HomeMy WebLinkAboutApproved Minutes - October 13, 2016Finance Committee Meeting Minutes October 13, 2016
Page 1 of 6
CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 13, 2016 MEETING I. CALL MEETING TO ORDER
The meeting was called to order at 4:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660.
II. ROLL CALL
PRESENT: Council Member Tony Petros (Chair), Council Member Keith Curry,
Mayor Diane Dixon, 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, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, IT Manager Rob Houston,
Accounting Manager Rukshana Virany, Assistant City Manager Carol Jacobs, Budget Manager Susan Giangrande, and Administrative
Specialist to the Finance Director Marlene Burns
MEMBERS OF THE
PUBLIC: Max Johnson, Jim Mosher, John Bartel (Bartel Associates), and Hannah Fry (Daily Pilot)
III. PUBLIC COMMENTS
Jim Mosher commented on the Finance Director’s recommendations to use a longer-term
investment strategy for non-expendable trust funds and other long-term holdings, which was discussed at the prior committee meeting. He also stated Moody’s bond rating service upgraded
the City’s bond rating and commented on apparent confusion over which property serves as collateral for the 2010 Certificates of Participation. He recommended that this could be discussed
during a future Public Facilities Corporation meeting.
Chair Petros closed public comments.
IV. CONSENT CALENDAR A. MINUTES OF SEPTEMBER 15, 2016 Recommended Action:
Approve and file.
Jim Mosher and Chair Petros noted corrections to the minutes.
MOTION Committee Member Warner moved and Committee Member Tucker seconded a motion to
approve the September 15, 2016, Finance Committee Minutes, as amended. The motion carried unanimously.
V. CURRENT BUSINESS
A. PRELIMINARY FISCAL YEAR 2017-2018 PENSION FUNDING RECOMMENDATION
Summary:
Finance Committee Meeting Minutes October 13, 2016
Page 2 of 6
At this meeting, staff will present a status update and primer on the City’s Pension and OPEB
liabilities. A consulting actuary will be present should the Committee have specific questions for an actuary. Based on a review of the most current valuations, staff has prepared
preliminary pension funding recommendation prior to the input and comment from our consulting actuary. Recommended Action: 1) Receive and file staff recommendations.
2) Direct consulting actuary to comment on staff recommendations at a subsequent meeting.
3) Provide the consulting actuary direction as to Committee expectations for the November 10, 2016, Finance Committee meeting. Finance Director/Treasurer Dan Matusiewicz introduced John Bartel, actuary, as having
extensive knowledge of CalPERS and pension liabilities. He reviewed terminology including: normal costs, projected benefit, accrued liability, market value of assets, and actuarial
accrued liability.
Chair Petros requested allowing members of the public to interject at will during the presentation.
Finance Director/Treasurer Matusiewicz continued reviewing terms including: UAAL,
unfunded pension liability, changes in actuarial assumptions and experience, gains and losses.
In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz
explained minimum contributions and amortization rates.
Finance Director/Treasurer Matusiewicz provided an example of a 49-year old employee to explain the difference between an accrued liability and projected benefit obligation.
Chair Petros asked what the legal instrument was for assigning the 7.5 percent discount rate
to the employer and could it be unwound. Mr. Bartel discussed Proposition 162, allowing CalPERS board to set the actuarial assumptions. He explained the CalPERS capital market
assumption process to determine the rate. He stated the 7.5 percent would be revisited, which he anticipated would drop to 7.25 or 7 percent. He stated the City did not have the
ability to change the rate but could set money aside if the City were concerned that the rate would not be met.
Chair Petros discussed how private sector retirement plans differ from public employee
pension plans. He stated the employee should assume the risk, not the employer. Mr. Bartel stated the City could negotiate with employees to cost share for the employee contribution.
Mr. Bartel suggested the Committee consider increasing the time allocated to discuss the
matter.
