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HomeMy WebLinkAboutApproved Minutes - February 16, 2017Finance Committee Meeting Minutes February 16, 2017 Page 1 of 9 CITY OF NEWPORT BEACH FINANCE COMMITTEE FEBRUARY 16, 2017 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Council Member Diane Dixon (Chair), Mayor Kevin Muldoon, Council Member Will O’Neill, Committee Member Patti Gorczyca, and Committee Member Larry Tucker ABSENT (EXCUSED): Committee Member William Collopy and Committee Member Joe Stapleton STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Assistant City Manager Carol Jacobs, Budget Manager Susan Giangrande, Accounting Manager Rukshana Virany, Human Resources Director Barbara Salvini, Public Works Director Dave Webb, Deputy Public Works Director Mark Vukojevic Administrative Manager Angela Velazquez, Fire Assistant Chief Chip Duncan, Lifeguard Captain Brian O’Rourke, Lifeguard Operations Assistant Chief Rob Williams, Public Works/Finance Administrative Manager Jamie Copeland, Community Development Director Kimberly Brandt, and Administrative Specialist to the Finance Director Marlene Burns OUTSIDE ENTITIES: Jayson Schmitt and Mia Corral Brown (Chandler Asset Management); John Bartel and Bianca Lin (Bartel Associates LLC); and Bradley Zint (The Daily Pilot) MEMBERS OF THE PUBLIC: Joy Brenner, Carl Cassidy, Jim Mosher, and Mary Lou Hergel III. PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher discussed the revamped Finance Department webpage including budget, salaries, and performance plan. He also stated the City published its required State annual balance sheet in the Daily Pilot and suggested the information be posted on the webpage. In response to Chair Dixon, Finance Director Matusiewicz explained that a Performance Plan was not prepared during the preliminary stages of the budget but the City did prepare a Performance Plan along with the final adopted budget. Joy Brenner asked how the public could connect with the Finance Committee to ensure the Corona del Mar Library project continued. Mary Lou Hergel asked about funds set aside for the Library. Committee Member O’Neill suggested moving the FFP forward on the agenda to allow the public to address the Committee regarding the Corona del Mar project. Finance Committee Meeting Minutes February 16, 2017 Page 2 of 9 Chair Dixon closed public comments. IV. CONSENT CALENDAR A. MINUTES OF NOVEMBER 10, 2016 Recommended Action: Approve and file. Committee Member Tucker presented corrections to the minutes. MOTION Committee Member Gorczyca moved and Council Member O’Neill seconded a motion to approve the corrected minutes of November 10, 2016. The motion carried 4-1-2, Mayor Muldoon abstaining and Committee Members Collopy and Stapleton absent. V. CURRENT BUSINESS A. REVIEW OF INVESTMENT POLICY, FINANCIAL MARKETS, INVESTEMENT PORTFOLIO, AND INVESTMENT STRATEGIES Summary: Staff and/or one or more investment advisors will discuss the City’s investment policy’s conformance to the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Committee will receive a financial markets overview and a performance report of the City’s investment portfolio through December 31, 2016. Staff will also recommend changes to the City’s investment strategy. Recommended Action: a) Review and comment on staff’s proposed changes to Council Investment Policy F-1. b) Direct staff to bring amended policy to Council for approval. c) Review and comment on staff’s proposed investment strategies. Jayson Schmitt, Chandler Asset Management, introduced Mia Corral Brown, Senior Vice President and Relationship Manager of the Client Team. He discussed the current economy, including the possibility of increased Federal fund rates, how the Trump administration may impact future fed rate monetary policy, employment rates, Producer Price Index, retail sales and consumer confidence, economic activity, housing, manufacturing, gross domestic product, and bond yields. In response to Mayor Muldoon, Mr. Schmitt explained that the Government Code and the City’s investment policy established the five-year maximum maturity. In response to Council Member O’Neill, Finance Director Matusiewicz explained that the portfolio’s pooled assets are representative of all fund balances in the budget. Mr. Schmitt discussed the City’s portfolio objectives including safety of principal, liquidity, and rate of return. In response to Council Member O’Neill, Finance Director Matusiewicz stated the City had two advisors with the funds largely split equally Chandler and PFM. Finance Director Matusiewicz stated there were also funds in local investment pools and cash outside either portfolio. Committee Member Gorczyca asked Mr. Schmitt to explain supranationals. Mr. Schmitt explained that supranationals were agencies like the World Bank and Inter-American Development Bank that pooled capital to be lent out to different countries for humanitarian projects. Finance Director Matusiewicz explained why supranationals were added to the Government Code. Mr. Schmitt discussed that asset diversification reduces the overall risk to the portfolio. Finance Committee Meeting Minutes February 16, 2017 Page 3 of 9 Mr. Schmitt reviewed portfolio characteristics and associated yields, types of securities, issuers, quality distribution, duration distribution, and investment performance. Chair Dixon stated the rate of return was 4.35 percent since inception. Mr. Schmitt continued reviewing the