HomeMy WebLinkAboutFinance Committee Agenda - June 2, 2016
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June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 3A
Public Comments
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 3A
Public Comments
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
Finance Committee Meeting Minutes April 28, 2016
Page 1 of 5
CITY OF NEWPORT BEACH
FINANCE COMMITTEE
APRIL 28, 2016 MEETING MINUTES
I. CALL MEETING TO ORDER
The meeting was called to order at 4:00 p.m. in the Community Room, 100 Civic Center Drive,
Newport Beach, California 92660.
II. ROLL CALL
PRESENT: Council Member Tony Petros (Chair) Committee Member Keith Curry, Mayor Diane Dixon, Council Member Tony Petros, Committee Member
Patti Gorczyca, Committee Member William C. O’Neill, Committee Member Larry Tucker, and Committee Member John Warner
STAFF PRESENT: City Manager Dave Kiff, City Attorney Aaron Harp, Finance
Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve
Montano, Assistant City Manager Carol Jacobs, , IT Manager Rob Houston, , Budget Manager Susan Giangrande, Human Resources
Director Barbara Salvini, Human Resources Manager Cheryl Anderson, Library Services Director Tim Heatherton, Fire Chief Scott Poster, Fire
Administrative Manager Angela Crespi, Revenue Manager Evelyn Tseng, Public Works Administrative Manager Lucie Delorme, Public
Works Director Dave Webb, Public Works Finance/Amin Manager Jamie Copeland, Deputy Public Works Director Mark Vukojevic, Senior Budget
Analyst Shannon Espinoza, Purchasing Agent Anthony Nguyen, Accounting Manager Rukshana Virany, Senior Accountant Theresa
Schweitzer, and Administrative Specialist to the Finance Director Marlene Burns
MEMBERS OF THE
PUBLIC: Jim Mosher, Nancy Skinner, and Hannah Fry of the Daily Pilot
I. PUBLIC COMMENTS
Chair Petros opened public comments
Mr. Jim Mosher requested and received clarification from Chair Petros as to whether the
Committee will invite the public to comment on each agenda item as they come up, asked if the
Finance Committee would coming back for future discussion items mentioned in Item No. 6
(Announcement-Future Agenda), and how the Newport Center Development Agreement would
benefit the public.
Committee Member O’Neill stated that his understanding was that Item No. 6 applies only to
Council, not the Committee, to which City Manager Dave Kiff replied that was his understanding
as well and added that the same rules and procedures currently in place can be followed by each
Committee because they are the standard rules enforced by Council. Chair Petros confirms that
the Finance Committee will be using the rules and procedures, unless decided against.
Chair Petros closed public comments.
Finance Committee Meeting Minutes April 28, 2016
Page 2 of 5
II. CONSENT CALENDAR
A. MINUTES OF MARCH 10, 2016
Recommended Action:
Approve and file.
Motion made by Mayor Diane Dixon, seconded by Committee Member Patti Gorczyca, to
approve March 10, 2016, Finance Committee Minutes as submitted. Chair Petros opened public comments.
Seeing no one wishing to address the Finance Committee, Chair Curry closed public comments.
III. CURRENT BUSINESS
A. FISCAL YEAR 2016-2017 PROPOSED BUDGET PRESENTATION & CIP FIRST LOOK Summary:
The City Manager’s Fiscal Year 2016-2017 Proposed Budget will be reviewed with a
PowerPoint presentation, with a more detailed look at the proposed Capital Improvement
Program (CIP). Budget Documents will also be posted to the web at
newportbeachca.gov/budget.
Recommended Action:
Staff recommends that the Committee directs staff to bring the Fiscal Year 2016-2017
Proposed Budget for City Council Approval.
City Manager Dave Kiff presented a PowerPoint presentation and distributed the Budget Detail of
the proposed budget, subject to amendment, that’s in consideration before the City Council. Mr.
Kiff stated that there is no expectation from staff for the Committee Members to have any working
knowledge of the document, but the hope is to use it as a take-away for later discussions. The
goal for the Finance Department is to receive recommendations from the Committee.
Chair Petros added that the expectation to be derived from the presentation and review of the
budget is the Committee's willingness to hold additional meetings, which can be done on a daily
basis or weekly basis. The end result is for all committee members to have the necessary time to
review the budget and provide recommendations.
Mr. Kiff provided an overview of the proposed budget and addressed various aspects of the
budget including general fund revenue, salary and benefits, OPEB (Other Post-Employment
Benefits) and the overall theme of the proposed budget. Discussion and questions followed
regarding the budget, how the funds are being allocated, and the revenue components.
City Manager Kiff continued with the presentation by reporting that overall salary increased by
four percent. This was calculated by taking under consideration employee promotions and
different levels of staff. Mr. Kiff also reported that Pension Liability payments increased by $3M.
Mr. Kiff reported that the Unfunded Pension Liability increased approximately $11M by end of
June 2015 and estimated that by end of June 30, 2016, the Unfunded Pension Liability will be
$299M. Mr. Kiff concluded by saying that tracking the Unfunded Pension Liability is a challenge
because it fluctuates every year and 70 percent of it is uncontrollable because it involves people
who have left the workforce. Finance Director Matusiewicz stated from start to finish, the
Unfunded Pension Liability is approximately $287M, which is not net present value.
City Manager Kiff reported on Capital Improvement and stated that capital improvement budget
are one-time expenses, not recurring expenses and half of the funds go toward meeting debt
Finance Committee Meeting Minutes April 28, 2016
Page 3 of 5
obligations. Staff is recommending to have some of the funds be allocated toward sewer funds,
which will allow the rate to decrease.
Mr. Kiff reported on replenishing the general liability funds. Mr. Kiff explained that general
liabilities are from claims and lawsuits and attorney fees associated with the claims and lawsuits.
Staff is recommending $3M to replenish the general liability funds.
Committee Member Gorczyca requested clarification regarding the status of the department
reaching the 25 percent contingency reserve. Mr. Kiff responded by stating that $4M is needed to
meet the 25 percent goal and the goal is within reach.
Mr. Matusiewicz reported that staff is proposing a fresh start with an amount of $2.7M, more than
the minimum contribution to PERS. Mr. Matusiewicz also stated that if staff were to remain with
the minimum contribution to PERS, it would create a negative amortization
City Manager Kiff concluded the presentation by stating that the information provided is new and
appreciates the discussion and asked if there is a design from the committee to possibly schedule
additional meetings to review the proposed budget in further detail. Mr. Kiff stated that there is a
council study session to be held May 24, and suggested for the Committee to meet frequently
prior to the May 24 meeting to discuss the budget and receive recommendations to be taken to
Council.
Discussion followed regarding future meetings to review the budget in depth.
Committee Member Curry suggested conducting the first meeting the following Thursday, and
continue on for as many Thursdays as needed until a comfort level is reach. As Mr. O’Neill will
not be available on Thursday, it was decided to schedule the meeting for Wednesday, May 4, at
4:00 p.m., with tentative date for a follow up on May 12, at 4:00 p.m.
Chair Petros opened public comments.
Nancy Skinner thanked staff for adding additional time to the lifeguard hours during the summer
months. Mr. Mosher stated that there appears to be a completed budget for current fiscal year on
the City’s website and the only thing that is lacking is that the old budget had the adopted
amendment and actual budget expenditures, while the current year is missing the actual
expenditures. Mr. Mosher is hoping the new budget will have a detail page listing last year’s
original budget amended versus the actual expenditures. Mr. Matusiewicz confirmed that the
website will be updated in the morning.
Additionally, Mr. Mosher commented on the allocation of the sewer funds. He believes that it is
unfair for those who are not part of the sewer system to be affected by the increase and thinks
that the people using the sewage should be the ones paying for it.
Chair Petros closed public comments.
B. CITY COUNCIL GENERAL FUND SURPLUS UTILIZATION POLICY
Summary:
Staff will propose a new City Council policy for the use of surplus funds resulting from
unrestricted General Fund annual revenues exceeding total actual expenditures,
encumbrances and commitments for that year.
Recommended Action:
Review the draft General Fund Surplus Utilization Policy, suggest changes as needed and
recommend the policy for submission to the City Council for final approval.
Finance Committee Meeting Minutes April 28, 2016
Page 4 of 5
City Manager Kiff reported that the drafted Surplus Utilization Policy is part of the committee’s
packet and welcomed any questions and feedback.
Committee Member Curry supports the policy. It was stated that surplus funds had recently been
used to subsidize the sewer funds and it wasn’t clear if that was a proper expenditure. So this
policy is needed.
Committee Member O’Neill agreed with Mr. Curry and continued by stating that he believes the
language is solid and supports other F policies, including the F-2 Reserve policy, which is a $50M
reserve policy. Mr. O’Neill concluded by stating that it is important to be cohesive with other F
policies especially when thinking of using the surplus towards the reserve policy.
Committee Member Tucker believes the policy should have more flexibility. Mr. Tucker
suggested for staff to replace the word “shall” to “should” and read as follows; “Should absence
circumstances justifying otherwise…” Mr. Tucker continued by stating the policy should have the
flexibility to adapt to certain circumstances that may occur during the course of the year.
Discussion of the merits of using the word “shall” or “should” ensued among the committee
members.
Chair Petros opened public comments.
Jim Mosher questioned whether or not Clause B is correcting the surplus of revenue. In addition,
he questioned if after allocations have been made if the City Manager comes up with some
corrective surplus. Manager Kiff responded by stating that it is clear in his mind what the surplus
is, which is a balance of funds available at the end of the year, and that the recommendation
made is straight forward.
Nancy Skinner commented on the sewer fees and stated that the fees should be taken out of the
budget.
Chair Petros suggested a straw vote to recommend the changing the word “Shall” to “Should
absence circumstances justifying otherwise…”
Committee Member Curry moved and seconded by Committee Member O’Neill to modify the
Surplus Utilization Policy to replace the word “Shall” to “Should absence circumstances justifying
otherwise…” Motion passed unanimously.
Chair Petros closed public comments.
C. BUDGET AMENDMENTS Summary:
Staff will report on the budget amendments for the prior quarter. All budget amendments are
in compliance with City Council Policy F-3, Budget Adoption and Administration.
Recommended Action:
Receive and file.
Committee Member Curry moved and seconded by O’Neill to approve the Budget Amendments.
Motion passed unanimously.
Chair Petros Closed public comments.
IV. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE
PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-
DISCUSSION ITEM)
A. SECTION 115 TRUST
Finance Committee Meeting Minutes April 28, 2016
Page 5 of 5
In response to City Manager Kiff’s inquiry as to when Section 115 Trust is to be discussed,
Chair Petros suggested for the item to be included at the regularly scheduled meeting May
26, 2016.
Committee Member Gorczyca stated she would like to have an independent actuary brought
on for financial advising. Mr. Curry did not concur, and opined that the115 Trust can be
misconstrued.
Mayor Dixon stated that her understanding was that Section 115, as noted, was approved
unanimously by Council in 2008.
Committee Member Gorczyca stated that it is not a matter of a 115 Trust; it is a matter of
actuary funding policy or buyout. Ms. Gorczyca continued by saying that her intent was to
have an independent actuary or consultant review the alternative strategies for 115 Trust and
is requesting to have the item brought back for consideration at the May 26 meeting.
Chair Petros confirmed that nothing is to be done for Item No. 6 at the moment, except to
include Committee Member Gorczyca’s request to engage with an independent actuary for
funding strategy as a proposed agenda item.
Committee Member O’Neill is unsure on how Certificates of Participation (COP) works and
requested clarification as to how COP applies to debt issuance. City Manager Kiff will add
this topic to the May 26 agenda for further discussion.
City Manager Kiff requested clarification from Committee Member Tucker as to whether or
not he would like information regarding how CalPERS calculate terms and liability as future
items on the agenda, to which Mr. Tucker answered that he will follow up with staff and there
is no need to add it as a future item on the agenda.
B. OPEB BUYOUT
C. PENSION AND OPEB FUNDING POLICY
VII. ADJOURNMENT
The Finance Committee adjourned at 5:44 p.m. to the next regular meeting of the Finance
Committee on May 26, 2016, at 4:00 p.m.
Filed with these minutes are copies of all materials distributed at the meeting.
The agenda for the Regular Meeting was posted on April 22, 2016, at 3:51 p.m., in the binder and
on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 Civic Center Drive.
Attest:
Tony Petros, Chair Date
Finance Committee Chair
Finance Committee eeting Minutes
April 28, 2016
City Manager Kiff reported that the drafted Surplus Utilization Policy is part of the
packet and welcomed any questions and feedback.
Committee Member Curry supports the policy. It was stated that surplus funds had recently been
used to subsidize the sewer funds and it wasn't clear if that was a proper expenditure. So this
policy is needed. 144.- pollett c
Committee Member O'Neill agreed with Mr. Curry id continued by stating that he believeethe
language is solid and supports other F policies, inc ding the F-2 Reserve policy, which is a $50M reserve policy. Mr. O'Neill concluded by stating fiat it is important to be cohesive with other F
policies especially when thinking of using the sur us towarietlje reserve poll .
Committee Member Tucker believes the pofc,sKould have more flexibility. Mr. Tuckpr
suggested for staff to replace the word "shall" ko shool4P-aftEl-fea4-ere-fe4lawst4hould abser
circumstances justifying otherwise,. ." Mr. Tucker continued by stating the policy should have the
flexibility to adapt to certain ciraimstances that may occur during the course of the year.
Discussion of the merits of using the word "shall" or "should" ensued among the committee
members.
Chair Petros opened public comments.
Jim Mosher questioned whether or not Clause B is correcting the surplus of revenue. In addition,
he questioned if after allocations have been made if the City Manager comes up with some
corrective surplus. Manager Kiff responded by stating that it is clear in his mind what the surplus
is, which is a balance of funds available at the end of the year, and that the recommendation
made is straight forward.
Nancy Skinner commented on the sewer fees and stated that the fees should be taken out of the
budget.
Chair Petros suggested a straw vote to recommend the changing the word '?tiall" to "frould
absenarcircumstances justifying otherwis7.."
Committee Member Curry moved and seconded by
Surplus Utilization Policy to replace the word
otherwise,. ." Motion passed unanimously.
Chair Petros closed public comments. -11-,e, Itivc,
C. BUDGET AMENDMENTS
Summary: pe-fi C.--
Staff will report on the budget amendments for the prior quarter. All budg amendments are
in compliance with City Council Policy F-3, Budget Adoption and Administration. —1-)
Recommended Action:
Receive and file. q
Committee Member Curry moved and seconded by O'Neill to approve the Budget Amendments.
Motion passed unanimously.
Chair Petros Closed public comments.
IV. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE
PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-
DISCUSSION ITEM)
A. SECTION 115 TRUST
Page 4 of 5
PO'
ommittee Member O'Neill to modify he
houldiabsen*circumstances justifying
PROPOSED CHANGES BY COMMITTEE MEMBER TUCKER Item No. 4A1
Draft Minutes April 28, 2016
Correspondence
June 2, 2016
Committee Member O’Neill requested Minutes modifications for 4/28/2016
•4/28/2016
o Page 1, second full paragraph from bottom. Change “Item No. 6” to “Council
Policy A-6.”
o Page 5, mid-page, starting with “Committee Member O’Neill.” The first sentence
is frankly not even close to what was said. Replace that sentence with the
following: “Committee Member O’Neill requested that the Finance Committee
agendize for the June meeting whether to recommend that the City consult with
an independent third party agency – such as the Orange County Auditor
Controller’s Office or a consultant – to either (1) review the City’s debt issuance
procedures for best practices, (2) provide a financial analysis of whether we are
currently in a position to take advantage of interest rates and at least alleviate
some of the COP long-term debt, or (3) both.”
Note – this is the language that is largely reflected in the minutes for May
4, 2016
Item No. 4A2
Draft Minutes April 28, 2016
Correspondence
June 2, 2016
DIXON
Minutes Correction April 28 2016 Finance Committee Meeting
Page 5
Minutes should read as follows:
Mayor Dixon stated that her understanding was that Section 115 Trust (called the California Employers’
Retiree Benefit Trust), as noted, was approved unanimously by Council in 2008. Further, Mayor Dixon
stated that the City had approximately $14.9 million of funds with the OPEB Section 115 Trust as of June
30, 2015. The City selected Strategy 1 (most aggressive) investment strategy for those funds which
included allocations in Global Equity, Fixed Income, Global Real Estate, Treasury Inflation Protected
Securities and Commodities.
Item No. 4A3
Draft Minutes April 28, 2016
Correspondence
June 2, 2016
June 2, 2016
To: Marlene Burns
From: Committee Member Gorczyca
Committee Member Gorczyca Requested Changes to the Minutes for April 28, 2016 and
May 4, 2016
April 28, 2016
Page 3 of 5, second full paragraph
Committee Member Gorczyca requested clarification regarding the status of the
“Department” reaching the 25% contingency reserve. Mr. Kiff responded by stating that
$4m is needed to meet the 25 percent goal the goal is within reach. What goal, the
general liability fund? $3M or $4M?
Third full paragraph
Mr. Matusiewicz reported that staff is proposing a Fresh Start with the amount of
$2.7M, more than the minimum contribution to PERS. Mr. Matusiewicz also stated that
if staff were to remain with the minimum contribution to PER, it would create a negative
amortization. [This needs clarification regarding timing options and costs].
Page 3 of 5, first full paragraph
Committee Member Gorczyca stated she would like to have an independent actuary
brought on for (strike Financial advising) and replace with “Pension and OPEB advising”.