Committee Member O’Neill asked what happened if the rate was reduced to 6.5 percent. Finance Director/Treasurer Matusiewicz explained the sensitivity analysis performed by staff
and the likely result if the CalPERS board were to adopt a 6.5 percent discount rate. He stated the City was most vulnerable in the next 17 years. He then stated the payment on the
unfunded liability would increase from $24 million today to $55 million in 2034, if the pension plans were only able to achieve a 6.5 percent return
Finance Director/Treasurer Matusiewicz continued the presentation illustrating the difference
in amortization schedule including level payment, level percent of pay, and level percent of pay with a 5-year phase in, and discussing the pros and cons of each schedule and
recommends an amortization term not to exceed 20 years.
Finance Committee Meeting Minutes October 13, 2016
Page 3 of 6
Finance Director/Treasurer Matusiewicz stated it was more cost effective to amortize experiences losses over 20 years versus the 30-year default schedule. He encouraged this
use of the 20-year option and illustrating the significant savings and amortization efficiency.
Committee Member Tucker confirmed that the “amortization efficiency ratio” refers to the fact that an obligor is amortizing principal more quickly and therefore paying less interest.
Chair Petros stated there were efficiencies, but the initial cost was higher. He stated it would
be imprudent to cut revenues, as a result.
Council Member Curry stated CalPERS historically hit their rate of return target on the average but they do not always make up for lost ground from years where returns are less
than the target rate.
Mayor Dixon stated they were still trying to make up for the 2008 and 2009 recession.
Committee Member Tucker suggested that staff prepare a schedule that projects 5 years out and plugging in a variety of assumed return rates so the Committee would have an idea of
the magnitude of the problem if CalPERS continued to underperform the discount rate of 7.5 percent by varying amounts. He stated it was necessary to be prepared. Chair Petros noted
that while that might be good information to know, any decision regarding what to do would likely not just be based upon assumed future returns that may or may not occur.
Committee Member Gorczyca suggested that the City employ multi-year budget projections.
Committee Member O’Neill asked who else went to a fresh start program.
Council Member Curry stated Irvine did.
Finance Director/Treasurer Dan Matusiewicz stated Huntington Beach and some agencies
had opted for lump sum discretionary payments to bring down the unfunded liability.
Finance Director/Treasurer Dan Matusiewicz continued his presentation and described the City of Newport’s amortization as compared to other cities. He suggested skipping the 5-year
phase-in option and recommended making a budgetary goal move to a level-dollar payment plan. He reviewed the status of the current plans. He recited a number of statistics about the
current employee population including the number employees receiving the reduced PEPRA benefit level.
Committee Member Gorczyca asked how the City compared to other employers statewide.
Mr. Bartel described the trend for safety employees to pay both employee and a portion of the employer contribution.
Finance Director/Treasurer Matusiewicz stated the City’s unfunded liability had reached $273
million and the plans were 67.5 percent funded as of the most recent actuarial valuation. He stated the 2016 investment experience loss would increase the City’s unfunded pension
liability to approximately $315 million.
Committee Member Tucker expressed concern about the rapid growth of the unfunded liabilities.
Mr. Bartel suggested looking where contributions would go and determining if the City would
be able to afford it.
Finance Committee Meeting Minutes October 13, 2016
Page 4 of 6
In response to Committee Member Gorczyca, Mr. Bartel discussed clients that prepare
budget forecasts. He mentioned Sunnyvale uses 20-year projections.
In response to Committee Member Tucker, Mr. Bartel explained that contributions would be more volatile as plan assets increased because even a relatively small shortfall in the rate of
return when multiplied by a large asset base results in a big addition to unfunded liabilities.
