccups,” but noted that such items continue to be monitored for updates. He expressed confidence that with improved coordination, these types of late-stage adjustments can be avoided in future budget cycles. He further explained that grant funding is often the primary source of mid-year budget adjustments. He noted that because grants are applied for and awarded throughout the year, the timing of notifications can create the need for budget amendments throughout the year. Committee Member Cashion inquired if staff is aware of any additional grant awards pending incorporation. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 5 of 10 Finance Director/Treasurer Al-Imam emphasized that City departments are constantly applying for new grants, which may result in future adjustments. City Manager Leung remarked regarding the reconciliation of capital projects and acknowledged that the issue in question could have been identified earlier. She expressed confidence in the reconciliation process and the accuracy of the final budget. She explained that due to the multi-year nature of capital projects, Public Works staff are actively working up to the point of final budget printing to account for project spending. She further explained that as part of this process, project savings may be identified and reallocated to other priority projects for the upcoming fiscal year. She noted that the ongoing movement of funds allows for adjustments based on project status and need. She remained confident in the final reconciliation process with the key objective to ensure that it is completed accurately and on time. Committee Member Cashion requested clarity on the status of the City’s current $12 million surplus. City Manager Leung expressed confidence that a substantial portion, potentially around $9 million, is expected to be allocated, given that $3 million is already accounted for in known commitments. Committee Member Cashion reiterated that the key takeaway is that there is no deficit spending, and the City continues to anticipate maintaining a positive surplus once all allocations are finalized. Director/Treasurer Al-Imam explained that the budget assumes full staffing levels, although in practice, there are always vacancies, which result in expenditure savings totaling millions of dollars each year. He noted that the City typically takes a conservative approach to revenue projections, which contributes to the consistent generation of budget surpluses. He explained that if certain labor agreements significantly increase personnel costs, the City may need to adjust future budgets. He further explained that it may become necessary to incorporate vacancy savings directly into the base budget to reflect more realistic staffing assumptions and to balance the budget. He advised that this will be reviewed during the next budget cycle. Committee Member Cashion encouraged staff to ensure that, during the upcoming City Council presentation, all key assumptions and contextual information are communicated. He encouraged staff to present the material in a way that is easily understood by the public, avoiding unnecessary complexity, while also emphasizing the positive aspects of the budget outlook. City Manager Leung reported that the City is still projecting a sizeable surplus for the current year. She emphasized that departments have generally remained disciplined in spending only what is necessary, and that vacancies throughout the year continue to contribute to expenditure savings. She noted that these patterns are reflected in the current third-quarter projections, which support the City’s ability to maintain fiscal stability. Committee Member Kramer noted that the City's overall budget surplus is much larger considering the City is paying additional amounts towards its pension liability. Director/Treasurer Al-Imam explained that the City is committed to paying $45 million annually to CalPERS towards its unfunded pension liability. Of this amount, approximately $30 to $35 million is required to be paid to CalPERS, whereas the remaining $10 million to $15 million represents the portion of the surplus where the City has discretionary flexibility. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 6 of 10 Committee Member Kramer recommended that the surplus be presented as the total available amount, with a visual breakdown showing the required obligations and the discretionary surplus separately. He noted that doing so would help contextualize the decision to pursue a greater- than-required debt paydown, which is being funded from the surplus. City Manager Leung explained that, under Council Policy, the City has committed to an aggressive pension paydown plan. Committee Member Kramer emphasized that the funding still originates from the City’s surplus and that exceeding the established threshold further demonstrates fiscal responsibility. He encouraged staff to present the surplus and related fiscal decisions as transparently and positively as possible, noting that this reflects a strong financial position and highlights the City’s commitment to sound governance. He further stated that this message often does not reach residents or business owners, despite standing in contrast to the broader fiscal challenges faced by many jurisdictions across California. He added that sharing this success story is essential to maintaining public trust and reinforcing the City’s reputation for responsible financial management. Director/Treasurer Al-Imam reported that in November, the City will conduct a more in-depth review of pension funding, which will include a presentation by a representative from CalPERS to the Finance Committee. He advised that the discussion would address the City’s efforts to significantly reduce its pension liability and its ability to exceed the actions taken by most municipalities. He noted that many cities are struggling to meet their minimum required contributions, while Newport Beach has consistently funded its obligations at levels well above the minimum, demonstrating a proactive and fiscally responsible approach. Chair Stapleton opened public comments. Mr. Jim Mosher addressed the committee and referenced a concern he had previously raised at the Joint Meeting regarding the library materials budget. He noted that the allocation for library materials had not increased from the prior year and