Committee Member Gorczyca (Strike rest of paragraph and replace with “stated that an
independent Actuary would educate the Committee regarding the range of tools
available to address the City’s Pension and OPEB liabilities and would help the
Committee develop a Pension & OPEB Policy for the City”.
Fourth full paragraph
Committee Member Petro confirmed that nothing is to be done at the moment, except
to include Committee member Gorczyca’s request to engage (strike “with”) an
independent actuary for (add “helping the Committee develop an Pension and OPEB”)
funding strategy as a proposed agenda item.
B. OPEB Buyout and C. Pension and OPEB Funding Policy are covered by language above.
Item No. 4A4
Draft Minutes April 28, 2016
Correspondence
June 2, 2016
May 4, 2016
Mr. Kiff’s Amendment to the February 11, 2016 Finance Committee Minutes were not
included in the minutes for May 4, 2016.
The amendment should “clarify that there was not a full presentation on Section 115
Fund detailing it’s implementation requirements, costs, pros and cons, admin
requirements, use by other pubic agencies or range of investment options at the
February 11, 2016 Finance Committee meeting”.
Item No. 4B2
Draft Minutes May 4, 2016
Correspondence
June 2, 2016
June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 4A5
Draft Minutes April 28, 2016
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
Finance Committee Meeting Minutes May 4, 2016
Page 1 of 4
CITY OF NEWPORT BEACH FINANCE COMMITTEE MAY 4, 2016 MEETING MINUTES I. CALL MEETING TO ORDER
The meeting was called to order at 4:00 p.m. in the Newport Coast Conference Room, Bay 2E, 100 Civic Center Drive, Newport Beach, California 92660.
II. ROLL CALL
PRESENT: Council Member Tony Petros, (Chair), Mayor Diane Dixon, Committee
Member Patti Gorczyca, Committee Member William C. O’Neill, Committee Member Larry Tucker, Committee Member John Warner, and
Council Member Keith Curry (arrived at 4:08 p.m.)
STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Administrative Specialist to the
Finance Director Marlene Burns, Budget Manager Susan Giangrande, Public Works Director David Webb, IT Manager Rob Houston, Budget
Analyst Tam Ho, and Budget Analyst Katherine Warnke-Carpenter
MEMBERS OF THE PUBLIC: Jim Mosher and Hannah Fry of the Daily Pilot
III. PUBLIC COMMENTS
Chair Petros opened public comments.
Mr. Jim Mosher commented on how items are placed on the agenda and mentioned procedures
other committee members follow regarding agenda items. Mr. Mosher suggested for the Committee to hold an unscheduled vote after each meeting to discuss items to be included on
following meeting agendas. Mr. Mosher also stated that at last meeting Council Member Tucker commented that he was going to follow up on some needed answers to his questions offline. Mr.
Mosher suggested for all questions regarding committee matters to be asked and answered during the meetings in order for members of the public to be kept informed of what is going on.
In reply to Mr. Mosher’s comments regarding agenda items, Chair Petros stated the Committee
will follow the standard best practices currently in place at other committee meetings and will also continue to follow the general recommendations currently in place to add items to the agenda.
Council Member O’Neill provided clarification on Section 115, Benefit Trust. Mr. O’Neill stated
that there have not been any specific suggestions, strategies or positions of authority held with
Section 115, Benefit Trust and if a community wants to pursue the topic further, staff or outside
consultant can provide the pros and cons along with strategies and examples for better
understanding.
Chair Petros appreciates the clarification made by Mr. O’Neill and informed the members that the
comment will be incorporated into the meeting minutes. Chair Petros also stated that Section
115, Benefit Trust is geared towards a holistic review of investment opportunities, not one
particular instrument. Therefore, he questioned if there is any value in pursuing it further.
Chair Petros closed public comments.
Finance Committee Meeting Minutes May 4, 2016
Page 2 of 4
IV. CURRENT BUSINESS A. FISCAL YEAR 2014-2016 BUDGET DISCUSSION Summary:
Continue review of the City Manager’s Fiscal Year 2016-2017 Proposed Budget. . Recommended Action:
Staff recommends that the Committee (1) direct staff to bring the Fiscal Year 2016-2017
Proposed Budget for City Council for consideration; (2) continue to review the budget at
subsequent Finance Committee meetings; or (3) both of the aforementioned options.
City Manager Dave Kiff provided a presentation and materials regarding the Fiscal Year 2016-
2017 Proposed Budget.
City Manager Dave Kiff provided an overview of the proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous, and safety and employee. The presentation
addressed the City’s overall projected growth, projected revenues and how funds are distributed among the City.
Discussion ensued regarding employee benefits. In response to question posed by Council
Member O’Neill regarding if every employee is entitled to COLA, City Manager Kiff responded that every employee gets a COLA unless the employee is tied to a contract. Mr. Kiff also
mentioned that employees are eligible for a yearly merit increase, unless the employee has reached the last step for merit increase.
In response to a question regarding the percentage of employees not at the 8-(highest in
promotional range) step level, Ms. Giangrande, stated that approximately 275 employees are
below the 8-step level. City Manager Kiff also stated that employees receive merit increases
yearly with the exception of any employee who has a performance issue or due to disciplinary
reasons.
In response to Mayor Dixon’s question regarding having a uniform base rate increase, City
Manager Kiff stated that the City has to conform to the policy per the MOU.
Discussions followed regarding how merit increase is calculated.
City Manager Kiff and Budget Manager Ms. Giangrande continued with the presentation by discussing the cafeteria allowance. City Manager Kiff explains that the cafeteria allowance is
medical, health and dental employee insurance bought by the City. The plan allows each employee to opt-in or opt-out based on their medical needs.
In response to questions posed regarding whether or not the City works with a healthcare
provider to create programs that employees can purchase on their own, Ms. Giangrande stated
that due to the Affordable Health Care Act, employees have to be in a group plan and cannot
purchase the plan on their own.
City Manager Kiff continued with the presentation by discussing budget items involving the Police
and Fire Department as well as Community Development.
Chair Petros opened public comments.
Finance Committee Meeting Minutes May 4, 2016
Page 3 of 4
Mr. Mosher stated that compared to the last year’s budget, the lines items for this budget have
changed. Mr. Mosher also stated that the proposed budget consists of abbreviations that the
public will not know what they stand for. In addition, Mr. Mosher stated that he noticed some
discrepancies in the report regarding the proposed numbers listed for salary.
In response to Mr. Mosher’s comments, Budget Manager Ms. Giangrande, stated that the
discrepancies have to do with the new software used to create the proposed budget. Ms.
Giangrande stated that she will make sure that staff correct any discrepancies listed on the
report.
Chair Petros asked due to the discrepancies noted by Mr. Mosher, if the projections listed affects
the budget amounts for 2017 targets. Ms. Giangrande stated that it will not be affected.
Council Member Warner left the meeting at 5:28 p.m.
Chair Petros closed public comments.
B. SUBCOMMITTEE RECOMMENDATIONS
Summary:
An update will be provided regarding the Finance Subcommittee.
Council Member Tucker reported that they are in the process of submitting a fifth draft for review.
Mr. Tucker stated they met with the City Manager’s office and the fifth draft was reviewed and
feedback and recommendation given. Mr. Tucker advised the members the document may be
ready to be discussed at the regular June Finance Committee Meeting.
Chair Petros opened public comments.
Mr. Mosher commented that it would be a good idea for the public and members of the
community be told which ideas were not included, to which a response was received stating that
no ideas were excluded, just phrases or words needed to be revised for better understanding.
Chair Petros closed public comments.
V. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM)
A. RECOMMEND THE CITY HIRE AN INDEPENDENT ACTUARY TO ADVISE, EDUCATE AND DEVELOP STRATEGIES TO MANAGE ITS PENSION AND OPEB.
Suggestions made to hold off on the discussion of this topic until the proposed budget discussion is finalized.
B. RECOMMEND THE CITY CONSULT WITH AN INDEPENDENT THIRD PARTY AGENCY (E.G., ORANGE COUNTY AUDITOR CONTROLLER’S OFFICE, CONSULTANT, GFOA, OR A REGISTERED INDEPENDENT MUNICIPAL ADVISOR) TO EITHER (1) REVIEW THE
CITY’S DEBT ISSUANCE PROCEDURES AND PROVIDE RECOMMENDATIONS TO IMPROVE AND INCORPORATE BEST PRACTICES FOR DEBT ISSUANCE AND
ADMINISTRATION INTO THE CITY’S POLICIES AND PROCEDURES; (2) EVALUATE THE ECONOMIC FEASIBILITY OF REDUCING AMOUNT OF OUTSTANDING
CERTIFICATES OF PARTICIPATION; OR (3) BOTH.
Discussion ensued regarding the continuation of the budget review to be added to next meeting
agenda.
Finance Committee Meeting Minutes May 4, 2016
Page 4 of 4
VI. ADJOURNMENT
The Finance Committee adjourned at 5:51 p.m. to the next regular meeting of the Finance Committee on May 12, 2016, at 4:00 p.m.
Filed with these minutes are copies of all materials distributed at the meeting.
The agenda for the Regular Meeting was posted on April 29, 2016, at 2:53 p.m., in the binder and
on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 Civic Center Drive.
Attest:
___________________________________ _____________________
Tony Petros, Chair Date Finance Committee Chair
Finance Commi ee Meeting Minutes
May 4, 2016
Mr. Mosher stated that compared to the last year's budget, the lines items for this budget have
changed. Mr. Mosher also stated that the proposed budget consists of abbreviations that the
public will not know what they stand for. In addition, Mr. Mosher stated that he noticed some
discrepancies in the report regarding the proposed numbers listed for salary.
In response to Mr. Mosher's comments, Budget Manager Ms. Giangrande, stated that the
discrepancies have to do with the new software used to create the proposed budget. Ms.
Giangrande stated that she will make sure that staff correct any discrepancies listed on the
report.
Chair Petros asked due to the discrepancies noted by Mr. Mosher, if the projections listed affects
the budget amounts for 2017 targets. Ms. Giangrande stated that it will not be affected.
Council Member Warner left the meeting at 5:28 p.m.
Chair Petros closed public comments.
B. SUBCOMMITTEE RECOMMENDATIONS
Summary:
An update will be provided regarding the Finance Subcommittee.
6-19)44 .Couar.ALM ember Tucker reported that they are in the process of submitting a fifth draft for review.
Mr. Tucker stated they met with the City Manager's office and the fifth draft was reviewed and
feedback and recommendation given. Mr. Tucker advised the members the document may be
ready to be discussed at the regular June Finance Committee Meeting.
Chair Petros opened public comments.
Mr. Mosher commented that it would be a good idea for the public and members of the
community be told which ideas were not included, to which a response was received stating that
no ideas were excluded, just phrases or words needed to be revised for better understanding.
Chair Petros closed public comments.
V. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE
PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-
DISCUSSION ITEM)
A. RECOMMEND THE CITY HIRE AN INDEPENDENT ACTUARY TO ADVISE, EDUCATE
AND DEVELOP STRATEGIES TO MANAGE ITS PENSION AND OPEB.
Suggestions made to hold off on the discussion of this topic until the proposed budget discussion
is finalized.
B. RECOMMEND THE CITY CONSULT WITH AN INDEPENDENT THIRD PARTY AGENCY
(E.G., ORANGE COUNTY AUDITOR CONTROLLER'S OFFICE, CONSULTANT, GFOA,
OR A REGISTERED INDEPENDENT MUNICIPAL ADVISOR) TO EITHER (1) REVIEW THE
CITY'S DEBT ISSUANCE PROCEDURES AND PROVIDE RECOMMENDATIONS TO
IMPROVE AND INCORPORATE BEST PRACTICES FOR DEBT ISSUANCE AND
ADMINISTRATION INTO THE CITY'S POLICIES AND PROCEDURES; (2) EVALUATE
THE ECONOMIC FEASIBILITY OF REDUCING AMOUNT OF OUTSTANDING
CERTIFICATES OF PARTICIPATION; OR (3) BOTH.
Discussion ensued regarding the continuation of the budget review to be added to next meeting
agenda.
Page 3 of 4
PROPOSED CHANGES BY COMMITTEE MEMBER TUCKER Item No. 4B1
Draft Minutes May 4, 2016
Correspondence
June 2, 2016
June 2, 2016
To: Marlene Burns
From: Committee Member Gorczyca
Committee Member Gorczyca Requested Changes to the Minutes for April 28, 2016 and
May 4, 2016
April 28, 2016
Page 3 of 5, second full paragraph
Committee Member Gorczyca requested clarification regarding the status of the
“Department” reaching the 25% contingency reserve. Mr. Kiff responded by stating that
$4m is needed to meet the 25 percent goal the goal is within reach. What goal, the
general liability fund? $3M or $4M?
Third full paragraph
Mr. Matusiewicz reported that staff is proposing a Fresh Start with the amount of
$2.7M, more than the minimum contribution to PERS. Mr. Matusiewicz also stated that
if staff were to remain with the minimum contribution to PER, it would create a negative
amortization. [This needs clarification regarding timing options and costs].
Page 3 of 5, first full paragraph
Committee Member Gorczyca stated she would like to have an independent actuary
brought on for (strike Financial advising) and replace with “Pension and OPEB advising”.
Committee Member Gorczyca (Strike rest of paragraph and replace with “stated that an
independent Actuary would educate the Committee regarding the range of tools
available to address the City’s Pension and OPEB liabilities and would help the
Committee develop a Pension & OPEB Policy for the City”.
Fourth full paragraph
Committee Member Petro confirmed that nothing is to be done at the moment, except
to include Committee member Gorczyca’s request to engage (strike “with”) an
independent actuary for (add “helping the Committee develop an Pension and OPEB”)
funding strategy as a proposed agenda item.
B. OPEB Buyout and C. Pension and OPEB Funding Policy are covered by language above.
May 4, 2016
Mr. Kiff’s Amendment to the February 11, 2016 Finance Committee Minutes were not
included in the minutes for May 4, 2016.
The amendment should “clarify that there was not a full presentation on Section 115
Fund detailing it’s implementation requirements, costs, pros and cons, admin
requirements, use by other pubic agencies or range of investment options at the
February 11, 2016 Finance Committee meeting”.
Item No. 4B2
Draft Minutes May 4, 2016
Correspondence
June 2, 2016
June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 4B3
Draft Minutes May 4, 2016
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
CITY OF NEWPORT BEACH
FINANCE COMMITTEE
STAFF REPORT
Agenda Item No. 5A
June 2, 2016
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov
SUBJECT: AUDITOR RECOMMENDATION
EXECUTIVE SUMMARY
Per Council Policy F-15, External Financial Reporting, Disclosure and Annual Audits, the City issued a
Request for Proposal (RFP) for audit services dated March 21, 2016, to audit its financial statements for
the fiscal year ending June 30, 2016, with the option of auditing its financial statements for four
subsequent fiscal years.
By the proposal due date of April 5, 2016, the following nine firms submitted proposals: Badawi &
Associates; Chavan & Associates LLP; Davis Farr LLP; Gruber & Associates; Lance, Soll & Lunghard
(LSL) LLP; The Pun Group; Rogers, Anderson, Malody & Scott LLP; Vavrinek, Trine & Day Co. LLP; and
White, Nelson, Diehl, Evans LLP (WNDE).
After a thorough selection process, staff recommends to the Finance Committee the services of WNDE as
the City Auditor.
DISCUSSION
Proposals were submitted in two parts, including a written technical proposal and a separated sealed
dollar cost bid. Under the coordination of the Accounting Manager, proposals were reviewed and scored
by a three-person Audit Selection Committee comprised of the Finance Director, the Deputy Finance
Director and the Accounting Manager. The written technical proposals were reviewed and scored by the
committee before the sealed dollar cost bids were opened and scored.
Staff evaluated each firm’s proposals based on the following criteria:
Providing consulting services related to auditing, with an emphasis on government accounting
and auditing of entities with at least the size and complexity of Newport Beach.
Quality, background, reputation, credibility and experience of the firm.
Quality of the staff with emphasis placed on educational background, time spent in the field, and
valid certifications possessed by the project team members.
Practices and procedures used to carry out the requested services according to the City’s
expectations.
Auditor Recommendation
June 2, 2016
Page 2
While all firms met the minimum qualifications, based on the technical content of the proposals, the
quality and experience of the proposed engagement staff, comparable and prestigious clients, and other
intangibles; the Audit Selection Committee rated WNDE as the top technical proposer as indicated below.
Sealed dollar cost bids were then opened and revealed annual cost as also indicated below.
LSL was not considered due to the recent alleged embezzlement disclosure in the City of Placentia where
LSL is currently engaged as the City Auditor. Allegations of this nature tend to damage the reputation
and credibility of an auditor. Since auditor’s are hired to lend credibility to the City’s financial statements,
staff decided it was best not to consider LSL further, under the current circumstances. Due to the lower
technical scores assigned to Pun, Badawi and Chavan relative to the other firms, staff did not advance
these three firms for further consideration. After obtaining additional information by conducting an
extensive reference check on the remaining firms, staff narrowed their selection consideration to Davis
Farr and WNDE. Both reputable firms have municipal audit expertise, staff expertise, and the ability to
provide high-quality consulting and tax expertise.
While either firm would make a great choice, staff selected WNDE because of its longevity and
reputation, having provided services to governments for over 80 years, including to the City of Newport
Beach for the past five. The specific knowledge WNDE has about the City and its operations will
enhance the quality of the audit. WNDE will be able to identify and focus on specific risk areas and will
reduce audit costs as staff will not spend time training the firm on the operations of the City. To maintain
audit quality and auditor independence, WNDE proposed to rotate the audit partner and audit supervisor
for this second engagement term with the City.