short-term portfolio, portfolio allocation, individual holdings, ratings, and liquidity. Finance Director Matusiewicz explained that LAIF funds were sometimes diverted into the short- term portfolio in an effort to obtain a better yield. Mr. Schmitt discussed the performance of the short term-portfolio. Finance Director Matusiewicz suggested LAIF as a benchmark for the portfolio. Mr. Schmitt reviewed the combined portfolio and individual holdings. Committee Member Tucker noted the negative rate of return over the last three months. Mr. Schmitt explained the small amount of securities sold and mentioned that unsold securities are reflected as unrealized losses unless they are sold. An unrealized loss occurs when the portfolio holding decreases after the City buys it, but has yet to sell it. Committee Member Tucker noted the increased stock market and decreased bond market impacting CalPERS. Mr. Schmitt discussed the possibility of moving towards a longer term strategy. He explained sector allocations, durations, ten-year annualized returns, and diversification. Finance Director Matusiewicz discussed his recommendation to segment the portfolio into individual strategies and the Committee’s recommendation to consider the 1-5-year strategy. Committee Member Tucker asked how much of the portfolio would be beyond 3 years. Mr. Schmitt stated there was no limit per the policy that could be invested in the 3-5-year band based on the strategy. Finance Director Matusiewicz stated half the portfolio could be 0-1 and half at 5, with the average duration at 2.6. Chair Dixon asked if the strategy should be quantified. Mr. Schmitt suggested that the strategy could be guided by a management directive. Finance Director Matusiewicz suggested that providing limitations may nullify the benefit of active portfolio management and recommended that no such constraint be added to the strategy or policy. Council Member O’Neill stated the Council policy already allowed 1-5 years. Finance Director Matusiewicz requested concurrence with the change in strategy prior to changing a long-term practice. In response to Mayor Muldoon, Mr. Schmitt discussed various mechanisms utilized by his clients in implementing strategies. He stated the most successful cities provided a duration benchmark and strategy. Chair Dixon asked for a recommendation. Deputy Finance Director Montano stated staff was looking for approval of a one to five-year duration strategy. Finance Director Matusiewicz stated published benchmark would be selected for performance measurement. Mr. Schmitt stated there was no limitation on the duration of the portfolio, rather a limitation on investment at five years. Council Member O’Neill recommended staff follow Policy F-1. Finance Committee Meeting Minutes February 16, 2017 Page 4 of 9 Mr. Schmitt discussed other proposed changes to the Policy based on Government Code changes. He discussed the changed language for money market mutual funds. In response to Council Member O’Neill, Finance Director Matusiewicz suggested approval of Chandler’s recommendation. In response to Mayor Muldoon, Mr. Schmitt stated there was no downside to the language, but now there was an investment that could be purchased but would require further investigation. He stated money market reform could produce different mutual funds in the future, but none were yet identified. In response to Committee Member Tucker, Mr. Schmitt stated there may be a launch of new money market funds. He stated the policy and Government Code established maximum investments at 10 percent of the portfolio. Committee Member Gorczyca asked about the restriction from investing in the Orange County Investment Pool (OCIP) which had been outperforming LAIF. She suggested due diligence on OCIP and a comparative analysis between LAIF and OCIP. Mayor Muldoon asked if that would create double risk. Committee Member Gorczyca suggested due diligence. Mr. Schmitt discussed the differential between LAIF and OCIP. Chair Dixon suggested informally watching OCIP. Finance Director Matusiewicz stated the OCIP Treasurer would appreciate the opportunity to present to the Committee. Committee Member Tucker questioned the amount of money in OCIP. Finance Director Matusiewicz stated the City could not opt out of funds that the County was temporarily holding on the City’s behalf but could choose not to invest idle discretionary funds in the City’s possession. Mr. Schmitt explained mandatory versus voluntary participation in OCIP. Chair Dixon suggested staff review the matter and provide a recommendation on whether the Committee should be considering OCIP. MOTION Committee Member O’Neill moved and Council Member Gorczyca seconded a motion to approve the staff recommended changes to Policy F-1 and forward the Committee’s recommendation to the City Council. Jim Mosher stated the policy changes were confusing and suggested proposed language. He discussed endowment funds and the importance of appropriate yield for these assets. The motion carried 5-2. Committee Members Collopy and Stapleton absent. B. PENSION UPDATE Summary: Staff will provide a status update of our CalPERS Pension plans based on recently announced discount rate changes. Staff will review the impact to our plans and make recommendations how to lessen the long-term cost of implementing the phased-in implementation plan contemplated by the CalPERS board. Recommended Action: Receive and file. Finance Committee Meeting