Finance Director/Treasurer Matusiewicz quantified the impact of 2015-2016 investment experience loss. He described various CalPERS efforts including the risk mitigation strategy,
flexible glide path and asset allocation study. He discussed the status of the OPEB plan and relatively smaller unfunded liability. With respect to the pension plans, he recommended
starting to pay on the 2016 loss, amortize the loss no longer than 20 years, leave 2014 experience gain as a future credit, consider a gradual movement toward a level payment plan
starting with the 2017-2018 budget, and establish a pension and OPEB funding policy.
In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained the significance of the 2014 experience gain and compared it to a store credit that
could be used to offset contribution rates in future years.
Committee Member Gorczyca inquired as to the City’s rate of projected revenue growth. Finance Director/Treasurer Matusiewicz estimated the average to be 3-5 percent.
Committee Member Warner left the meeting at 5:20 p.m.
Finance Director/Treasurer Matusiewicz suggested memorializing policies.
In response to Mayor Dixon, City Manager Kiff suggested the Committee determine the plan
it wished the consulting actuary review, along with his recommendations.
Committee Member O’Neill discussed having data, then making policy. He asked what data was used in 2014. Finance Director/Treasurer Matusiewicz explained how the contribution
rates were determined and that the Committee recommended a fresh start as a form of forced fiscal discipline. Council Member Curry explained that the data provided an
affordability opportunity. Chair Petros explained the prior review and clarified that the fresh start was necessary.
Mayor Dixon questioned how it was different in a private situation.
Committee Member Tucker stated that in the City environment the City is at risk for shortfalls
since pensions are in essence guaranteed; whereas, retirement contributions in the private sector are usually not predefined.
Mayor Dixon agreed that budget forecasting was important. She expressed concern with
decreasing development agreement funds and the need to use general funds. She suggested the budget planning and projections be considered along with the actuarial plan.
In response to Committee Member O’Neill, Finance Director/Treasurer Matusiewicz clarified
where the 2014 fresh start and 2016 partial fresh start were included in the current budget.
Council Member Curry suggested focusing efforts on affordability rather than chasing the unfunded liability.
Committee Member Gorczyca questioned the 100 percent target policy. She requested
additional training on pensions. She stated multi-year budget projections were necessary in order to determine affordability.
Finance Committee Meeting Minutes October 13, 2016
Page 5 of 6
Chair Petros suggested the discussion be continued as the only item on the next meeting and starting the meeting at 3:00 p.m.
Committee Member Tucker stated it was necessary to understand the issue. He agreed with
Committee Member Curry that it was futile to chase the unfunded liability.
Mr. Bartel recommended looking at the City’s history and preparing a contribution projection and where the unfunded liability was likely to go.
Committee Member Gorczyca requested information on other agencies and their practices.
Committee Member Tucker reiterated his request for a 5-year estimate with different rates of
returns being assumed.
Mr. Bartel stated he would bring back information on the history, unfunded liability, contribution rates, and comparison to other entities.
Council Member Curry stated he was interested in what the City can do and the most efficient
policies.
Committee Member Gorczyca requested information on the various CalPERS payment plans.
Chair Petros left the meeting at 5:44 p.m. B. BUDGET AMENDMENTS Summary:
Receive and file a staff report on the budget amendments for the last quarter of Fiscal Year 2015-2016 and for the first quarter of Fiscal Year 2016-2017. Recommended Action: Receive and file.
Budget Manager Giangrande presented the staff report.
Committee Member O’Neill clarified that the amendments were for the last budget.
In response to Mayor Dixon, Budget Manager Giangrande clarified that budget amendments
were related to the current budget and stated the City Council had already approved the items.
Committee Member O’Neill asked about use of surplus funds. Finance Director/Treasurer
Matusiewicz explained that some of the surplus used is from restricted funding sources.
In response to Committee Member Gorczyca, City Manager Kiff explained the CalOptima reimbursement for transportation of Medicare patients.
Jim Mosher suggested indicating how much was added to the budget that was not planned to
be spent and was not offset by new revenues.
VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-
DISCUSSION ITEM)
None.
VII. ADJOURNMENT