Davis Farr is a newly reconstituted firm of seasoned professionals who for the most part worked for Mayer
Hoffman McCann (MHM). This firm no longer participates in the local government audit marketplace.
MHM was engaged with the City of Bell at the time that the financial corruption scandal emerged there in
2010. While Davis Farr staff consists of highly experienced government audit professionals, staff
believes that having a few more years as an established firm would make it more attractive.
With Finance Committee concurrence of staff’s recommendation, staff will proceed with the
recommended action and bring the new auditor contract to the City Council for approval.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz
Deputy Finance Director Finance Director
Attachment:
A. WNDE Technical RFP Proposal
Firm Annual Price Technical Score
White Nelson Diehl Evans $45,500 97.0
Davis Farr, LLP $43,000 96.0
Rogers, Anderson, Malody & Scott $47,650 91.0
LSL $52,630 90.0
Gruber & Associates $37,000 89.5
Vavrinek, Trine, Day & Co.$63,000 85.5
The Pun Group $43,500 72.0
Badawi & Associates $45,990 66.5
Chavan & Associates $35,000 61.0
Average $45,919 83.2
ATTACHMENT A
WNDE Technical RFP Proposal
CITY OF NEWPORT BEACH PROFESSIONAL AUDITING SERVICES PROPOSAL RFP NO. 16‐33
FOR THE YEAR ENDING JUNE 30, 2016
(WITH AN OPTION FOR THE FOUR YEARS
ENDING JUNE 30, 2020)
Submitted By:
2875 MICHELLE DRIVE, SUITE 300
IRVINE, CALIFORNIA 92606
TITLE PAGE
RFP Subject: Certified Audits on the City of Newport Beach
For the Year Ending June 30, 2016
(With an Option for the Four Years
Ending June 30, 2020)
Name of Proposer: White Nelson Diehl Evans LLP
Certified Public Accountants and Consultants
Local Address: 2875 Michelle Drive, Suite 300
Irvine, CA 92606‐5165
Telephone: (714) 978‐1300
Fax: (714) 978‐7893
Federal Identification Number: 33‐0686301
California CPA License Number: PAR 6123
Website: www.wndecpa.com
Email: rcallanan@wndecpa.com
Contact Persons: Robert J. Callanan, CPA
Engagement Partner
Nitin P. Patel, CPA
Technical Review Partner
Date: April 5, 2016
CITY OF NEWPORT BEACH
TABLE OF CONTENTS
April 5, 2016
Page
Number
Letter of Transmittal 1 ‐ 2
Firm Profile and Qualifications:
Firm Organization Chart 3
Licensing and Independence 4
Size and Location of Firm 4
Range of Activities 4
Participation in “Quality Review” Programs 5
Education Programs 5
Participation in Professional Organizations 6
GFOA Award Program 7
Computer Auditing Capabilities 8
Partner, Supervisory and Staff Qualifications and Experience:
Audit Team 9
Commitment Related to Personnel 9
Nondiscrimination Policy 9
Audit Team Organization Chart 10
Resumes of Audit Team Personnel 11 ‐ 14
Firm Experience with Governmental Entities:
Similar Engagements with Other Municipal Entities 15
List of City Engagements 15
City Client References 16
Enterprise Fund Experience 16
Single Audit Experience 17
Experience with Preparation of State‐Mandated Reports 17
Special Districts 18
Nonprofit Corporations and Joint Power Authorities 18
Scope of Work, Timing and Audit Approach:
Entities to Be Included in Audit 19
Reports to Be Issued and Due Dates 19
Audit Timing 20
Commitment to Deliver Reports on a Timely Basis 20
Audits to Be in Accordance with GAAS and Other Requirements 20 ‐ 21
Audit Approach 21 ‐ 22
Audit Approach Redevelopment Agency/Successor Agency 23
Approach to Internal Control 23
Single Audit Approach 24
CITY OF NEWPORT BEACH
TABLE OF CONTENTS
(CONTINUED)
April 5, 2016
Page
Number
Scope of Work, Timing and Audit Approach (Continued):
Determining Laws and Regulations Subject to Audit 24
Method of Sampling 25
Analytical Procedures 25
Management Letters 25
Potential Audit Problems 25
Retention of and Access to Audit Workpapers 25
Other Professional Services 26
Irregularities and Illegal Acts 26
Segmentation of the Audit Hours, By Partner and Staff Level 26
Segmentation of the Audit Hours, By Phases of the Audit 26
Discussion of Relevant Accounting Issues:
GASB Statement No. 72 27
GASB Statement No. 73 27
GASB Statement No. 74 27
GASB Statement No. 75 27
GASB Statement No. 76 28
GASB Statement No. 77 28
GASB Statement No. 78 28
GASB Statement No. 79 29
GASB Statement No. 80 29
Work Required by City Staff 30
Consulting Services Department:
Overview of Services Provided 31
Attachment I:
Current City Client References
Attachment II ‐ Results of Outside Quality Review
2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
1
April 5, 2016
Mr. Anthony Nguyen
Purchasing Agent
City of Newport Beach
100 Civic Center Drive
Newport Beach, CA 92660
Dear Mr. Nguyen:
We are pleased to present our proposal to continue serving as independent auditors for the City of Newport Beach. We
have prepared this information in accordance with the guidelines set forth in your request for proposal.
Who We Are
White Nelson Diehl Evans LLP is a California certified public accounting and consulting firm with offices in Irvine, Carlsbad
and Escondido. Our firm has specialized in providing services to the governmental industry for over 80 years and has no
intentions of discontinuing these services.
Why We Are The Best Qualified Firm
We consider ourselves to be the best qualified firm to perform auditing and accounting services for the City of Newport
Beach. Please consider these qualifications:
Our firm has provided the City with audit services for the past 5 years which has allowed the firm to gain specific
knowledge about the City and its operations. The specific knowledge about the City and operations will enhance
audit quality by allowing our firm to identify and focus on specific risk areas and will reduce audit costs as your staff
will not spend time training us on the operations of the City. We understand the City’s objective in enhancing auditor
independence, objectivity and professional skepticism. To achieve the City’s objective while maintaining audit quality
and reducing costs to the City, we are proposing a rotation in the audit partner and audit supervisor.
A significant part of our practice is devoted to providing professional services to the governmental industry and over
the past year, the firm provided services to approximately 100 governmental organizations and on an annual basis
our firm issues over 150 reports on audits of local governmental agencies including, Cities, the Successor Agency to
Redevelopment Agencies, Special Districts and Joint Power Authorities.
Our firm has devoted a substantial amount of time and resources in order to provide governmental agencies with
quality audits. Our knowledge of the industry is best demonstrated by the fact that our clients who apply for the
“Certificate of Achievement in Financial Reporting” issued by the Government Finance Officers Association (GFOA)
consistently receive that award. A list of these clients is presented on page 7 of this proposal.
We are in a professional alliance with BDO Seidman, a National Accounting Firm, and a network of accounting firms
allowing us the ability to provide quality attestation services. The BDO Alliance provides us access to BDO’s personnel
and technical resources which allows White Nelson Diehl Evans LLP to deliver the range of services and capabilities of
a large national firm, including the use of specialists to support the needs of our clients.
We are a full service CPA firm. Our Consulting Services Department can provide the City with a variety of services,
including investment policy compliance reviews, litigation support, dispute resolution services, and consulting on a
wide array of governmental issues.
Our audits include extensive use of information technology as described in detail on page 8 of this proposal.
2
Why We Are The Best Qualified Firm (Continued)
We understand that we provide a service to the City. We are committed to providing an effective and efficient audit
that will meet the proposed timing of the project deliverables by assigning experienced governmental auditors.
Understanding the size of the City of Newport Beach and the scope of work requested in the proposal, we are
proposing an engagement team with extensive governmental audit experience. The staffing plan includes Robert
Callanan, CPA, the engagement partner with 26 years of experience, Kassie Radermacher, CPA, with 11 years of
experience who will manage the audit, and Joseph Ludin, CPA, a supervisor with 7 years of experience who will be
on‐site supervising and performing the fieldwork. We are confident that the proposed staffing plan with an
engagement team experienced in governmental audits and who are familiar with municipal procedures will result in
an effective and efficient audit that meets the project timing and deliverables requirements with minimum disruption
to your staff.
The scope of our services for the year ending June 30, 2016 would be as follows:
A financial audit of the basic financial statements of the City of Newport Beach in accordance in with auditing
standards generally accepted in the United States of America and Government Auditing Standards issued by the
Comptroller General of the United States, to be included in the Comprehensive Annual Financial Report (CAFR).
A Single Audit of Federal Grants to be performed to meet the requirements of Title 2 U.S. Code of Federal
Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirement for Federal
Awards (Uniform Guidance).
An agreed‐upon procedures review of the calculation of the City’s GANN Appropriations Limit (GANN), as
required by Section 1.5 of Article XIIIB of the California Constitution.
A management letter containing any comments or recommendations resulting from our review of the systems of
internal controls in connection with the financial audits.
A report communicating information related to the audit to those in charge of governance at the conclusion of
the audits.
We make a commitment to deliver all necessary reports based on the timetable presented herein on page 19. Also, a
more detailed discussion of our understanding of the work to be performed is set forth on pages 19 through26.
Our goal is to provide the City with the highest quality of service, including a CAFR which meets all required reporting
standards. We are confident that our service and experience will be of benefit to the City and will provide added value
over and above the performance of the audit itself. Throughout the year, you should feel comfortable in calling us for
advice regarding accounting and auditing matters, as we are never too busy to meet the needs of our clients.
We thank the City for the opportunity to present our proposal. Please feel free to contact me, or Mr. Nitin P. Patel, CPA, at
(714) 978‐1300 if you have any questions. This proposal constitutes a firm and irrevocable offer for 60 days from the date
of this letter. Mr. Patel and I are authorized to represent our firm, and bind the firm to a contract.
Very truly yours,
WHITE NELSON DIEHL EVANS LLP
Robert J. Callanan, CPA
Engagement Partner
3
FIRM PROFILE AND QUALIFICATIONS
FIRM ORGANIZATION CHART
* The staffing levels described above have remained fairly constant for the past four years.
Administration
CFO
Marketing
Director
Human
Resources
A/P and
A/R
Partners
Executive
Committee
Managing Director
Audit Director
Audit Department
-Partners 11
-Supervisory Staff 14
-Seniors and Staff
Accountants 23
Tax Director
Tax Department
-Partners 11
-Supervisory Staff 15
-Seniors and Staff
Accountants 34
Consulting Division
4
LICENSING AND INDEPENDENCE
Our firm, and all of our certified personnel, are properly licensed to practice public accounting in
California.
Also, we meet the independence requirements of “Government Auditing Standards”, as published by
the U.S. General Accountability Office. We have no conflict of interest with the City and will provide
written notice to the City of any professional relationships contemplated with the City during our term
as auditors. We have been providing auditing and other services to the City since 2011.
SIZE AND LOCATION OF THE FIRM
White Nelson Diehl Evans LLP is a California accounting firm with offices in Irvine, Carlsbad and
Escondido.
Our firm has approximately 140 employees,
which includes 22 partners with separate
assurance and tax departments. Your City
would be served by the assurance department
from our Irvine office, which has
approximately 48 professional staff members,
including 11 partners, and 14 managers and
supervisors. The Irvine Office assurance
department staff with governmental
experience consists of four partners, four
managers, seven supervisors, six seniors and
twelve staff accountants.
White Nelson Diehl Evans LLP has extensive experience in providing auditing, accounting and
consulting services in the governmental sector. Over twenty thousand hours per year are devoted to
this area of our practice for over 100 governmental units including cities, successor agencies, special
districts, nonprofit corporations and joint power authorities.
RANGE OF ACTIVITIES
White Nelson Diehl Evans LLP is a full service CPA firm. We offer a broad range of services, including:
Certified Audits Tax Planning and Consulting
Compilations and Reviews Income Tax Preparation and Representation
Agreed‐Upon Procedure Reviews Consulting Services
Financial Services Litigation Support Services
Our specific services available to governmental agencies are more fully set forth in this proposal.
5
PARTICIPATION IN “QUALITY REVIEW” PROGRAMS
In July 2015, our firm underwent a quality review, by an independent CPA firm, under provisions of
the AICPA Quality Review Program. This review is required every three years and covered our audits
of governmental agencies. A final report dated July 22, 2015 with a pass rating on our systems and
procedures was received. A copy of the independent CPA firm’s report is included herein at
Attachment II. Accordingly, we are confident that our current auditing standards and techniques meet
all existing requirements.
No regulatory action has ever been taken against any office of our firm due to substandard work. We
had no significant deficiencies noted in any federal or state desk reviews over the past three years.
EDUCATION PROGRAMS
White Nelson Diehl Evans LLP has a formal continuing education program. All firm auditors are
required to obtain 80 hours of continuing education every two years in the accounting and auditing
area as required by Government Auditing Standards, and at least 24 hours of government related
continuing education courses. Our staff is continually expanding their knowledge of the governmental
industry through our in‐house training programs, programs offered by the AICPA, GFOA, the California
Society of Certified Public Accountants and other professional organizations, and through on‐the‐job
training.
Noted below is a description of certain in‐house education courses taken by our partners and staff to
meet the governmental continuing education requirements. All personnel involved with governmental
auditing are required to attend these courses.
Understanding the Risk Assessment Standards
Understanding of GASB Statement No. 34, Basic Financial Statements ‐ and Management’s
Discussion and Analysis ‐ for State and Local Governments
Understanding, and Auditing, Deposits and Investments of California Governmental Units
Reviews of Internal Controls in Accordance With Statements on Auditing Standards
Assessing Audit Risk and Materiality in Conducting An Audit
Consideration of Fraud in a Financial Statement Audit
Computer Auditing in the Governmental Environment The Single Audit ‐ New Provisions under Title 2 U.S. Code of Federal Regulations Part 200, Uniform
Administrative Requirements, Cost Principles, and Audit Requirement for Federal Awards (Uniform
Guidance).
Laws and Regulations in the Government Sector
Understanding GASB Statement 54 related to Fund Balance Reporting and Governmental Fund
Type Definitions
Understanding GASB Statement 65 related to reporting of Deferred Outflows and Deferred Inflows
of Resources
Understanding the new GASB Pension Standards
6
PARTICIPATION IN PROFESSIONAL ORGANIZATIONS
Our partners and staff are actively involved in professional organizations in the governmental
accounting field. Noted below is a summary of our participation in various national and California
governmental organizations.
AICPA
Our firm is a member of the AICPA Governmental Audit Quality Center. The Center is a firm‐based
voluntary membership Center whose primary purpose is to promote the importance of quality
governmental audits to purchasers of governmental audit services. The Center provides members
with an online forum tool for sharing best practices, as well as discussions on audit, accounting, and
regulatory issues. As a member of the Center, the firm receives updates on changes in auditing and
accounting standards that effect governmental audits. The quality control partner is required to
attend an annual web cast to discuss auditing and reporting issues effecting governmental audits. Our
firm uses the resources of the Center to maintain the quality of our governmental audits.
GFOA, GASB and FASB
Our firm is an associate member of the Government Finance Officers Association of the United States
and Canada (GFOA).
Also, we have web based access to the latest pronouncements issued by the Governmental
Accounting Standards Board (GASB) and the Financial Accounting Standard Board (FASB), including
Interpretations, Technical Pronouncements and Newsletters. We regularly analyze these
pronouncements and advise our governmental clients of changes in accounting rules.
CSMFO
Our Irvine office partners and our Director of Consulting Services are associate members of the
California Society of Municipal Finance Officers (CSMFO). Our personnel regularly attend local CSMFO
chapter meetings throughout Southern California, and the annual statewide conference. We often
provide public speakers for these meetings.
CSCPA
Several partners and principals of the firm have been members of the Governmental Accounting and
Auditing (GAA) Committee of the Orange County Chapter of the California Society of Certified Public
Accountants (CSCPA). Mr. Patel, Mr. Ludin and Mr. Morgan have each served as chairman of this
committee. Firm personnel have been involved over the years in preparing position papers issued for
professional organizations on governmental accounting matters. Currently, Mr. Patel and Mr. Callanan
are members of the State Governmental Accounting and Auditing Committee.
7
GFOA AWARD PROGRAM
The partner and manager will be involved in all phases of report preparation or review. Reporting
checklists will be used to assure compliance with all reporting requirements. In addition, another
member of the firm, not associated with the audit, and with extensive governmental auditing and
accounting experience, will review each financial statement audited and related reports. Based on
the high quality of our review process, we have been able to assist various clients in obtaining the
GFOA “Certificate of Achievement for Excellence in Financial Reporting”. The recent clients that have
received the award are:
Cities: Cities (Continued):
Alhambra
Bellflower
Beverly Hills
Burbank
Camarillo
Campbell
Colton
Costa Mesa
Cypress
Del Mar
Downey
Fountain Valley
Gilroy
Goleta
Hawaiian Gardens
Highland
Lake Forest
Lakewood
Lancaster
Newport Beach
Palm Desert
Pico Rivera
Rancho Santa Margarita
San Buenaventura
San Gabriel
Sanger
Signal Hill
Stanton
Tustin
West Covina
West Hollywood
Westminster
Special Districts:
Costa Mesa Sanitary District
Inland Empire Utilities Agency
Las Virgenes Municipal Water District
Olivenhain Municipal Water District
Otay Water District
Rancho California Water District
Santa Ana Watershed Project Authority
Yorba Linda Water District
8
COMPUTER AUDITING CAPABILITIES
White Nelson Diehl Evans LLP uses technology to make the audit process more effective. We utilize a
paperless audit software, ProSystem fx Engagement, which allows us to manage our audit
documentation electronically. Some of the benefits of paperless audit are:
Receive the City’s schedules in either hard copy or electronic format.