emphasized that this was not an isolated case. He stated that many items in the proposed budget show no recommended increases, reflecting no change from the previous fiscal year. He pointed out that while much of the overall budget increase is attributed to the anticipated rise in City employee compensation, the line items related to contracted professional services, those provided by external vendors, mostly show zero increase. He expressed surprise at this, given that costs in those areas would also reasonably be expected to rise. Mr. Mosher posed a broader question regarding the budget development process, asking what a department should do if it wishes to request an increase in a line item that has historically remained flat. He shared a hypothetical strategy, which he has occasionally recommended to the Library Board, suggesting that rather than coming in under budget as a sign of fiscal restraint, departments might consider modestly exceeding their budget allocations to signal a need for increased funding in future years. He inquired whether such a tactic would be effective in securing additional resources or if there is a more appropriate strategy. Mr. Mosher observed what appeared to be a typographical error in the budget document beginning on page 206. He noted the inclusion of a detailed budget for a department labeled the “Recreation Works Department,” which he had not seen referenced elsewhere. He asked whether this represented an in-progress departmental change or was simply an error in the document. Chair Stapleton closed public comment. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 7 of 10 Director/Treasurer Al-Imam explained that, as part of the budget development process, the Finance Department meets with individual departments to review their budgets and solicit input. He further explained that departments are asked to provide feedback on whether additional funding is needed. He noted that, however, if a department requests additional funding but has not been fully utilizing its existing budget, staff applies discretion in determining whether an increase is warranted. He noted that the City does not automatically apply CPI-based increases to departmental budgets, particularly for departments that consistently come in under budget. He emphasized that this approach is intended to strike a balance between meeting operational needs and ensuring fiscal responsibility. Chair Joe Stapleton emphasized the importance of highlighting the City’s strong financial position, including the fact that it maintains a balanced budget, holds a AAA credit rating, aggressively pays down its pension liability, and continues to operate with a surplus. The committee agreed that these strengths should be prominently featured in the budget presentation. MOTION: Committee Member Kramer moved to approve the final recommendations to the City Council concerning the City Manager’s Fiscal Year 2025-26 Proposed Budget, seconded by Committee Member Cashion. The motion carried as follows: AYES: Cashion, Kenney, Kramer, Grant, Weber, Stapleton NOES: None ABSENT: Collopy ABSTAIN: None B. THIRD QUARTER BUDGET UPDATE Recommended Action: Staff recommend that the Finance Committee review and discuss this report and provide any recommendations for consideration by the City Manager and City Council. Finance Manager Nguyen provided the third-quarter budget update for Fiscal Year 2024-25. She reported that General Fund revenues are projected to end the year approximately 0.16 percent, or $0.5 million, lower than projected in the second quarter. She explained that this decline is primarily the result of decreases in the “other taxes” category, service fees and charges, parking revenues, and license and permit fees. She noted that the decrease is partially offset by an increase in transient occupancy tax (TOT) revenue. Finance Manager Nguyen reported that property taxes remain the City’s largest single source of General Fund revenue, accounting for approximately 50 percent of the total. She advised, as noted in the second quarter update, property tax revenue for FY 2025 was projected at $152.6 million, representing an increase of $6.4 million over the prior year. She stated that third-quarter projections are consistent with those forecasts and that no adjustments are recommended. She added that these figures remain steady due to stable cash receipts from supplemental property taxes. Finance Manager Nguyen reported that the second largest General Fund revenue source is sales tax, which accounts for more than 15 percent of the total. She advised, as noted in the second quarter update, sales tax revenue for FY 2025 was projected at $45.2 million, reflecting an assumed 4 percent increase, or $1.8 million, over the prior year. She stated that sales tax data from the California Department of Tax and Fee Administration for the quarter ending March 31, 2025, is not yet available. As a result, she noted that the third quarter projection remains at $45.2 million. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 8 of 10 Finance Manager Nguyen reported that the third largest General Fund revenue source is transient occupancy tax (TOT), which represents more than 10 percent of the total. She stated that the overall TOT projection is 4.1 percent higher than the prior year’s actuals and that the third quarter projection is 1.1 percent, or $0.4 million, higher than projected in the second quarter. Finance Manager Nguyen reported that the FY 2025 General Fund expenditure budget totals $323.4 million. She stated that spending trends for the fiscal year are generally consistent with prior years and do not indicate any cause for concern. She further reported that General Fund expenditures are projected to total $313.6 million, which is $2.2 million lower than previously forecast, with the variance primarily due to additional savings from vacant positions. Finance Manager Nguyen reported that for Fiscal Year 2025, unrestricted General Fund resources are projected to total $19.2 million. Based on the Fiscal Year 2026 proposed budget, she announced that an estimated $2.1 million will be required to fully fund the contingency reserve, leaving approximately $17.1 million expected to remain available for City Council appropriation. She added that, as in prior years, additional year-end savings are anticipated, which could further increase