Minutes February 16, 2017 Page 5 of 9 John Bartel of Bartel Associates LLC, participating via conference line, reviewed the CalPERS discount rate change and scenario comparison. He discussed contribution projections for safety. City Manager Kiff explained that it was necessary to set aside $.72 to $.84 cents for pension for every dollar in salary. Mr. Bartel indicated support for shortening the amortization period. He suggested targeting specific amortization bases to save money by paying less interest. He discussed Slide 35 and the assumption that investment returns on CalPERS would be 6.5 percent. In response to Chair Dixon, Mr. Bartel stated 6.5 percent was what the investment advisors determined. City Manager Kiff asked how other cities were reacting and whether there was traction for additional pension reforms. Mr. Bartel presented three categories of clients: 1) those that can afford it; 2) those that had difficulty affording it and were trying to mitigate it; and 3) those that could not afford it and could not mitigate it. He stated the City of Newport Beach was in Category 1 and would be better in the long-term. He stated most of his clients were in Category 2, which were looking towards supplemental pension trusts. In response to Chair Dixon, Mr. Bartel explained supplemental pension trusts providing more flexibility than CalPERS. Committee Member Tucker explained the pitfall that the City would control the money, but 7 percent was still accruing on unfunded liability. He asked if the amortization assumed the sudden shortfall depicted. Mr. Bartel stated it was based on a 20-year amortization. Committee Member Tucker stated 70 percent of the General Fund went to salaries which would be a $14 million increase in annual contribution. City Manager Kiff confirmed. Finance Director Matusiewicz discussed Slide 14 outlining the current amortization schedule and various alternative payment options. He stated it was necessary to determine how much the City could afford. Council Member O’Neill stated the change of discount rate had an immediate impact on the cost to the City. In response to Chair Dixon, Finance Director Matusiewicz explained the concept of ramp up and how it contributes to more cost over the long-run. Council Member O’Neill pointed out that the graphs depicted only the unfunded portion. Finance Director Matusiewicz anticipated the cost of salaries would increase 3.5-4.0 percent. Mr. Bartel suggested the cost would be slightly lower due to PEPRA and the decreasing discounted rate. In response to Council Member O’Neill, Deputy Finance Director Montano stated the current pension budget net of employee contributions was about $32 million, including the payment on the unfunded liability. Finance Director Matusiewicz reviewed Slide 10 and suggested taking on the expenses now rather than at the default roll out that would defer payment on known losses over several years. Finance Committee Meeting Minutes February 16, 2017 Page 6 of 9 Council Member O’Neill referred to CAFR page 17 indicating the City would continue to fund its pension rate at 6.5 percent. Finance Director Matusiewicz clarified that that was the stretch goal. Council Member O’Neill expressed concern with that statement. Chair Dixon stated the Finance Committee needed to consider the unfunded pension liability when considering the budget. Finance Director Matusiewicz explained that the proposed payment options on the unfunded liability ranged from $25-$41 million depending how budget resources are ultimately prioritized. Chair Dixon reiterated that the Committee had to determine how much of the $16 million the City should spend towards unfunded liability. Mayor Muldoon discussed the need for the State to make changes and the City to remain healthier than the critical mass. Finance Director Matusiewicz stated he was not suggesting increasing the unfunded liability payment by $16 million in one year but was presenting the range of options identifying what the City might aspire to achieve over a period of time. Chair Dixon stated the problem would be gone in 20 years after the bulk of the unfunded liability was paid off. Committee Member Tucker discussed the potential of future experience losses. Chair Dixon stated the City Manager had indicated it would be difficult to come up with $10 million. City Manager Kiff confirmed that it would be hard to maintain the City’s current level of service. Finance Director Matusiewicz stated legislation would not likely have a material impact on the unfunded liability. Mr. Bartel concurred. City Manager Kiff discussed the possibility of a bail out or the reduction in retiree COLAs. Mr. Bartel stated modification to the COLA would impact the unfunded liability. He stated he had made suggestions to CalPERS without response. Committee Member Tucker stated it was speculation until the California Supreme Court ruled. Council Member O’Neill stated the City would be billed on its normal and UAL pension cost. He stated Council Policy F-13 had to be considered. Chair Dixon stated the surplus might have to change. She thanked Mr. Bartel for his input. Finance Director Matusiewicz stated the Committee had a standing agenda item for future pension discussion and inquired whether it was the Committee’s intent to have Mr. Bartel participate in each and every one. Chair Dixon stated yes. In response to Committee Member Gorczyca, Mr. Bartel stated the next CalPERS experience study would occur