Import and integrate trial balance data from virtually any accounting system. We avoid the
time and expense of keying in account numbers, descriptions and account balances. We
simply take your electronic trial balance and import it directly into our audit software.
Create our own lead sheets, which can include prior year balances. This helps us to easily
identify significant fluctuations between fiscal years.
CAFR schedules are linked to trial balances. CAFR is updated automatically for any last minute
journal entries, if any.
Our approach includes using IDEA (Interactive Data Extraction and Analysis) which is a data analysis
software that can be used to analyze large amounts of information. It allows the firm to extract data
from the City’s accounting records to tailor specific audit tests based on risk assessments. Some audit
procedures that IDEA can be utilized for are:
Mechanical accuracy of worksheets or general ledgers.
Exception and gap/completeness testing for missing check numbers.
Cross checking different data bases for common information such as employee names.
Duplicate testing of invoice numbers.
Completeness of general ledger balances.
The firm also has document management software which allows our clients to access our web portal.
We utilize the web portal to transfer data files that are confidential or too large to be sent by e‐mail.
9
PARTNER, SUPERVISORY AND STAFF QUALIFICATIONS AND EXPERIENCE
AUDIT TEAM
The audit team assembled consists of individuals who have extensive experience auditing
governmental agencies and are familiar with municipal accounting. In addition, each team member’s
skill and experience developed working in other industries our firm serves can be applied to the
individual requirements of the City of Newport Beach.
The personnel assigned to the engagement team are as follows:
The engagement partner will be Mr. Robert J. Callanan, CPA. Mr. Callanan has over 26 years of
experience with audits of local governments. He will be involved with all phases of the audit including
(a) the planning phase of the audit to assess risks related to the audit (b) a final review of all the work
papers and financial reports, and (c) attending any meetings with City’s management and City council
at the conclusion of the audit. He will be responsible for assuring that all work for the City is
performed in a complete and timely manner.
Mr. Nitin P. Patel, CPA, will be the Technical Review Partner and will perform a quality review of all
reports issued in connection with the audit. Mr. Patel has over 30 years of experience with audits of
local governments. He will also consult on the accounting treatment of unusual transactions or audit
issues.
Ms. Kassie Radermacher, CPA, will serve as the audit manager. Ms. Radermacher has over 11 years of
experience with audits of local governments. She will be the primary contact for the City and related
audits. She will (a) perform the initial review of the work papers including a review of the work
completed related to internal controls, (b) supervise the completion of the financial reports and
management letter and (c) assist in the audit of any complex or unusual audit areas.
The audit supervisor will be Mr. Joseph Ludin, CPA. Mr. Ludin has over 7 years of experience with
audits of local governments. He will be on‐site supervising staff accountants and performing the
fieldwork including performing tests of internal controls, substantive tests of account balances, and
analytical tests. He will also draft the financial statements and various reports required for this
engagement.
Resumes for the above partners and personnel are included at pages 11 through 14.
COMMITMENT RELATED TO PERSONNEL
We make a commitment to retain the same personnel on the City from year to year, except where
such personnel leave the firm, or where the change is approved by the City. If a staff member is
replaced, we make a commitment to replace that person with staff of at least equal experience.
NONDISCRIMINATION POLICY
Our firm has a policy to provide equal employment opportunities to all qualified persons without
regard to race, color, age, sex, religion, national origin or handicap.
10
AUDIT TEAM ORGANIZATION CHART
Engagement Partner Robert J. Callanan, CPA Technical
Review Partner
Nitin P. Patel, CPA
Consulting
Department
Audit Manager Kassie Radermacher, CPA
Audit Supervisor
Joseph Ludin, CPA
Staff
Accountants
Administrative
Support Staff
11
ROBERT J. CALLANAN, CPA
Position
Engagement Partner
Education
Aquinas College, Grand Rapids, Michigan
Bachelor of Arts, Business Administration, 1988
Bachelor of Science, Accounting, 1988
Licensing
Certified Public Accountant in California since 1993
Professional Organizations
American Institute of Certified Public Accountants ‐ Member
California Society of Certified Public Accountants ‐ Member
California Society of Municipal Finance Officers (CSMFO) ‐ Associate Member
California Governmental Accounting and Auditing Committee Member
Range of Experience
Twenty‐six years with the firm specializing in governmental audit, accounting, and consulting services.
Two years of experience as Chief Financial Officer of a mortgage lending corporation.
Responsible for the firm’s in‐house governmental accounting and auditing training programs.
GFOA Report Reviewer for Award Program ‐ Certificate of Achievement for Excellence in Financial
Reporting.
Mr. Callanan was the engagement partner on the following local government audits in 2015:
Cities:
Camarillo
Campbell
Del Mar
Hawaiian Gardens
Norco
Pico Rivera
Rancho Santa Margarita
San Buenaventura
Special Districts:
Laguna Beach County Water District
Pico Rivera Water Authority
Pomona‐Walnut‐Rowland Joint Water
Line Commission
Rowland Water District
Southeast Water Coalition
Sunset Beach Sanitary District
Surfside Colony Stormwater Protection District
Surfside Community Services District
Ventura Port District
Continuing Professional Education
Total hours were 209 in the last three years, of which 157 hours were for meeting the requirements of
the Government Audit Standards.
12
NITIN P. PATEL, CPA
Position
Technical Review Partner
Education
University of California at Irvine, Bachelor of Arts in Economics
California State University at Long Beach Masters of Accounting Program
Licensing
Certified Public Accountant in California since 1988
Professional Organizations
American Institute of Certified Public Accountants
California Society of Certified Public Accountants
California Society of Municipal Finance Officers (CSMFO) ‐ Associate Member
Governmental Accounting and Auditing Committee of Orange County ‐
Committee Chairman (2001‐2002)
California Governmental Accounting and Auditing Committee Member
Range of Experience
Has been with the firm since 1986 with emphasis in governmental accounting and financial reporting and is
responsible for firm’s in‐house governmental accounting and auditing training programs.
Experience includes supervision of over one hundred audits of governmental agencies including cities,
successor agencies/redevelopment agencies, non‐profit corporations, joint powers authorities and special
districts.
CSMFO Report Reviewer for Award Program.
GFOA Report Reviewer for Award Program ‐ Certificate of Achievement for Excellence in Financial Reporting.
Other experience includes providing consulting services for governmental agencies including special internal
control reviews, cost allocation plans, cable television rate reviews, reviews of City Treasurer operations and
transient occupancy tax reviews of city hotels/motels.
Mr. Patel was the engagement partner on the following local government audits in 2015:
Cities:
Alhambra
Artesia
Bellflower
Burbank
Colton
Costa Mesa
Cypress
Gilroy
Lake Forest
Laguna Hills
Laguna Woods
Newport Beach
Norwalk
Palm Desert
Rialto
San Gabriel
Cities (Continued):
Stanton
West Hollywood
Westminster
Special Districts:
Calleguas Municipal Water District
Chino Basin Desalter Authority
Costa Mesa Sanitary District
Cypress Recreation and Park District
Inland Empire Regional Composting Authority
Inland Empire Utilities Agency
La Habra Heights County Water District
La Puente Valley County Water District
Orchard Dale Water District
Rancho California Water District
Santa Ana Watershed Project Authority
Yorba Linda Water District
Continuing Professional Education
Total hours were 186 in the last three years, of which 144 hours were for meeting the requirements of the
Government Audit Standards.
13
KASSIE RADERMACHER, CPA
Position
Senior Audit Manager
Education
West Virginia University
Masters of Professional Accountancy, 2005
Bachelor of Science, 2003
Licensing
Certified Public Accountant in California since 2010
Certified Public Accountant in Virginia since 2006
Professional Organizations
California Society of Certified Public Accountants (CSCPA)
Range of Experience
Ms. Radermacher has been with the firm since June 2009. Ms. Radermacher has performed all
phases of local governmental audits including cities, successor agencies/redevelopment agencies,
single audit of federal grants, special districts, compliance audits and agreed‐upon procedures
engagements. As an audit manager, she is involved with planning the audit, performing fieldwork for
all aspects of the audit, supervising staff accountants and preparation of financial statements.
Ms. Radermacher served as the Audit Manager on the following local government audits in 2015:
City of Artesia
City of Bellflower
City of Cypress
City of Fountain Valley
City of Laguna Hills
City of Lake Forest
City of Newport Beach
City of Norwalk
City of Rancho Santa Margarita
City of Rialto
City of San Gabriel
City of Stanton
La Puente Valley County Water District
Lake Elsinore & San Jacinto
Watersheds Authority
Local Agency Formation Commission (LAFCO) ‐
Orange County
Midway City Sanitary District
Orchard Dale Water District
Orange County Mosquito & Vector Control
District
Pico Water District
Rancho California Water District
Santa Ana Watershed Project Authority
Yorba Linda Water District
Prior to joining the firm, Ms. Radermacher was senior in‐charge of compilations, reviews, single
audits, and financial audits for non‐profit and business clients with Rager, Lehman & Houck, P.C. in
Frederick, MD. She was also responsible for educating and monitoring the staff.
Continuing Professional Education
Total hours were 209 in the last three years, of which 189 hours were for meeting the requirements of
the Government Audit Standards.
14
JOSEPH LUDIN, CPA
Position
Audit Supervisor
Education
California Polytechnic, San Luis Obispo, California
Bachelor of Business Administration and Marketing, 2001
Licensing
Certified Public Accountant in California since June 2013
Range of Experience
Mr. Ludin has been with the firm since July 16, 2009. Mr. Ludin has performed all phases of local
governmental audits including cities, successor agencies/redevelopment agencies, single audit of
federal grants, special districts, compliance audits and agreed‐upon procedures engagements. As an
audit supervisor, he is involved with planning the audit, performing fieldwork for all aspects of the
audit, supervising staff accountants and preparation of financial statements. Mr. Ludin served as the
Audit Supervisor on the following local government audits in 2015:
City of Camarillo
City of Costa Mesa
City of Del Mar
City of West Covina
City of West Hollywood
Calleguas Municipal Water District
La Habra Heights County Water District
Sunset Beach Sanitary District
Surfside Colony Community
Services District
Surfside Colony Storm Water
Protection District
In recent years, Mr. Ludin has also been involved with the following governmental clients:
City of Avalon
City of Downey
City of Fountain Valley
City of Goleta
City of Huntington Beach
City of Irvine
City of La Habra Heights
City of Lake Elsinore
City of San Buenaventura
City of Sanger
City of Westminster
Midway City Sanitary District
Rancho California Water District
Continuing Professional Education
Total hours were 162 in the last three years, of which 142 hours were for meeting the requirements of
the Government Audit Standards.
15
FIRM EXPERIENCE WITH GOVERNMENTAL ENTITIES
SIMILAR ENGAGEMENTS WITH OTHER MUNICIPAL ENTITIES
Your request for proposal called for a list of similar engagements performed for the fiscal year
ended 2015 serviced in Los Angeles, Riverside, Orange and San Diego Counties. These are set forth
below:
LIST OF CITY ENGAGEMENTS
We have listed below the cities which were under contract with us during the past fiscal year.
Period of Service
City From To Scope of Work
Alhambra 2005 Present CA, RDA, SA, SCR
Artesia 2012 Present CA, RDA, SA
Bellflower 2013 Present CA, SA, SCR, Financing Authority, Public Facilities Corp.
Beverly Hills 2013 Present CA, SA
Burbank 2013 Present CA, AQMD, SA, Water & Utility Enterprise Fund
Camarillo 2012 Present CA, RDA, SA
Campbell 2013 Present CA, SA, T, Solid Waste Management Authority
Colton 2014 Present CA, SA, SCR, Child Care Program
Costa Mesa 2012 Present CA, RDA, PFA, SA, Housing Authority
Cypress 2012 Present CA, RDA, RA, SA
Del Mar 2014 Present CA, SA, SCR
Fountain Valley 2013 Present CA, SA, Housing Authority, Financing Authority
Gilroy 2013 Present CA, SA
Goleta 2013 Present CA, SA, SCR, SR
Hawaiian Gardens 2012 Present CA, RDA, PFA, SA
Hesperia 1997 Present CA, RDA, SA
Highland 2012 Present CA, SA
Laguna Hills 2015 Present CA, SA, SCR. SR
Laguna Woods 2015 Present CA, SA
Lake Forest 2011 Present CA, RDA, SA, Housing Authority
Lancaster 2013 Present CA, SA, SCR ‐ City, SCR ‐ Power Authority
Newport Beach 2011 Present CA, SA
Norco 2015 Present CA, SA, SCR
Norwalk 2015 Present CA, AQMD, PFA, SA, T, OCU, SCR ‐ City & Transit
Palm Desert 2008 Present CA, RDA, SA, Housing Authority
Pico Rivera 2012 Present CA, PFA, SA, SCR, Water Authority
Rancho Santa Margarita 2012 Present CA, SA
Rialto 2013 Present CA, SA
San Buenaventura 2011 Present CA, RDA, PFA, SA, SCR
San Gabriel 2013 Present CA, SA
Sanger 2011 Present CA, RDA, PFA, SA, SCR
Stanton 2012 Present CA, RDA, SA
Tustin 2011 Present CA, RDA, SA, SCR
West Covina 2011 Present CA, RDA, AQMD, SA
West Hollywood 2014 Present CA, SA, SCR
Westminster 1997 Present CA, RDA, AQMD, SA
Legend:
AQMD ‐ Air Quality Management District Audit RA ‐ Recreation Authority
CA ‐ City Audit RDA ‐ Former Redevelopment Agency Audit
OCU ‐ Other Component Unit Audits SA ‐ Single Audit
PFA ‐ Public Financing Authority SCR ‐ State Controllers' Reports
PI ‐ Public Improvement SR ‐ Street Report
PP ‐ Pension Plans T ‐ Transportation
Substantially all of the above engagements were performed through the firm's Irvine office.
16
CITY CLIENT REFERENCES
One means of judging the high quality of our auditing and accounting services would be contact with
some of our clients over the past year. We are including the names and phone numbers of the city
clients as presented in Attachment I of this proposal. We encourage you to contact any of these
individuals and verify our level of service.
ENTERPRISE FUND EXPERIENCE
Most cities audited by our firm have a water utility enterprise fund. Noted below is a partial listing of
other enterprise funds audited by our firm in recent years:
City Enterprise
Alhambra Water, Sewer, Storm Drain, Sanitation, Golf Course
Artesia Residential Refuse Service
Bellflower Water
Beverly Hills Water, Solidwaste, Wastewater, Stormwater
Burbank Water Reclamation, Sewer, Golf, Electric Utility
Water Utility, Refuse Collection and Disposal
Camarillo Water, Sanitary, Solidwaste, Transit
Colton Electric Utility, Water Utility, Wastewater Utility
Cypress Sewer
Del Mar Water, Wastewater, Cleanwater
Downey Water, Sewer, Golf Course, Transit System
Fountain Valley Water, Solidwaste
Gilroy Water, Sewer
Hesperia Water, Sewer
Laguna Hills Property Leasing
Lakewood Water
Lancaster Power Authority
Newport Beach Water, Sewer
Norco Water, Sewer
Norwalk Transit System, Water, Sewer, Golf Course
Palm Desert Golf Course
Pico Rivera Water, Sports Arena, Golf
Rialto Airport, Cemetery, Recreation, Wastewater, Water
San Buenaventura Water, Sewer
Sanger Water, Sewer, Disposal, Ambulance
Signal Hill Water
Stanton Sewer
Tustin Water
West Covina Simulator, Computer
West Hollywood Sewer District, Sewer Charge, Solid Waste,
Landscape District and Street Maintenance
Westminster Water
17
SINGLE AUDIT EXPERIENCE
We perform single audit services for most of our cities and special districts that receive federal funds
as required by the Uniform Guidance. In recent years, Single Audits were performed for the following
cities and special districts.