the final surplus. Finance Manager Nguyen reported that state requirements and increased demand for oil well maintenance have caused maintenance and repair costs, as well as other agency fees, to exceed budgeted amounts. She stated that an additional $145,000 is expected to be required in the current fiscal year. She further noted that this cost will be fully offset by higher-than- budgeted oil sale revenues, resulting in no net impact to the fund. Committee Member Kenney requested clarification regarding the $19.1 million surplus projection at the end of FY25, and whether that amount was before any additional allocations such as the $5 million set-aside for CalPERS. Director/Treasurer Al-Imam explained that in the current fiscal year, an additional $5 million allocation to CalPERS was funded at the time the Fiscal Year 2025 budget was adopted. While the $19.2 million surplus remains the current forecast, he advised that the contingency reserve will need to be funded. Based on projections in the Fiscal Year 2025–26 proposed budget, he noted that this amount had been estimated at $2 million. However, given the possibility that the $12 million surplus projected for next year may be fully utilized, he suggested that the contingency reserve funding requirement may be closer to $4 million. Director/Treasurer Al-Imam stated that the contingency reserve funding will be revisited in October, when the year-end financial report is presented. He explained that by that time, it is expected that all labor contracts will be finalized, providing a clearer picture of the City’s actual budget position. He further explained that the FY 26 budget will determine the contingency reserve set-aside amount, which in turn will define the funds available for allocation purposes. He clarified that under City Council Policy F-3, 50 percent of any surplus is typically allocated toward the paydown of long-term debt, while the remaining 50 percent is generally directed to capital project funding. He noted that the City Council has the authority to waive this policy and relies on recommendations from the Finance Committee when doing so. Committee Member Kenney inquired about the contingency reserve. Director/Treasurer Al-Imam explained that the contingency reserve is set at 25 percent of operating expenditures. He noted that to calculate this amount, the operating budget is reviewed, capital-related items and discretionary spending are subtracted, and 25 percent of the remaining total is allocated to the reserve. Based on current figures, he reported that the contingency reserve is estimated at approximately $66 million. Finance Committee Meeting Minutes May 29, 2025 Agenda Item No. 5B Page 9 of 10 Chair Stapleton noted that even with a $4 million allocation to the reserve, the City would still net an estimated $15 million surplus in the current fiscal year, with $5 million already allocated to CalPERS. He confirmed that City Council policy directs how surplus funds are allocated, with past practice occasionally including policy waivers approved by the City Council. He clarified that under standard policy, 50 percent of the surplus is allocated to the paydown of long-term obligations and 50 percent to one-time capital improvement projects. Chair Stapleton opened public comments. Mr. Mosher offered comments regarding the City’s pension liability strategy. He recalled that before the City initiated its current program of aggressive pension liability paydown, there had been some pushback from certain members of the Finance Committee. He noted that what was informally referred to as the “Larry Tucker theory” suggested that, because many other cities were facing unmanageable pension liabilities, a future statewide action might occur to forgive or substantially reduce those debts. He advised that under that theory, if Newport Beach remained current on its obligations, the City might not benefit from any such amnesty program. He stated that many other cities are still paying only the minimum required contributions, as they were when this theory was first discussed. He inquired whether other cities are now facing ballooning pension liabilities and what, if any, changes they have implemented to address the issue. Chair Stapleton closed public comments. In response to the question, Director/Treasurer Al-Imam advised that a pension liability amnesty program does not exist. He explained that CalPERS is legally obligated to fund pension costs for labor only to the extent that there are actual monies available in the trust fund. He further explained that if a city stops making payments to CalPERS or fails to contribute enough to meet its obligations, CalPERS would be legally required to reduce payments to retirees. He noted that no statute would permit a pension liability amnesty program, nor could CalPERS take funds from one city to cover another city’s obligations. Committee Member Kenney referenced the state's challenging financial condition and expressed strong doubt that the state would have the capacity to fund any kind of debt reduction program for municipal pension liabilities. Chair Stapleton emphasized that any such approach would ultimately result in reductions to employee pensions, which the City is not pursuing. He stated that the City’s strategy is to pay down its pension obligations as quickly as possible, a position that has been consistently supported by the City Council over multiple terms. He likened the situation to the mortgage crisis, noting that if there were ten homes on a block and nine went into short sale while one remained current, Newport Beach would be the homeowner who continued making payments. In this scenario, while other cities may struggle to meet their obligations, Newport Beach will continue to make the payments it has committed to. Chair Stapleton acknowledged that there has been long-standing discussion about alternative strategies, including the possibility that, in a particularly strong year, the City could make a larger payment to shorten the overall payoff period. He advised that under the current plan, the goal is to fully pay off the pension liability within the next eight years. Committee Member Cashion inquired about a remedy for non-payment of pension liability. Director/Treasurer Al-Imam explained that the only remedy available to CalPERS is to reduce or stop paying retiree benefits.