in November 2017. C. REVIEW OF FACILITIES FINANCING PROGRAM Summary: Staff will present a draft of Facilities Financing Program reviewing the timing, means of financing, and fiscal impacts associated with funding Council prioritized capital projects. Recommended Action: Review and comment. City Manager Kiff explained the Facilities Financing Program (FFP) and the Council’s suggestions at its February 14, 2017, meeting. He requested the Finance Committee provide Finance Committee Meeting Minutes February 16, 2017 Page 7 of 9 input on how to reduce the General Fund contribution and move to a Facilities plus Harbor Plan. He stated the staff would propose options. He presented current allocations and surplus. Chair Dixon stated she wanted to determine how to pay facilities, harbor, pension, enterprise funds and debt. She stated $8.5 million was currently contributed to the FFP. City Manager Kiff explained the process of determining the amount for the FFP. Mary Lou Hergel asked about the funds set aside for new construction on the Corona del Mar Library and Fire Station. City Manager Kiff explained that the budget was a plan for an expenditure. He stated $7 million was set aside for the Library/Fire Station project. He recommended shelving the project while determining mechanisms to handle the pension issue. He stated it was necessary to balance community needs with debt obligations. Chair Dixon suggested retaining the project on the plan with the funding year set at 2022. City Manager Kiff stated the project was not funded until the construction contract was let. Chair Dixon explained the West Newport Community Center was on the list as a targeted project but was not funded. Finance Director Matusiewicz explained that money was accumulated and saved for building replacement but stated it was up to Council to determine the ultimate prioritization. Chair Dixon stated developer fees had paid for City facilities for 30 years. She stated she supported modest development due to the investment in the community by the developer. Ms. Hergel stated she did not realize that construction of the Fire Station and Library were dependent on developer fees. Ms. Hergel asked if the project would have started if the bids had come in as expected. City Manager Kiff stated he would have still recommended a stop due to CalPERS. Ms. Hergel suggested minor repairs in the meantime. Chair Dixon requested information on the necessary modest improvements. City Manager Kiff stated the Council set aside funds for facility maintenance. Committee Member O’Neill suggested the Library / Fire Station project be retained in the Capital Improvement Program (CIP) and proceed within 3-5 years. Ms. Hergel discussed the possibility of fundraising for the project. City Manager Kiff stated staff would return with recommended funding levels on all obligations. Committee Member Tucker stated recommending how capital funds be spent, should not be within the Committee’s purview. City Manager Kiff suggested the Finance Committee comment and provide theme ideas. Mayor Muldoon suggested actual projects be determined by the Council. Jim Mosher questioned whether the CIP contained current commitments. City Manager Kiff stated the commitment was firm when the contract was let. D. REVIEW INITIAL DRAFT OF LONG-TERM FINANCIAL FORECAST Summary: Finance Committee Meeting Minutes February 16, 2017 Page 8 of 9 Staff will present the bare bones of a high-level Long-term Financial Forecast that summarizes future assumptions and key elements of the City’s finances culled from other long-term plans such as the Facilities Financing Program, Pension Projections, Harbor Master plan, etc. Recommended Action: Review and comment. Deputy Finance Director Montano presented a prototype for a long range financial forecasting tool, including revenue growth, maintenance and operations, salary and benefits, revenue categories, General Fund transfers, and expenditures. In response to Mayor Muldoon, Deputy Finance Director Montano explained the means for future projections. Finance Director Matusiewicz explained that all financial plans would be incorporated into the forecast. Committee Member Tucker asked about the assumptions utilized. Finance Director Matusiewicz reminded the Committee that it was a draft model. Jamie Copeland explained that the harbor plan included the capital long term needs and maintenance and operation commitments. Committee Member Gorczyca discussed the General Fund surplus process. Carl Cassidy commended staff for presenting the need for a forecast. Jim Mosher questioned the input from Dr. Thornberg. E. REVIEW DRAFT WORKPLAN Summary: Staff will present and seek approval of the tentative Finance Committee agenda topics scheduled for the calendar year. The work plan represents the planned topics of discussion; however, is subject to change based on the availability of information and the need to schedule other topics as they arise. Recommended Action: Review and comment. In response to Committee Member Tucker, Susan Giangrande and Steve Montano discussed the timing for budget approval. Chair Dixon indicated she was unavailable March 2. Committee Member Gorczyca indicated she was also unavailable. Jim Mosher reminded the Committee that the Council requested the Committee’s formal written recommendation on the budget. F. BUDGET AMENDMENTS Summary: Staff report on the budget amendments for the prior quarter. Recommended Action: Receive and file.