Cities:
City of Alhambra
City of Artesia
City of Bellflower
City of Beverly Hills
City of Burbank
City of Camarillo
City of Campbell
City of Colton
City of Costa Mesa
City of Cypress
City of Del Mar
City of Downey
City of Fountain Valley
City of Gilroy
City of Goleta
City of Hawaiian Gardens
City of Hesperia
City of Highland
City of La Habra Heights
City of Laguna Hills
City of Laguna Woods
City of Lake Forest
City of Lakewood
City of Lancaster
City of Newport Beach
City of Norco
City of Norwalk
City of Palm Desert
City of Pico Rivera
City of Rancho Santa Margarita
City of Rialto
City of San Buenaventura
City of San Gabriel
City of Sanger
City of Signal Hill
City of Stanton
City of Tustin
City of West Covina
City of West Hollywood
City of Westminster
Special Districts:
Inland Empire Utilities Agency
Las Virgenes Municipal Water District
Olivenhain Municipal Water District
Rancho California Water District
Valley Wide Recreation and Park District
EXPERIENCE WITH PREPARATION OF STATE‐MANDATED REPORTS
We have experience with the preparation of various state‐mandated reports, such as the State
Controller’s Report and the Annual Street Report. Specifically, with regard to cities, we have prepared
the state mandated reports, in recent years, for the following cities:
City of Alhambra
City of Bellflower
City of Colton
City of Del Mar
City of Goleta
City of La Habra Heights
City of Laguna Hills
City of Lancaster
City of Norco
City of Norwalk
City of Pico Rivera
City of San Buenaventura
City of Sanger
City of Tustin
City of West Hollywood
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SPECIAL DISTRICTS
Noted below is a listing of special districts audited by our firm in recent years:
Borrego Water District Orange County Development Authority ‐
Calleguas Municipal Water District Eco‐Rapid Transit
Chino Basin Desalter Authority Orange County Vector Control District
Chino Basin Regional Financing Authority Orchard Dale Water District
Costa Mesa Sanitary District Otay Water District
Cypress Recreation and Park District Padre Dam Municipal Water District
Downey Cemetery District Pico Water District
El Toro Water District Placentia Library District
Grossmont Healthcare District Rancho California Water District
Heber Public Utilities District Rincon del Diablo Municipal Water District
Inland Empire Regional Composting Authority Rowland Water District
Inland Empire Utilities Agency Santa Ana Watershed Project Authority
La Habra Heights County Water District South Coast Water District
La Puente Valley County Water District South County Regional Wastewater Authority
Laguna Beach County Water District Sunset Beach Sanitary District
Lake Elsinore and San Jacinto Surfside Colony Stormwater
Joint Powers Authority Drainage District
Las Virgenes Municipal Water District Surfside Community Services District
Leucadia Wastewater District Vallecitos Water District
Midway City Sanitary District Valley Wide Recreation and Park District
Monterey Peninsula Regional Park District Ventura Port District
Olivenhain Municipal Water District Yorba Linda Water District
NONPROFIT CORPORTIONS AND JOINT POWER AUTHORITIES
Noted below is a partial listing of nonprofit corporations and joint power authorities audited by our
firm over the past year. Some of these entities are “component units” which are combined into the
basic financial statements of governmental organizations which exercise oversight responsibility.
American Family Housing
Anaheim District of the Churches
of the Nazarene
Cal State L.A. Metrolink Authority
California Transplant
Casa de las Campanas
Casa Romantica Cultural Center
Child Abuse Prevention Center
Palm Desert Recreational Facilities Corporation
Pomona‐Walnut‐Rowland Joint
Water Line Commission
Public Cable Television Authority
The RARE Project
Trinity Children’s Foundation
Trinity Youth Services
United Cerebral Palsy Association
Valencia Heights Water Company
Westview Services, Inc.
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SCOPE OF WORK, TIMING AND AUDIT APPROACH
ENTITIES TO BE INCLUDED IN AUDIT
City of Newport Beach
Newport Beach Public Facilities Corporation
REPORTS TO BE ISSUED AND DUE DATES
Draft Final
Due Dates Due Dates
City of Newport Beach:
Independent Auditors’ Report on the
Comprehensive Annual Financial Report December 1 December 20
Management Letter December 1 December 20
Audit Committee Letter December 1 December 20
Independent Auditors’ Report on Internal Control Over
Financial Reporting and on Compliance and Other
Matters Based on an Audit of Financial Statements
Performed in Accordance With Government Auditing
Standards December 1 December 20
Report on Compliance with Article XIIIB Appropriation
Limit (GANN Limit Review) December 1 December 20
Single Audit Report: February 15 March 1
Independent Auditors’ Report on Compliance for
Each Major Program and on Internal Control Over
Compliance Required by the Uniform Guidance
and on the Schedule of Expenditures of Federal
Awards.
20
AUDIT TIMING
Assuming that the City’s books are closed and ready for examination and that all necessary schedules
and documents are available for our use by September 30th each year, the suggested time schedule
for the various phases of the audit would be approximately as follows:
Completed By
Entrance conference with key City staff. Discussion of any
prior audit concerns and the performance of interim work. June 15
Interim audit fieldwork and management review June 30
List of Schedules to be prepared by the City of Newport
Beach prior to final fieldwork July 31
Final audit fieldwork and management review November 4
Exit conference to summarize the results of the fieldwork
and to review significant findings November 4
Deliver draft copies of reports See page 19
Deliver final reports See page 19
COMMITMENT TO DELIVER REPORTS ON A TIMELY BASIS
If all books and records, schedules and documents are made available to us by September30th, we
make a commitment to have audit team members available and to provide all reports by the due
dates specified above.
AUDITS TO BE IN ACCORDANCE WITH GAAS AND OTHER REQUIREMENTS
We will audit the financial statements of the City and the component units noted on the preceding
page. The financial statements of all entities where the City exercises oversight will be combined with
the City’s financial statements, in accordance with GASB requirements. Our audit will be in
accordance with auditing standards generally accepted in the United States of America as set forth by
the AICPA, and will include such auditing procedures as we consider necessary under the
circumstances. We will apply certain limited procedures, which consist principally of inquiries of
management regarding methods of measurement and presentation of required supplementary
information. However, we do not audit such information and do not express an opinion on it. Any
supplemental financial statements will be subjected to auditing procedures as we consider necessary
in relation to the financial statements taken as a whole. The scope of our audit will not include any
statistical information, and we will not express an opinion concerning it.
21
AUDITS TO BE IN ACCORDANCE WITH GAAS AND OTHER REQUIREMENTS (CONTINUED)
Our audits will conform with the guidelines set forth in the AICPA’s Industry Audit Guide, Audits of
State and Local Governmental Units. Also, each examination will comply with the standards for
financial and compliance audits contained in the Government Auditing Standards, issued by the
U.S. General Accounting Office, the provisions of the Single Audit Act and the provisions of Title 2 U.S.
Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit
Requirement for Federal Awards (Uniform Guidance).
Also, we will perform an agreed‐upon procedures review of the City’s Gann Spending Limitation
Computation as required by Section 1.5 of Article XIIIB of the California Constitution. Our review will
be performed in conformance with the provision of the “League of California Cities Uniform
Guidelines”.
AUDIT APPROACH
Our audit approach is tailored to meet the technical requirements while maintaining professional
skepticism without forgetting that we provide a service. The following aspects of our audit
approach will add additional value to the audit services and minimize the amount of time spent
by the City’s staff in dealing with the audit.
We will assign experienced staff auditors including the in‐charge field auditor having at least
3 years of experience. For first year engagements, all other staff will have at least 1 year of
experience. You will not spend time training our auditors.
Whenever possible, we will use same format for audit supporting schedules used in prior years for
the current year audit. This will reduce time spent by the City staff in dealing with the audit when
a different audit firm is chosen.
Throughout the year we are available as a resource to our clients in researching technical
questions, dealing with new pronouncements, reviewing complex financial entries and helping
with any other issues as they arise.
The work papers will be reviewed by the manager or partner as field work is being completed to
minimize additional questions after the fieldwork is completed.
Our firm uses a governmental audit program which will be modified to the City of Newport Beach’s
operations to accommodate specific client circumstances. Our audit programs are organized by the
financial statement approach and general procedures. The requirements by the Standards for
assessing risk are utilized to modify the audit programs to focus on the higher risk areas of the
financial statements.
1. Audit Planning Procedures:
Pre‐audit conference with the City to establish process of communication between the
audit team and City staff.
Discuss any new accounting pronouncements to be implemented in the current year.
Establish scope of work and timing of fieldwork.
22
AUDIT APPROACH (CONTINUED)
2. Interim Fieldwork:
Gather information about the City and its environment, including internal control:
Evaluate the design of internal controls that are relevant to the audit and determine
whether the control, either individually or in combination is capable of effecting,
preventing or detecting and correcting material misstatements. Determine that the controls have been implemented, that is, that the controls exist and
that the City is using it. Specific areas to review include:
- Accounts payable/cash disbursements - Accounts receivable/cash receipts
- Payroll disbursements - Utility billing process
- Investment compliance - Property and equipment
Review of minutes of the City of Newport Beach. Review of important contracts and debt agreements.
Interim exit conference with the City to review results of interim fieldwork, including any
findings.
3. Final Audit Work:
During the final audit work, we will assess “risk” of material misstatement based on understanding
of the City’s audit environment, including its internal control, to identify account balances to audit
that appear in the City’s financial statements. Our audit programs will be specifically tailored to
address any significant risks identified. The Prepared by Client (PBC) list will be provided at least
one month in advance of fieldwork. Our work may include:
Confirmation of cash and investments balances and testing of bank reconciliations.
Confirm significant receivable balances or review subsequent cash receipts to verify
receivable balance.
Search for unrecorded liabilities. Testing of interfund balances and transfers.
Test capital asset additions and depreciation expense. Confirm long‐term debt balances and review the accounting treatment of debt issued or
refunded. Test support for other significant assets or liabilities.
Analytical procedures on balance sheet and revenue and expenditure accounts, to evaluate
and explain unusual fluctuations from prior year balances or current year budgeted
amounts. Review of attorney letters for significant legal matters affecting the City’s financial position.
An exit conference will be held to review any significant adjustments or findings.
The audit workpapers will be reviewed by our management team as the work is being performed
in the field so that at the conclusion of the fieldwork we are able to report any adjustments or
findings.
23
AUDIT APPROACH REDEVELOPMENT AGENCY/SUCCESSOR AGENCY
Recent legislation related to the dissolution of Redevelopment Agencies will impact our audit
approach as detailed below.
Our procedures will include:
Audit the balances reported for cash, investments, receivables, payables, capital assets and
long term liabilities as of end of the year.
Review the activity reported on ROPS.
Review the activities of the Successor Agency to ensure compliance with AB 26, AB 1484 and
other relevant legislation enacted.
APPROACH TO INTERNAL CONTROL
Our audit will include obtaining an understanding of the entity and its environment, including internal
control, sufficient to assess the risks of material misstatement of the financial statements and to
design the nature, timing, and extent of further audit procedures. Our understanding of the internal
controls will be completed by completing narratives and checklists for various processes related to
internal control. Tests of controls may be performed to test the effectiveness of certain controls that
we consider relevant to preventing and detecting errors and fraud that are material to the financial
statements and to preventing and detecting misstatements resulting from illegal acts and other
noncompliance matters that have a direct and material effect on the financial statements. Our tests,
if performed, will be less in scope than would be necessary to render an opinion on internal control
and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to
Government Auditing Standards.
As required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative
Requirements, Cost Principles, and Audit Requirement for Federal Awards (Uniform Guidance), we will
perform tests of controls over compliance to evaluate the effectiveness of the design and operation
of controls that we consider relevant to preventing or detecting material noncompliance with
compliance requirements applicable to each major federal award program. However, our tests will be
less in scope than would be necessary to render an opinion on those controls and, accordingly, no
opinion will be expressed in our report on internal control issued pursuant to the Uniform Guidance.
An audit is not designed to provide assurance on internal control or to identify significant
deficiencies. However, during the audit, we will communicate to management and those charged
with governance internal control related matters that are required to be communicated under AICPA
professional standards, Government Auditing Standards, and the Uniform Guidance.
24
SINGLE AUDIT APPROACH
The single audit will be performed in accordance with all the requirements of the Single Audit Act, the
Uniform Guidance and Government Auditing Standards issued by the GAO (the “Yellow Book”) for
cities that expend greater than $750,000 in federal awards in fiscal year 2015‐2016 and subsequent
years.
We will identify the Major and Nonmajor Federal Programs of the City through the risk‐based
approach required by the Uniform Guidance. This approach includes consideration of current
and prior audit experience, oversight by Federal agencies and pass‐through entities, and the
inherent risk of the federal program.
We will review all federal and industry‐specific publications and guidance and inform the City
of any recent changes.
We will perform tests of controls to evaluate the effectiveness of the design and operation of
controls that we consider relevant to preventing or detecting material noncompliance with
applicable compliance requirements. If weaknesses in the internal controls are noted, we will
modify our audit program as needed.
Our audit will include tests of transactions related to major federal award programs for
compliance with applicable compliance requirements and certain provisions of laws,
regulations, contracts and grant agreements.
Our procedures will consist of the applicable procedures described in the Uniform Guidance
for the types of compliance requirements that could have a direct and material effect on each
of the City’s major programs. The purpose of those procedures will be to express an opinion
on the City’s compliance with requirements applicable to major programs in our report on
compliance issued pursuant to the Uniform Guidance.
We will assist the City in completing and filing the Data Collection Form.
DETERMINING LAWS AND REGULATIONS SUBJECT TO AUDIT
Under provisions of AICPA Auditing Standards, management of the City is responsible for identifying
to its outside auditors any laws and regulations which would have a significant effect on the audit.
This would include federal laws (such as federal grant regulations), State laws (such as permitted
investments under the California Government Code) and local laws (such as restrictions on special
revenues levied by the City). After our selection as auditors, we will consult with City officials
regarding these matters, to determine what laws and regulations need to be evaluated in connection
with our audit. If a City is not able to identify specific laws and regulations that effect it, we have
references (California Government Code and Health and Safety Code) to the more common laws, rules
and regulations in our standard audit programs for the usual activities of a California City or Successor
Agency to the Redevelopment Agency which will assist us in identifying laws and regulations to review
in the audit.
25
METHOD OF SAMPLING
Our approach is to utilize random sampling based in our testing of the internal control systems related
to cash receipts, cash disbursements, payroll and utility billings. Based on a statistical conclusion used
by the firm our sample sizes can range from 25 to 60 transactions for each system. A random sample
selection allows each item in the population of an equal chance of being selected. In addition, for
disbursements, we may select a stratified sample of all transactions over a specified dollar amount for
review.
ANALYTICAL PROCEDURES
Analytical procedures are used in the planning and final stages of the audit. In the planning phase, we
use analytical procedures to identify unusual financial transactions and comparing relationships to
expected results. We compare current year information to the prior years for balance sheet items,
revenues and expenditures. In addition, revenues and expenditures are compared to budgets to
identify unexpected results. In the final stages of the audit, the financial statements are reviewed to
identify expected relationships such as comparing debt paid to expenditures recorded on
governmental funds, transfers between funds, depreciation expense, etc. For all significant
relationships identified, explanations are obtained as to why the situation occurred and additional
audit procedures are applied to resolve any concerns.
MANAGEMENT LETTERS
In connection with each audit, a complete review of internal controls will be made of all significant
accounting procedures. Our firm uses an internal control questionnaire, computer systems
questionnaire and narration to gain an understanding of the internal control process as part of our
audit. We will identify weaknesses and after discussion with the appropriate City staff, we will submit
a management letter which will identify weaknesses observed during these reviews and throughout
the audit. The management letter will also assess the effect of the management letter comments on
the financial reporting process and recommend steps towards eliminating the weaknesses.
POTENTIAL AUDIT PROBLEMS
We do not anticipate any significant potential audit problems. If any potential audit problems are
identified, we will immediately discuss them with the City’s management. Our approach is to
coordinate the resolution of any problems with the City’s management. Considering our experience
with auditing governmental entities and resources, we expect minimal disruption to the City’s
management in resolving any identified audit problems.
RETENTION OF AND ACCESS TO AUDIT WORKPAPERS
In accordance with provisions of the Uniform Guidance, GAO requirements, and the California Board
of Accountancy, our audit workpapers will be maintained for at least seven years after the date of the
report. These workpapers will be made available as necessary to your cognizant audit agency (or its
designee), to GAO representatives, or to any other federal or state agency needing access to the
workpapers. Also, our firm will respond to any reasonable inquiries of successor auditors and we will
allow any successor auditors to review our workpapers.
26
OTHER PROFESSIONAL SERVICES
We will be available for any other professional assistance you require to research and answer
accounting and reporting problems raised by the City, regardless of the time of year. Such assistance
may include, but is not limited to, tax questions, the review of bond documents, cost allocation
programs and employee benefit programs. We have provided several tax opinions to City audit clients
for matters relating to deferred compensation, fringe benefits, stipends and allowances, and other
issues. We also will keep the City informed of new developments affecting municipal finance and
reporting, changes in grant rules and regulations, etc. IRREGULARITIES AND ILLEGAL ACTS
We will make an immediate, written report of all irregularities, illegal acts or indications of illegal acts
of which we become aware, to the following parties: City Manager, David A. Kiff City Attorney, Aaron Harp Finance Director and City Treasurer, Dan Matusiewicz
SEGMENTATION OF THE AUDIT HOURS, BY PARTNER AND STAFF LEVEL
Supervisory
Partner Managers Staff Staff Clerical Total
City of Newport Beach ‐
Financial Audit 15 28 101 163 6 313
City of Newport Beach ‐
Single Audit 2 5 20 24 4 55
City Total 17 33 121 187 10 368
Government‐Wide
Statements and
Reconciliations (Optional) 1 2 ‐ 14 1 18
TOTAL HOURS 18 35 121 201 11 386
Service
SEGMENTATION OF THE AUDIT HOURS, BY PHASES OF THE AUDIT
Supervisory
Partners Managers Staff Staff Clerical Total
Planning 4 6 10 5 ‐ 25
Interim Fieldwork 4 8 30 80 ‐ 122
Final Fieldwork and Review 10 21 81 116 11 239
Total Hours 18 35 121 201 11 386
27
DISCUSSION OF RELEVANT ACCOUNTING ISSUES
GASB STATEMENT NO. 72
GASB Statement No. 72, “Fair Value Measurement and Application”, is effective for periods beginning
after June 15, 2015. This Statement addresses accounting and financial reporting issues related to fair
value measurement. The definition of fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement
date. This Statement provides guidance for determining a fair value measurement for financial
reporting purposes. This Statement also provides guidance for applying fair value to certain
investments and disclosures related to all fair value measurements.
GASB STATEMENT NO. 73
GASB Statement No. 73, “Accounting and Financial Reporting for Pensions and Related Assets That Are
Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB
Statements 67 and 68”, is effective for periods beginning after June 15, 2015 ‐ except for those
provisions that address employers and governmental nonemployer contributing entities for pensions
that are not within the scope of Statement 68, which are effective for periods beginning after
June 15, 2016. The requirements of this Statement extend the approach to accounting and financial
reporting established in Statement 68 to all pensions, with modifications as necessary to reflect that
for accounting and financial reporting purposes, any assets accumulated for pensions that are
provided through pension plans that are not administered through trusts that meet the criteria
specified in Statement 68 should not be considered pension plan assets. It also requires that
information similar to that required by Statement 68 be included in notes to financial statements and
required supplementary information by all similarly situated employers.
GASB STATEMENT NO. 74
GASB Statement No. 74, “Financial Reporting for Postemployment Benefit Plans Other Than Pension
Plans”, is effective for periods beginning after June 15, 2016. The objective of this Statement is to
improve the usefulness of information about postemployment benefits other than pensions (other
postemployment benefits or OPEB) included in the general purpose external financial reports of state
and local governmental OPEB plans for making decisions and assessing accountability. This Statement
also includes requirements to address financial reporting for assets accumulated for purposes of
providing defined benefit OPEB through OPEB plans that are not administered through trusts that
meet the specified criteria.
GASB STATEMENT NO. 75
GASB Statement No. 75, “Accounting and Financial Reporting for Postemployment Benefits Other Than
Pensions”, is effective for periods beginning after June 15, 2017. The scope of this Statement
addresses accounting and financial reporting for postemployment benefits other than pension (other
postemployment benefits or OPEB) that is provided to the employees of state and local governmental
employers. This Statement establishes standards for recognizing and measuring liabilities, deferred
outflows of resources, deferred inflows of resources, and expense/expenditures for defined benefit
and defined contribution plans.
28
GASB STATEMENT NO. 76
GASB Statement No. 76, “The Hierarchy of Generally Accepted Accounting Principles for State and
Local Governments”, is effective for periods beginning after June 15, 2015. The requirements of this
Statement improve financial reporting by (1) raising the category of GASB Implementation Guides in
the GAAP hierarchy, (2) emphasizing the importance of analogies to authoritative literature when the
accounting treatment for an event is not specified in authoritative GAAP; (3) requiring the
consideration of consistency with the GASB Concepts Statements when evaluating accounting
treatments specified in nonauthoritative literature.
GASB STATEMENT NO. 77
GASB Statement No. 77, “Tax Abatement Disclosures”, is effective for periods beginning after
December 15, 2015. This Statement requires governments that enter into tax abatement agreements
to disclose the following information:
Brief descriptive information, such as the tax being abated, the authority under which tax
abatements are provided, eligibility criteria, the mechanism by which taxes are abated,
provisions for recapturing abated taxes, and the types of commitments made by tax
abatement recipients.
The gross dollar amount of taxes abated during the period.
Commitments made by a government, other than to abate taxes, as part of a tax abatement
agreement.
Governments should organize those disclosures by major tax abatement program and may disclose
information for individual tax abatement agreements within those programs.
GASB STATEMENT NO. 78
GASB Statement No. 78, “Pensions Provided Through Certain Multiple‐Employer Defined Benefit
Pension Plans”, is effective for periods beginning after December 15, 2015. This Statement amends
the scope and applicability of Statement 68 to exclude pensions provided to employees of state or
local governmental employers through a cost‐sharing multiple‐employer defined benefit plan that
(1) is not a state or local governmental pension plan, (2) is used to provide defined benefit pensions
both to employees of state or local governmental employers and to employees of employers that are
not state or local governmental employers, and (3) has no predominant state or local governmental
employer (either individually or collectively with other state or local governmental employers that
provide pensions through the pension plan). This Statement establishes requirements for recognition
and measurement of pension expense, expenditures, and liabilities; note disclosures; and required
supplementary information for pensions that have the characteristics described above.
29
GASB STATEMENT NO. 79
GASB Statement No. 79, “Certain External Investment Pools and Pool Participants”, is effective for
periods beginning after June 15, 2015, except for certain provisions on portfolio quality, custodial
credit risk, and shadow pricing, those provisions are effective for reporting periods beginning after
December 15, 2015. This Statement addresses accounting and financial reporting for certain external
investment pools and pool participants. It establishes criteria for an external investment pool to
qualify for making the election to measure all of its investments at amortized cost for financial
reporting purposes. An external investment pool qualifies for that reporting if it meets certain
applicable criteria established in this Statement. It establishes additional note disclosure
requirements for qualifying external investment pools that measure all of their investment at
amortized cost for financial reporting purposes and for government that participate in those pools.
GASB STATEMENT NO. 80
GASB Statement No. 80, “Blending Requirements for Certain Component Units ‐ An Amendment of
GASB Statement No.14”, is effective for periods beginning after June 15, 2016. This Statement
amends the blending requirements established in paragraph 53 of Statement No. 14, “The Financial
Reporting Entity, as amended”. This Statement amends the blending requirements for the financial
statement presentation of component units of all state and local governments. The additional
criterion requires blending of a component unit incorporated as a not‐for‐profit corporation in which
the primary government is the sole corporate member. The additional criterion does not apply to
component units included in the financial reporting entity pursuant to the provisions of Statement
No. 39, “Determining Whether Certain Organizations Are Component Units”.
30
WORK REQUIRED BY CITY STAFF
Our fixed annual fees contemplate that conditions satisfactory to the normal progress and completion
of the examination will be encountered and that City accounting personnel will furnish the
agreed‐upon assistance in connection with the audit. However, if unusual circumstances are
encountered which make it necessary for us to do additional work, we shall report such conditions to
the responsible City officials and provide the City with an estimate of the additional accounting fees
involved.
Noted below is a listing of work required by City staff to assist in the audit.
1. Technical assistance in familiarizing our staff with:
The flow of information through the various departments and accounting systems.
Reports generated by your accounting system.
The system of internal controls.
Controls established to monitor compliance with federal grants.
2. Preparation of trial balances for all funds, after posting of all year end journal entries.
3. Preparation of schedules supporting all major balance sheet accounts, and selected revenue and
expenditure accounts.
4. Typing of all confirmation requests.
5. Pulling and refiling of all supporting documents required for audit verification.
6. Assistance with the preparation of the CAFR and footnotes, including:
a. Determination of major funds.
b. Determination of general and program revenues and allocation of program revenues to:
1. charges for services,
2. operating grants and contributions, and
3. capital grants and contributions.
c. Determination of components of net position (net investment in capital assets, restricted and
unrestricted net position).
d. Assistance in determining the amounts to be reported (1) the Reconciliation of the Balance
Sheet of Governmental Funds to the Statement of Net Position and (2) in the Reconciliation of
the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental
Funds to the Statement of Activities.
e. Consolidation of internal service fund activity into governmental activities or business‐type
activities in the government‐wide financial statements.
f. Preparation of the management’s discussion and analysis, transmittal letter and all statistical
tables for the CAFR.
31
CONSULTING SERVICES DEPARTMENT
OVERVIEW OF SERVICES PROVIDED
White Nelson Diehl Evans LLP offers a wide range of consulting services to governmental agencies.
This section of our proposal summarizes the primary types of services provided by the firm.
The firm’s Director of Consulting Services is Mr. William S. Morgan, CPA. Mr. Morgan has over thirty
years of experience in providing accounting, auditing and consulting services to California cities,
counties, successor agencies/redevelopment agencies, water districts, special districts, joint power
authorities and nonprofit corporations. Many of the firm’s consulting projects are planned, supervised
and reviewed by Mr. Morgan.
Our firm provides the following types of services:
Governmental Tax Consulting
Performance and Operational Studies
Redevelopment Consulting Services
Reviews of City Treasurer Operations
Cable Television and Broadband Consulting Services
Reviews of Solid Waste Haulers and
Assistance With Trash Rate Negotiations
Litigation Support and Dispute Resolution Services
Fraud Investigations
Hotel/Motel Transient Occupancy Tax Reviews
Business License Operation Reviews
With regard to these engagements, we would intend to perform limited procedures reviews in
connection with each assignment, in accordance with the AICPA’s attestation standards. Under the
provisions of the attestation standards, the City would designate what specific procedures it wishes to
have performed. We would then perform those procedures and report on our findings. This type of
engagement would not constitute a certified audit in accordance with auditing standards generally
accepted in the United States of America. Such special services are not part of our standard fee
arrangements and would be subject to a separate fee quotation.
ATTACHMENT I CURRENT CITY CLIENT REFERENCES
CURRENT CITY CLIENT REFERENCES
One means of judging the high quality of our auditing and accounting services would be contact with some of our existing clients. We
are including the names and phone numbers of our city clients over the past year. We encourage you to contact any of these individuals.
City of Alhambra
Mr. Paul Espinoza
Finance Director
(626) 570‐5027
City of Artesia
Ms. Justine Menzel
Deputy City Manager
(562) 865‐6249
City of Bellflower
Mr. Tae Rhee
Director of Finance
(562) 804‐1424
City of Beverly Hills
Mr. Don Rhoads
Finance Director
(310) 285‐2429
City of Burbank
Mr. Dino Balos
Accounting Manager
(818) 238‐5518
City of Camarillo
Mr. Ronnie Campbell
Finance Director
(805) 388‐5320
City of Campbell
Mr. Jesse Takahashi
Finance Director
(408) 866‐2113
City of Colton
Ms. Anita Agramonte
Finance Director
(909) 370‐5039
City of Costa Mesa
Ms. Colleen O’Donoghue
Assistant Finance Director
(714) 754‐5421
City of Cypress
Mr. Matt Burton
Director of Finance & Administrative Services
(714) 229‐6718
City of Del Mar
Ms. Teresa McBroome
Director of Finance/Treasurer
(858) 755‐9354
City of Fountain Valley
Mr. David Cain
Finance Director/Treasurer
(714) 593‐4501
City of Gilroy
Ms. Christina Turner
Finance Director
(408) 846‐0750
City of Goleta
Ms. Genie Wilson
Finance Director
(805) 961‐7527
City of Hawaiian Gardens
Ms. Linda Hollinsworth
Finance Director/Treasurer
(562) 420‐2641 x236
City of Hesperia
Mr. Brian Johnson
Director of Administrative Services
(760) 947‐1442
City of Highland
Mr. Chuck Dantuono
Director of Administrative Services
(909) 864‐6861
City of Laguna Hills
Ms. Janice Mateo‐Reyes
Finance Manager
(949) 707‐2623
City of Laguna Woods
Ms. Margaret Cady
Administrative Services/
City Treasurer
(949) 639‐0500
City of Lake Forest
Mr. Keith Neves
Director of Finance
(949) 461‐3400
City of Lancaster
Ms. Pamela Statsmann
Assistant Finance Director
(661) 723‐6038
City of Newport Beach
Mr. Dan Matusiewicz
Director of Finance
(949) 644‐3126
City of Norco
Ms. Gina Schuchard
Finance Officer
(951) 270‐5650
City of Norwalk
Ms. Jana Stuard
Director of Finance
(562) 929‐5056
City of Palm Desert
Mr. Paul Gibson
Director of Finance
(760) 346‐0611
City of Pico Rivera
Mr. Michael Solorza
Director of Finance
(562) 801‐4391
City of Rancho Santa Margarita
Ms. Stefanie Turner
Finance Director
(949) 635‐1812
City of Rialto
Mr. George Harris, II
Director of Administrative
and Community Services
(909) 421‐7219
City of San Buenaventura
Ms. Bridgette McInally
Accounting Manager
(805) 654‐7892
City of San Gabriel
Mr. Thomas Marston
Director of Finance
(626) 308‐2812
City of Sanger
Ms. Patty Hartman
Interim Finance Director
(559) 876‐6300
City of Stanton
Mr. Stephen Parker
Director of Administrative Services
(714) 890‐4226
City of Tustin
Ms. Jenny Leisz
Finance Manager
(714) 573‐3079
City of West Covina
Ms. Christa Buhagiar
Finance Director
(626) 939‐8463
City of West Hollywood
Ms. Lorena Quijano
Accounting Services Manager
(323) 848‐6513
City of Westminster
Ms. Sherry Johnson
Accounting Manager
(714) 898‐3311
ATTACHMENT II RESULTS OF OUTSIDE QUALITY REVIEW
June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 5A1
Public Comments
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
REQUEST FOR QUALIFICATIONS
16-33
(PROFESSIONAL AUDIT SERVICES)
PROCUREMENT PROCESS OVERVIEW
Item No. 5A2
Auditor Recommendation
Staff Presentation
June 2, 2016
∗Posted on PlanetBids system
∗74 vendors pre-registered with the City
∗250 vendors registered with PlanetBids but not
specifically with the City
∗25 vendors registered as Interested Bidders
∗9 Interested Bidders submitted an RFQ response
RFQ DISTRIBUTION
∗Qualifications-Based System
∗Designated for Professional Services
∗Technical Factors and Sealed Price Proposals
∗Audit Selection Committee (panel)
EVALUATION PROCESS
∗Experience in providing consulting services related to auditing, with an emphasis on government accounting and auditing of entities with at least the size and complexity of Newport Beach.
∗Quality, background, reputation, credibility and experience of the firm.
∗Quality of the staff with emphasis placed on educational background, time spent in the field, and valid certifications possessed by the project team members.
∗Practices and procedures used to carry out the requested services according to the City’s expectations.
TECHNICAL FACTORS
Firm Technical Score
White Nelson Diehl Evans, LLP 97.00
Davis Farr, LLP 96.00
Rogers, Anderson, Malody & Scott 91.00
LSL 90.00
Gruber & Associates 89.50
Vavrinek, Trine, Day & Co. 85.50
The Pun Group 72.00
Badawi & Associates 66.50
Chavan & Associates 61.00
TECHNICAL SCORES
∗White Nelson Diehl Evans, LLP and Davis Farr, LLP
were identified as the two highest-qualified firms for
this project.
∗Reference Checks performed on both finalists.
∗Technical Factors and Reference Checks resulted in
WNDE being identified as the most qualified firm for
this project.
∗Sealed cost proposals opened and WNDE pricing
confirmed.
FINALISTS
PROPOSED ANNUAL COSTS
Firm Annual Cost
White Nelson Diehl Evans, LLP $45,500.00
Davis Farr, LLP $43,000.00
Rogers, Anderson, Malody & Scott $47,650.00
LSL $52,630.00
Gruber & Associates $37,000.00
Vavrinek, Trine, Day & Co. $63,000.00
The Pun Group $43,500.00
Badawi & Associates $45,990.00
Chavan & Associates $35,000.00
1
MEMORANDUM
To: Finance Committee
From: Finance Committee Subcommittee (Members O’Neill, Tucker and Warner)
Date: May 19, 2016
BACKGROUND
The Finance Committee (the “Committee”) was established by City Council (the “Council”) Resolution
No. 94-110 dated December 12, 1994. The original duties of the Committee included: (1) review and
monitor events and issues which may affect the financial status of the City; (2) make recommendations
to the Council regarding amendments of financial and budgetary policies; (3) recommend actions to the
Council to further the aims of the Finance Committee’s policies; (4) review the activities of staff
regarding the preparation of the City’s budget and other fiscal matters consistent with Council policy; (5)
review the activities of staff as outlined in the Council Income Property Policy, periodically review and
inventory all City-owned income property, and make recommendations to the full Council related to the
management of income property; and (6) review the activities of staff pursuant to the City Council
Annexation Policy and make recommendations to the Council regarding the annexation of additional
territory to the City.
The Committee was disbanded in 1998 but re-established on December 12, 2000 by Resolution No.
2000-103. Over time, the Committee’s responsibilities and membership have been amended three
times, with the most recent time being Resolution No. 2015-5 (the “Resolution”). The Resolution
reconstituted the Committee from a three (3) member Council subcommittee to a seven (7) member
committee that includes three (3) Council Members appointed by the Mayor and four (4) public
members each of whom is nominated by a Council Member not a member of the Committee and
confirmed by the Council. A goal of the Council in expanding the Committee was to increase citizen
input into the City’s financial and budget practices. The Resolution recommends that appointed
resident members of the Committee possess a level of expertise in financial matters (the “Public
Members”).
The City staff has spent the last year acquainting the Committee with the financial statements, budgets
and operations of the City. At the February 11, 2016 meeting of the Committee, the Committee
unanimously resolved that a subcommittee of three Public Members (the “Subcommittee”) be
appointed with the charge of reviewing and making recommendations to the full Committee with
respect to financial and budgetary policies of the City as contemplated by the Resolution. Those
recommendations are to be reviewed by the Committee and, to the extent deemed appropriate by the
Committee, will be forwarded (as they may be modified by the Committee) as recommendations for
consideration by the Council. The appointment of the Subcommittee was delegated to then Committee
Chairman Curry who appointed Public Members O’Neill, Tucker and Warner as the Subcommittee.
The Subcommittee notes that the current and projected revenues of the City appear to be consistent
with the Resolution’s direction to the Committee. Revenues have adequately satisfied annual operating
budget needs, with a surplus exceeding $14M for the fiscal year ending June 30, 2015. The 2015-2016
budgeted amounts include a “Fresh Start” accelerated pay down of the City’s unfunded pension
liabilities and the yearly debt service on long-term debt incurred in connection with the Civic Center and
Park project. Revenues are projected to adequately satisfy these projected long-term obligations as well
Item No. 5B
SUBCOMMITTEE RECOMMENDATIONS
June 2, 2016
2
as address anticipated costs associated with department budgets for the foreseeable future, the largest
being salaries and benefits.
Under the Resolution, in addition to other Purposes and Responsibilities, the Committee is to make
recommendations to the Council “to maximize the City’s revenues”1 and “to minimize the City’s cost to
provide core services and required activities.”2 The Subcommittee has chosen to focus in this
Memorandum on aspects of those functions and budget process issues that have come to the attention
of the Subcommittee members over the past year. The Subcommittee has not attempted to evaluate
the political viability of its suggestions, but rather has approached its review as if the operation of the
City were a private sector business.
A. MAXIMIZE REVENUES
At the March 2016 Finance Committee meeting, City staff presented projected FY2017 General Fund
revenues, which included property tax ($94M), sales tax ($36.2M), transient occupancy tax ($22M),
service fees and charges ($19.2M), other taxes ($8.3M), property income ($9.3M), and other revenues
($10M), totaling approximately $199M. The two largest sources of revenues (65% of the total),
property taxes and sales taxes, come to the City based upon formulas over which the City has no
control. Other sources such as transit occupancy taxes, business license taxes, rates charged for services
and development related charges are within the control of the City. With respect to revenues, the
Subcommittee recommends the following:
1. The Subcommittee notes that the City has a backlog of capital projects that it has identified as either
being necessary to undertake, or desirable to undertake. The ability of the City to fund these capital
projects is tied directly to the generation of revenue by the City. Each year, the City allocates money out
of the Operating Budget towards the CIP Budget. In addition, a substantial portion of any yearly surplus
from the Operating Budget is often also allocated to the CIP Budget. Accordingly, in order to have the
ability to fund the CIP Budget to the maximum extent practicable, or to achieve other priorities of the
Council, the Subcommittee recommends no changes to the types and calculations of recurring revenues
that are due the City. The Subcommittee also recommends that fees or rents charged related to
development or use of City property or assets overseen by the City also be updated on a fixed schedule
to remain current (the Subcommittee recommends every three years).
2. The Subcommittee recommends that amounts charged by enterprise funds should also be updated
on a fixed schedule to remain current (the Subcommittee recommends at least every five years).
3. There has been a trend in the City to replace obsolete or less desirable commercial uses with
residential uses. Presumably that trend reflects an economic reality that in those locations residential
uses create more value for the property owner. While good land planning and environmental
considerations should be the paramount factors, residential uses do demand more services from the
1 “Recommend for Council approval, and manage an on-going process for measuring and
setting goals designed to maximize the City’s revenues consistent with existing taxation
structures and inter-governmental funding opportunities, fee generation consistent with
market rate charges for City provided services and market rate fees for utilization of City owned
assets.”
2 “Recommend for Council approval, and manage an on-going process for measuring and
setting goals designed to minimize the City’s cost to provide core services and required
activities, consistent with the desired service level for residents and other internal and external
customers.”
3
City and more demand on City infrastructure. To the extent they replace retail uses, they also could
result in a reduction in sales taxes, while perhaps increasing property taxes. Accordingly, the
Subcommittee recommends that the City undertake a review of policies in the General Plan to ensure
that property owners who propose conversions to residential uses contribute an appropriate amount
towards infrastructure costs and maintenance. Those contributions could be implemented through
development agreements detailing the benefits to the public and to the property owner seeking a land
use change.
4. In statistical areas of the City where more than one project is under consideration, but they all cannot
be implemented without one or more of them being required to go through a Charter Section 423 vote
of the public, all other things being equal, the Subcommittee recommends that if the Council chooses to
prioritize the projects, the generation of maximum financial benefit to the City should be a factor in
deciding which project would have priority.
B. MINIMIZE COSTS
1. While there are significant expenditures of City funds across the many City departments, it is beyond
the scope of the Committee to effectively review expenditures on a line by line basis of the various
departments. However, due to the significant percentage of the City’s operating budget being
expended on salaries and the long term benefits that inure to employees, the Subcommittee believes a
primary function of the Committee could be to assist the Council in finding potential strategies to reduce
the financial burden of employee benefits to the long term financial health of the City.
2. Approximately 57.6% of the City’s overall operating budget goes toward salaries and benefits, with
70.49% of the general fund operating budget going toward such uses. Salaries and benefits are
governed by bargaining unit contracts reflected in ten (10) Memoranda of Understanding. These
amounts include payments that fund defined-benefit pensions for current, retired and separated
employees. The Subcommittee has been advised that approximately 70% of the nearly $300,000,000
unfunded pension liability (projected as of June 30, 2016) is owed to retired and separated employees.
3. The Subcommittee has also been advised that the City has outsourced a number of functions over
the past few years. At present, a determination of whether to outsource additional functions is based
upon an analysis that savings will occur. That analysis in turn is based upon the best information that
may be generated at the time it is prepared. However, revisions by CalPERS of its actuarial assumptions
as to life expectancy, and other factors like future salary increases or average time of service before
retirement have shown that assumptions can change to the detriment of the City. In addition, the rate
of investment return assumed in determining the obligations of the City to contribute towards pensions
can likewise materially affect the City’s obligations by a further adjustment.
4. Due to the risk of pension obligations being greater than what they reasonably appeared to be when
an analysis was completed, the Subcommittee recommends that when an analysis indicates that there is
little-to-no cost savings in outsourcing, the City consider doing so anyway since outsourcing would
reduce the risk of a later determination that the assumptions used in the original analysis were
incorrect. However, the decision on whether to outsource those functions that involve public safety or
greater potential liability from an outside contractor failing to properly or timely perform should be
evaluated in light of those risks as well as financial considerations. Further, the prospect of vendor
pricing firming and/or the quality of service diminishing below the pre-outsourcing level once a service is
outsourced, and whether future State legislation could increase the costs of an outsourced service (such
as revisions to prevailing wage legislation), should also be evaluated as part of the analysis.
5. Pension costs throughout the organization should be mitigated by employees continuing to
contribute significant amounts to their pensions.
4
6. The Subcommittee has been advised that the employee benefit exposure involved in contracting with
another agency to perform the public safety function cannot be expected to be reduced with respect to
sworn functions, so it does not appear there would be a benefit in contracting out sworn public safety
functions. However, the City should thoroughly analyze the number of public safety employees to see if
management and administration can be streamlined, or functions can be combined internally or with
other nearby agencies. In addition, functions that are not required to be staffed by sworn personnel
should be performed by non-sworn personnel. In addition those functions that are not required to be
performed by sworn personnel should be subjected to the same outsourcing analysis as other functions
in the City.3 The Subcommittee recommends that department management justify sworn personnel
being used to perform any functions other than those that require sworn personnel.
7. The Subcommittee is not in a position to judge whether the number of employees in a department is
the number of employees that are necessary, or whether some employee and management functions
can be combined to reduce the employee count. However, a review of staffing levels of various City
departments should be entertained. Accordingly, the Subcommittee recommends that the City retain
an outside consultant to review the City’s staffing practices to ensure that only the number of
employees are on staff that are necessary to properly perform the work expected of staff. Given the
City’s wide variety of activities, it would be best if the City Manager initially selected a single department
to undergo review to ensure that the process is found to be worthwhile before expanding the review
more broadly. The scope of the consultant’s services should be reviewed by the Subcommittee or the
entire Committee to ensure that the consultant’s scope is appropriate and focused.
8. As for a line by line review of the material expenditures unrelated to salaries and benefits throughout
the organization, the City might consider engaging an outside internal auditor to conduct a review of the
appropriateness of expenditures that are routinely made by departments. The rate charged by a firm
with internal audit expertise should be materially less than rates charged by a CPA firm, but would give
assurances to the Committee that a hard look has occurred at expenditures in City departments where
economies may be available or waste or inefficiencies avoided.
C. BUDGET PROCESS
1. Once revenue is maximized and costs minimized, any decision on how to spend available money is a
political decision and therefore the Subcommittee makes no recommendation to the Committee or the
Council on spending choices. However, the Subcommittee observes that to the extent expenditures are
made which increase the value of real property in the City and/or the prospects of retail sales or
occupancy tax generating businesses, the Council will have available to it more revenue with which to
address the Council’s priorities.
2. The Subcommittee believes it would be prudent for the Council to consider prioritizing expenditures
it chooses to make in the Capital Improvement Program on the basis of potential exposure to the City
for failing to make such expenditures in a timely fashion. To the extent the City has a master plan for a
particular infrastructure type of item, the Subcommittee recommends that the master plan be adhered
to if the failure to do so could result in liability to the City for failing to follow its own plan. Alternatively,
the master plan could be change in a reasonable fashion so that it can be implemented on the schedule
set forth in an amended master plan. Given that the Council has historically not been asked to approve
3In its report to the Committee, the Police Department noted that using civilian employees
reduces staffing costs, allows for additional continuity and specialization of staff, and ensures
that more sworn Officers are assigned to field positions.
5
master plans for infrastructure replacements and refurbishment, funding decisions that would restrict
the ability of staff to implement a master plan should be identified to the Council so that funding may be
provided or staff may be directed to modify the master plan to be consistent with the funding priorities
of the Council.
3. At the time the City Hall project began, a “programming analysis” was conducted in order to size the
facility. The facility was sized to accommodate existing personnel and to allow for a modest increase in
personnel over time since that had been the history of the employee count of the City for many years.
Instead, what has occurred is a reduction in employees with an increase in employees not being likely in
the foreseeable future. So City Hall may have more space than is needed by the functions currently
being conducted at City Hall. If so, to the extent that administrative functions are being carried out in
other facilities in the City, they may be able to be relocated to City Hall if the current employee functions
at City Hall can efficiently be consolidated into less space. Thereafter, if new facilities are needed to
replace old facilities that no longer are able to efficiently carry out their mission (“Presumed Outdated
Facilities”), the sizing of those new facilities should consider whether the administrative function of the
Presumed Outdated Facilities could be relocated to City Hall (thereby reducing the size of the new
facility), or if instead of a new facility, the relocation of administrative functions to City Hall could allow a
Presumed Outdated Facility to instead be updated and refurbished so that it may continue to be used
after relocation of the administrative function to City Hall. Such an analysis has the prospects of
reducing capital improvements which could allow the City to fund other items in the CIP Budget sooner.
The same logic would also apply to other non-core functions in the Presumed Outdated Facilities that
may be capable of being relocated and combined with other existing City facilities.
4. The Subcommittee recommends that expenditures be based upon the adopted Annual Budget.
Unbudgeted expenditures that require amendment to the Annual Budget ought to be avoided to the
extent practicable. The integrity of the budget process is best preserved in most cases by ensuring that
each proposed expenditure has to compete with every other potential expenditure at the time the
Annual Budget is adopted. Budget Year Amendments do not usually go through the same competition
as they would if they were considered at the time of deliberation of the Annual Budget. Therefore, the
Subcommittee recommends that Budget Amendments be infrequently used especially in the second half
of a fiscal year when the Annual Budget deliberations are or will shortly be underway.
5. The Subcommittee recommends that enterprise funds be operated on a stand-alone basis with the
City being charged the same rates by enterprise funds as unrelated customers, and likewise the City
should charge the same amounts to an enterprise fund as are charged to unrelated customers for goods
and services provided by the City. The goal should be to ensure that rates charged customers are
sufficient to cover costs, including sufficient reserves to cover expected replacements and upgrades that
will occur over time.
D. PENSION REFORM
The Subcommittee has been taken aback at the size of the City’s unfunded pension obligations that have
all accrued since June 30, 2007. While it appears that Newport Beach is in a position to be able to fund
its obligations, it is not hard to imagine that many agencies will not be able to do so in the not too
distant future. If that were to happen, it seems somewhat likely that a legislative solution would be
crafted and it is possible that it could have an adverse financial impact on the financial well-being of the
City. Accordingly, the Subcommittee would urge the Council to seek a leadership position in the
advocacy of comprehensive pension reform in California. The sooner comprehensive pension reform is
addressed by the Legislature and Governor, the less difficult it should be to enact something that is
palatable. Waiting until many agencies are in deep trouble would be problematic. The Subcommittee
6
recommends that the Committee stand ready to assist the Council in this endeavor as the Council may
see fit.
E. NEXT STEP
To the extent the Committee determines that suggestions of the Subcommittee should be
recommended to the Council for review (as they may be modified), City staff should be asked to
incorporate the accepted concepts into one or more existing policies, or come up with a new policy.
Any revised policy or new policy would be subject to the review and approval of the Committee before it
is formally recommended to the Council for consideration. This Memo as updated for Committee
consensus should also be provided to the Council so that the Council is informed of the process
undertaken by its Finance Committee to address issues related to revenues, costs and the budget
process.
June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 5B1
Public Comments
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
ABSTRACT:
In accordance with the authorizing resolution (the “Resolution”) that formed, and identifies the roles and responsibilities of, the Finance Committee, the Finance
Committee has reviewed the City Manager’s proposed budget and recommends
approval of the budget by the City Council. [The Committee also may propose or
comment upon other recommendations that would maximize the City’s revenues, minimizing the City’s cost to provide core services, improve the budget process, and advocate for comprehensive pension reform in California.] Staff will incorporate these
recommendations into existing policies, and/or propose new policies for further
consideration by the Finance Committee and City Council at a later time.
RECOMMENDATION:
a)Determine that the action is exempt from the California Environmental Quality Act(CEQA) pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines
because it will not result in a physical change to the environment, directly or
indirectly;
b)[Offer a formal recommendation to the City Council regarding the adoption of theproposed Fiscal Year 2016-2017 City budget; and
c)Offer any other comments or perspectives on the upcoming decision(s) of the City
Council relating to the Budget, the Budget Checklist, the allocation of the Fiscal Year
2014-2015 Year End Fund Balance, or requests made by individual council
members regarding specific operational changes/reforms.]
[SUGGESTED LANGUAGE/CONCEPTS FOR THE FINANCE COMMITTEE’S CONSIDERATION FOR
INCLUSION IN THIS BUDGET TRANSMITTAL TO
THE CITY COUNCIL ARE INDICATED IN BLUE
TEXT]
Item No. 5C
Finance Committee Fiscal Year 2016-2017 Budget Recommendations
Additional Materials Received
June 2, 2016
FUNDING REQUIREMENTS:
The Fiscal Year 2016-2017 proposed budget is balanced but subject to change based
on Council’s final recommended action.
DISCUSSION:
In furtherance of the Resolution, Finance Committee members agreed on September
16, 2015, to pursue a series “deep dives” into the Fiscal Year 2015-2016 Budget. This
action provided members with the context and understanding of the City’s programs in
advance of the Fiscal Year 2016-2017. The Committee reviewed several of the City’s largest budget divisions and programs, and received explanations about the budget detail including salaries, benefits, contract service accounts, and more as indicated on
the schedule below.
Fiscal Year 2015-2016 Budget Review Summary
10/15/15
Implementation of Budget Preparation Framework - Review of Fiscal
Year 2016 Operating Budget, Session 1 (Recreational and Senior
Services Department).
11/12/15 Implementation of Budget Preparation Framework - Review of Operating
Fiscal Year 2016 Budget, Session 2 (Police Department)
12/10/15 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 3 (Fire Department).
01/14/16 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 4 (Public Works Department).
02/11/16 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 5 (Municipal Operations
Department)
When the Fiscal Year 2016-2017 Proposed Budget became available, the Committee
also reviewed various aspects of the Fiscal Year 2016-2017 budget including economic
overview, revenues, expenditures, revenue/expenditure trends, use of surplus funding and the nature of budget variances from prior years according to the schedule below.
Fiscal Year 2016-2017 Budget Review Summary
03/10/16 Review of Fiscal Year 2017 Budget Assumptions
04/28/16 First review of Fiscal Year 2017 Operating Budget
05/04/16 Second review of Fiscal Year 2017 Operating Budget
05/12/16 Third review of Fiscal Year 2017 Operating Budget
05/24/16 Joint City Council/Finance Committee Budget Study Session
06/02/16 Budget Discussion and Recommendations to Council
The General Fund budget, as submitted, is balanced and includes $199.2 million in
operating revenues, $190.1 million in General Fund operating expenditures and $5.6
million in new General Fund Capital Improvement Plan Expenditures. General Fund
operating revenues are projected to increase 2.58% and 4.52% over Fiscal Years 2015-2016 and 2014-15, respectively. Net of a one-time $2.0 million receipt expected in
Fiscal Year 2015-2016, the Fiscal Year 2016-2017 budget assumes a 3.65% increase
over the prior year. The budget increase is only 0.2% when the cost of MOUs and
accelerated payments on the City’s net pension obligation are removed. The average
rate of revenue increase over the past six years is 4.79%.
The Committee notes that the current and projected revenues of the City appear to be
consistent with the Resolution’s direction to the Committee. Revenues have adequately
satisfied annual operating budget needs, with a surplus exceeding $14 million for the
fiscal year ending June 30, 2015. Revenues are projected to adequately satisfy projected long-term obligations as well as address anticipated costs associated with
department budgets for the foreseeable future, the largest being salaries and benefits.
General Fund operating expenditures are projected to increase 3.87% and 8.92% over
Fiscal Years 2015-2016 and 2014-2015, respectively. The average rate of expenditure increase over the past six years is 4.98%. The majority of expenditure increases are
the result of MOUs and pension costs. Pension costs are increasing $3.9 million to a
total of $40.36 million in Fiscal Year 2016-2017. This is offset by higher employee
pension contributions of $1 million for a total employee pension contribution of $9.5
million in Fiscal Year 2016-2017. Results of financial operations produced net savings to the City in the last seven years due to conservative budgeting and Council Direction
to conserve resources. The budget proposes a net 6.0 FTE decrease in staffing, which
will contribute to additional operational savings in Fiscal Year 2016-2017.
The City maintains financial flexibility by funding and maintaining a $47.5 million contingency reserve equal to 25% of operating costs. In addition, more than $20 million of the City’s revenues is saved to fund the City’s long-term liabilities and capital
replacement plans including $8.5 million to the Facilities Financial Plan, $1 million to the
long-term facilities maintenance plan, $0.5 million towards equipment replacement and
$6.9 million to fund the City’s general liability and workers’ compensation program.
The budget as submitted is reflective of healthy revenues to support a variety of
programs, strong reserves, a sound debt position and addresses long-term obligations
such as pension liabilities and other post-employment benefits. In accordance with its
roles and responsibilities, the Finance Committee has reviewed the City Manager’s proposed budget and recommends approval of the budget by the City Council.
[Additionally, at the May 24, 2016, Joint meeting of the Finance Committee and the City
Council, some Council members expressed comments about the following strategic
issues relating to City operations and activities:
1.Whether to ask departments to return annually with 1-3% in operational savings.
2.Whether to examine a new model for mooring management that may involve greater
use of technology and less operational hours for supervision.
3.Whether to sell the former City Hall site, now under construction as the Lido HouseHotel.4.Whether to move to a flat business license fee of $50 (versus a business license tax)
and to offset that General Fund revenue reduction with an increase in the
Wastewater Enterprise Fund’s fees.
5.Whether to consider a longer replacement schedule for Newport Harbor’s publicpiers and docks.6.Whether to consider outsourcing all plan check for commercial properties’ tenant
improvement (TI) plans.
7.Whether to conduct a new review of Capital Improvement Projects with a priority on
essential efforts versus “wants.”8.Whether to wait on any pension “Fresh Start” decision until additional FinanceCommittee review occurs as to alternatives to another Fresh Start.
[Finance Committee members may wish to discuss any of these items, as well as the
proposed use of the Fiscal Year 2014-2015 excess Fund Balance, including whether or not to suggest that the Council adopt an allocation of up to $3.5 million of the Fund Balance for stabilization of the Wastewater Fund.]
[If the Finance Committee makes a recommendation to supplement the Enterprise Fund
with General Fund dollars, it is the City Manager’s strong recommendation that the Committee also consider recommending that the Council move forward (after public hearing and protest measurement) to adopt a new wastewater rate structure in Fall
2016 that fully funds the Wastewater Fund’s capital and operational needs.
Doing so would avoid making this same General Fund to Enterprise Fund transfer in future years.
The City Manager suggests this because:
•The Wastewater Enterprise Fund should be self-sufficient and recession-proof, while
accommodating a robust capital improvement plan to replace and maintain thecommunity’s wastewater infrastructure; and
•There are significant other obligations – including but not limited to excessive
unfunded pension liabilities – that deserves the Budget’s attention in the months andyears to come.]
At the February 11, 2016, Finance Committee meeting, the Finance Committee
unanimously resolved that a subcommittee consisting of the three Public Members (the
“Subcommittee”) be appointed with the charge of reviewing and making recommendations to the full Committee. Specifically, the recommendations address the responsibilities of the Finance Committee pertaining to the development of
recommendations that would maximize the City’s revenues, minimizing the City’s cost to
provide core services, improving the budget process, and the need for comprehensive
pension reform. The Finance Committee, as a whole, reviewed and concurred with the recommendations of the Finance Subcommittee, (as amended) on June 2, 2016. Staff will incorporate these recommendations into existing policies, and/or propose new
policies for further consideration by the Finance Committee and City Council.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
June 2, 2016, Finance Committee Agenda Comments
These comments on items on the Newport Beach City Council Finance Committee agenda are submitted
by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
III. PUBLIC COMMENTS
I seem to recall a comment made at the May 12, 2016, Finance Committee meeting (for which
minutes don’t yet seem to be available) – and repeated in the City Manager’s Insider’s Guide to
the May 24th joint meeting with the City Council – that the City’s unfunded pension liability “is
completely akin to debt - borrowed at 7.5%.”
Although I understand that recent GASB rules may require recording the unfunded pension
liability as “debt,” I find the idea that we effectively have a loan with CalPERS on which we are
paying 7.5% interest deeply puzzling.
I’m not sure if the term of this hypothetical equivalent loan is 15, 30 or some other number of
years, but whatever the hypothetical term, if this picture is correct, that we have a $299 million
loan with CalPERS on which we are paying 7.5% interest, then it would clearly be in the City’s
best interest to pay off the CalPERS loan with the proceeds from a different loan, say at 7%, on
which the City would (for $299 million) be paying something like $21 million per year interest,
perhaps in perpetuity (if it made no progress on the principal).
But that makes little sense to me, since I wasn’t aware the City was paying CalPERS interest on
the unfunded pension liability.
Does the City actually receive an annual bill from CalPERS demanding 7.5% interest on what
the public is told is the dollar amount of the unfunded liability, independent of how well CalPERS
did that year?
On the contrary, I had a vague notion that instead of having taken out a loan, the City has
reserves on deposit with CalPERS which are earning money, and the “unfunded liability” is an
actuarial statement regarding the shortfall between the actual reserve and the reserve that
would be necessary to fund future pension obligations if CalPERS were, in the future, to achieve
a steady 7.5% return on the deposits it holds. If CalPERS were to achieve better than 7.5%, the
current reserve would be closer to sufficient, and the unfunded part would go down – as it
seems to have done, according to the City’s May 24th presentation, in 2011, for example (see
Slide 26 of the “Budget Overview Handout”). At least that was my understanding.
Something the principal of which goes down or up depending on whether attainable market
rates are above or below 7.5% does not sound to me equivalent to a loan at 7.5%; but perhaps
someone can disabuse me of my faulty understanding.
Based on my possibly faulty understanding I wonder if in addition to concern about growing
unfunded pension liability, what the City also needs is a more thoughtful policy regarding what
to do in years when CalPERS is doing well and the reserve is more than adequate to meet
needs (that is, in years of negative unfunded liability). The past decision to respond to negative
unfunded liability by increasing benefits and eliminating employee contributions doesn’t seem, in
retrospect, to have been a wise one, although I assume a positive unfunded liability could have
appeared in bad years anyway.
Item No. 5C1
Public Comments
Correspondence
June 2, 2016
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 2 of 6
Item IV.A. MINUTES OF APRIL 28, 2016
The content of these draft minutes is difficult to follow, in part due to awkward, and in some
cases (probably unintentionally) misleading or inscrutable phrasing. I would again suggest the
Committee consider preserving the digital audio recordings along with the minutes. Short of a
complete rewrite, and in addition to the corrections suggested by Committee member Tucker, I
might point out the following, which seem obvious errors:
Page 1, misnumbered item heading: “I. III. PUBLIC COMMENTS”
Page 1, paragraph 3 from end: “Mr. Jim Mosher …, asked if how the Finance Committee
would coming back for be handling the future discussion items mentioned in Item No. 6 VI
(Announcement-Future Agenda), …”
Page 1, paragraph 2 from end: “Committee Member O’Neill stated that his understanding
was that Item No. 6 Policy A-6 applies only to Council, not the Committee, …”
Page 2, misnumbered item heading: “II. IV. CONSENT CALENDAR”
Page 2, Item “II.A”, last line: “Seeing no one wishing to address the Finance Committee,
Chair Curry Petros closed public comments.”
Page 2, misnumbered item heading: “III. V. CURRENT BUSINESS”
Page 2, paragraph 3 from end: “City Manager Kiff continued with the presentation by
reporting that overall salary salaries increased by four percent.”
Page 2, last paragraph: “City Manager Kiff reported on Capital Improvement and stated that
capital improvement budget are one-time expenses, not recurring expenses and half of the
funds go toward meeting debt obligations.” [half the Capital Improvement budget goes to
debt service? This doesn’t sound right.]
Page 3, paragraph 4: “City Manager Kiff concluded the presentation by stating that the
information provided is new and appreciates the discussion and asked if there is a design
desire from the committee to possibly schedule additional meetings to review the proposed
budget in further detail.” [?]
Page 3, paragraph 6: “Committee Member Curry suggested conducting the first meeting the
following Thursday, and continue on for as many Thursdays as needed until a comfort level
is reach reached.”
Page 3, paragraph 2 before Item B: “… and thinks that the people using the sewage sewer
system should be the ones paying for it.”
Page 4, misnumbered item heading: “IV. VI. FINANCE COMMITTEE ANNOUNCEMENTS
…”
Page 5, paragraph 3: “Mayor Dixon stated that her understanding was that a Section 115
trust, as noted, was approved unanimously by Council in 2008.” [? – this entire section is
similarly garbled]
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 3 of 6
Page 5, paragraph 3: “Committee Member O’Neill is unsure on how Certificates of
Participation (COP) works work and requested clarification as to how COP applies to debt
issuance. City Manager Kiff will add this topic to the May 26 agenda for further discussion.”
Page 5, signature lines: “Tony Petros, Chair … Finance Committee Chair”
Item IV.B. MINUTES OF MAY 4, 2016
As with Item IV.A, above, one would have to have been present, or to have listened to the audio
recording, or both, to understand much of what is reported in these draft minutes. In addition to
the corrections suggested by Committee member Tucker, I offer the following:
Page 1, Item III, paragraph 2: “Mr. Jim Mosher commented on how items are placed on the
agenda and mentioned procedures other committee members committees follow
regarding agenda items. Mr. Mosher suggested for the Committee to can hold an
unscheduled vote after at each meeting to discuss items to be included on following meeting
agendas.”
Page 2, Item III, paragraph 2 of body: “City Manager Dave Kiff provided an overview of the
proposed budget that touched on salary, cost of cafeteria plan purge rates, miscellaneous,
and safety and employee.” [Seems a strange word. I recall the City Manager mentioning, on
several occasions, that cafeteria plan benefits are not “PERSable.” Without benefit of
listening to the recording, could this have something to do with that?]
Page 2, paragraph 4 from end: “City Manager Kiff and Budget Manager Ms. Giangrande
continued with the presentation by discussing the cafeteria allowance. City Manager Kiff
explains explained that the cafeteria allowance is medical, health and dental employee
insurance bought by the City.”
Page 3, paragraph 1: “Mr. Mosher stated that compared to the last year’s budget, the lines
line items and line item identification numbers for this budget have changed. Mr. Mosher
also stated that the proposed budget consists of contains abbreviations that the public will
not know what they stand for.”
Page 3, paragraph 4: “Council Committee Member Warner left the meeting at 5:28 p.m.”
Page 3, Item 3, paragraph 3: “Mr. Mosher commented that it would be a good idea for the
public and members of the community Committee to be told which ideas were not
included, to which a response was received Committee Member Tucker responded,
stating that no ideas were excluded, just phrases or words needed to be revised for better
understanding.”
Page 4, signature lines: “Tony Petros, Chair … Finance Committee Chair”
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 4 of 6
Item V.A. AUDITOR RECOMMENDATION
This item seems to me to be a complete cop-out.
First, whether it conforms to modern practice or not, City Charter Section 1116 appears to say
the auditor for a particular year is supposed to be selected at “the beginning of each fiscal year,”
not at its end.
Second, several years ago, in the wake of the City of Bell scandal and the embarrassing
revelation that Newport Beach was among the cities that had retained the same (apparently
ineffective) auditor for many years, the City Council adopted a policy of changing auditors.
My recollection is that White Nelson was already overdue for replacement last year, but City
staff decided, without quite seeking Council approval until after the fact, because of disruptions
created by the implementation of the Enterprise Resource Planning software.
Now, White Nelson is being recommended once more, for less obvious reasons, for yet another
five years with little indication anyone feels there is any need to ever change auditors again.
It least in my view, this will lead to the public perception of a too cozy relationship between the
auditor and the audited.
My other comment is to wonder how many people it takes to audit a city the size of Newport
Beach. I have the impression the other firm City staff considered – Davis Farr – is a two person
operation (Marc Davis serves as Treasurer to the Costa Mesa Sanitary District, and his wife
Wendy [not part of Davis Farr] as Finance Director).
Item V.B. SUBCOMMITTEE RECOMMENDATIONS
The Subcommittee’s recommendations seem generally sound to me, but I have these
comments:
1. Statements such as that at the end of the first full paragraph on page 2, that the
Subcommittee “has approached its review as if the operation of the City were a private
sector business” are troubling to many in the community. Governments, including city
governments, are, to them, fundamentally different from private sector businesses.
2. It is not entirely clear to me how the “all other things being equal” in Recommendation A.4 is
intended to be read. All other things are never exactly equal, so what importance are
financial considerations proposed to be given in some practical situation?
3. I do not agree with Recommendation B.4, that the City should outsource even when doing
so has little-to-no cost savings. Outsourcing is no panacea, and its purported financial
benefits need to be weighed against its effects on employee morale and the public
perception that their city services are being performed by dedicated public employees with
“pride of ownership” and over whom their elected and appointed officials have complete
control. And outsourcing arrangements can and do go sour. In addition to looking for new
opportunities to outsource, I think the City needs to spend equal time evaluating whether
existing outsourcing options continue to make sense, both in cost and performance.
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 5 of 6
4. Regarding Recommendation C.1, I’m not sure why the Subcommittee would view itself as
non-political and averse to making policy recommendations. Policy has to come from
somewhere, and Section E suggests the present document is in fact a policy
recommendation, as I think it should be. As to politics, the decision to view the City as a
business is already a political decision unpalatable to many.
5. Recommendation C.3 reminds one of what the status of the Civic Center Audit being
overseen by the City Attorney is? Like many things, it seems to have fallen off the radar
screen. The implication of Recommendation C.3 seems to be that the Police and Municipal
Operations administrative functions could be brought to the City Hall, which I think is an idea
worth exploring.
Item V.C. FINANCE COMMITTEE FISCAL YEAR 2016-2017 BUDGET
RECOMMENDATIONS
Since most, if not all, of the City’s outside expenses are by contract, my perennial comment
about the budget has to do with how the line items relate to City Charter Section 421, which
gives the City Manager authority to contract for those items approved by the Council in the
budget, and only those (so that all expenses are ultimately approved publicly, by the Council,
either in the budget or as a separate request).
That sounds simple enough in concept, but aside from the Capital Improvements Program and
possibly salaries, this resident is totally in the dark as to what the Council is being asked to
approve in the line items. Rather than being a budget specifying exactly what goods and
services we need to set money aside to purchase in the coming year (pursuant to Charter
Section 421), the Newport Beach budget seems more a statement that we expect to have
enough funds on hand to spend the same amounts we did in the prior year in certain broad
categories that are oddly the same for all departments.
Yet, at times I have heard Newport Beach department heads say that funds for a particular item
are “in the budget” or “not in the budget,” which made me naively believe that before the
budget’s adoption there was a list, somewhere, of the anticipated expenses that would total that
department’s requested amount for, say, “professional services” or “supplies.” Possibly all they
meant was that if the expense asked about (along with a list of past expenses and other
anticipated future expenses they keep in their head) was assigned to the category to which it
belongs, it would put them over their spending limit in that category (or not).
At the May 24th Joint Meeting I used the example of airport consulting services, because I know
the City has a recently renewed contract (C-7071-1) for $70,000 per year for Airport Policy
Implementation Services with former Council member and Mayor Tom Edwards, but at the
same time the Budget Checklist requests eliminating the $241,000 page titled "City Council
Airport Issues" (page 3 of the City Council budget in the FY2016-17 Budget Detail).
The response was that the line item designation for the $241,000 is “01005001 811008 SVCS
PROF” and it isn’t needed because there is $240,000 with almost the same line item
designation (“01005005 811008 SVCS PROF”) on page 2 of the City Council budget, and
another $300,000 with line item designation “01020005 811008 SVCS PROF” on page 17 of the
City Manager budget. Hence, it should be obvious to all that Tom Edwards’ contract will be
June 2, 2016, Finance Committee agenda comments - Jim Mosher Page 6 of 6
expensed to one or the other, or some combination, of these, and there will still be nearly
$500,000 left for airport consulting.
The problem with this is that if we truly have a list of anticipated expenses justifying the budget
requests in compliance with Charter Section 421, then there must be other expected needs for
specific professional services – likely totally unrelated to the airport – contributing to and
justifying the $240,000 and $300,000 line items. But if there are, then we have no idea how
much is planned or left for airport consulting beyond the Tom Edwards contract. Indeed, it could
be nothing at all, or given the looseness of the “budgeting,” it could be that airport expenses are
anticipated in other requests, or could be expensed to them – for instance a Community
Services line item. I have been chastised for suggesting there will be no clear answer, but my
guess is we have budgeted (in the sense of identifying a definite expected need) nothing and
just assume there will be money available if we haven’t spent it on something else.
Again, this does not seem to me to be a budget in the sense of Charter Section 421, but simply
a statement we expect to have enough revenue to be able to spend similar amounts to what we
did in the prior year in broad categories – with no details of what we actually anticipate spending
those dollars on.
My other budget question is: has the FY2016-17 Performance Plan been presented to the City
Council?
City Charter Section 1102 requires the budget (and one assumes the whole budget) to be
submitted for review at least 35 days prior to July 1. If the Performance Plan is part of the
budget, it seems overdue and I would think the Committee would want to see it before making a
recommendation.
Item No. 5C2
Finance Committee Fiscal Year 2016-2017 Budget Recommendations
Additional Materials Received
June 2, 2016