HomeMy WebLinkAboutFinance Committee Agenda - February 15, 2018CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA - Final
100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D
Thursday, February 15, 2018 - 3:00 PM
Finance Committee Members:
Diane Dixon, Chair / Council Member
Will O'Neill, Mayor Pro Tem
Kevin Muldoon, Council Member
William Collopy, Committee Member
Patti Gorczyca, Committee Member
Joe Stapleton, Committee Member
Larry Tucker, Committee Member
Staff Members:
Dave Kiff, City Manager
Carol Jacobs, Assistant City Manager
Dan Matusiewicz, Finance Director / Treasurer
Steve Montano, Deputy Director, Finance
Marlene Burns, Administrative Specialist to the Finance Director
The Finance Committee meeting is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that
the Finance Committee agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that
the public be allowed to comment on agenda items before the Committee and items not on the agenda but are within
the subject matter jurisdiction of the Finance Committee. The Chair may limit public comments to a reasonable amount
of time, generally three (3) minutes per person.
The City of Newport Beach’s goal is to comply with the Americans with Disabilities Act (ADA) in all respects. If, as an
attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, we will
attempt to accommodate you in every reasonable manner. Please contact Dan Matusiewicz, Finance Director, at least
forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is
feasible at (949) 644-3123 or dmatusiewicz@newportbeachca.gov.
NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT
Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance
Department 24 hours prior to the scheduled meeting.
I.CALL MEETING TO ORDER
II.ROLL CALL
III.PUBLIC COMMENTS
Public comments are invited on agenda and non-agenda items generally considered to be
within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments
to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for
the record. The Finance Committee has the discretion to extend or shorten the speakers’ time
limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all
speakers. As a courtesy, please turn cell phones off or set them in the silent mode.
IV.CONSENT CALENDAR
February 15, 2018
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Finance Committee Meeting
MINUTES OF OCTOBER 12, 2017A.
Recommended Action:
Approve and file.
DRAFT MINUTES 101217
MINUTES OF JANUARY 11, 2018B.
Recommended Action:
Approve and file.
DRAFT MINUTES 011118
V.CURRENT BUSINESS
CREATE A SUBCOMMITTEE TO REVIEW COUNCIL FINANCE POLICIESA.
Summary:
The Finance Committee will consider the creation of a Finance Subcommittee to
review Council Finance policies, discuss membership, scope of work and timeline.
Recommended Action:
Discuss and recommend the formation of Finance Policy Subcommittee and related
details.
RISK-BASED RESERVE SUBCOMMITTEE UPDATEB.
Summary:
Discuss Finance Committee progress since the last meeting.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
DEBT POLICY-REVIEW SUBCOMMITTEE UPDATEC.
Summary:
Subcommittee will discuss revisions of Debt Policy and discuss next steps.
Recommended Action:
Recommendation to the City Council to revise the Debt Policy as indicated.
STAFF REPORT
ATTACHMENT A
ATTACHMENT B
February 15, 2018
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Finance Committee Meeting
REVIEW OF POLICE DEPARTMENT BUDGET TO ACTUAL RESULTSD.
Summary:
In preparation of the 2018-2019 Budget, staff will review budget assumptions against
actual results for Fiscal Year 2016-2017 and pertinent updates concerning the Fiscal
Year 2017-2018 to date.
Recommended Action:
Receive and file.
YEAR-END CLOSING RESULTSE.
Summary:
Staff will present year-end closing results for Fiscal Year 2016-2017.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
PENSION DISCUSSIONF.
Summary:
Agenda item reserved for discussion regarding the status of the City's pension
liability, payment strategies, CalPERS policy updates and or advocacy efforts.
Recommended Action:
Discussion if applicable.
REVIEW OF FINANCE COMMITTEE WORKPLANG.
Summary:
Staff will review with the Committee the agenda topics scheduled for the remainder
of the fiscal year and highlight those work plan items carried forward from the prior
fiscal year. The Committee will also consider setting up a subcommittee to review
finance related Council Policies.
Recommended Action:
Receive and file.
ATTACHMENT A
February 15, 2018
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Finance Committee Meeting
VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS
WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR
REPORT (NON-DISCUSSION ITEM)
VII.ADJOURNMENT
Finance Committee Meeting Minutes October 12, 2017
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CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 12, 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 William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and
Committee Member Larry Tucker
ABSENT: None.
STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director, Finance Steve
Montano, Budget Manager Susan Giangrande, Accounting Manager Rukshana Virany, Purchasing Agent Anthony Nguyen, Fire Chief Chip
Duncan, Public Works/Finance Administrative Manager Jamie Copeland, and Administrative Specialist to the Finance Director Marlene Burns
OUTSIDE ENTITIES: John Bartel, Bartel Associates, LLC, Mia Corral, Chandler Asset
Management, Jayson Schmitt, Chandler Asset Management, and Mark Young KNN Public Finance, LLC
MEMBERS OF THE
PUBLIC: Mr. Jim Mosher and Ms. Joy Brenner
III. PUBLIC COMMENTS
Chair Dixon opened public comments.
Jim Mosher commented on the City’s debt policy and noted it will also be on the City Council’s
Study Session agenda to consider possible solutions to the City’s debt. He stated wisely acquiring debt and spending are two different matters and inquired regarding the audit of the Civic Center
project. He spoke about spending money for salaries and contracts, noting the “Voice of OC” publication has been reporting about various municipal contracts, and referenced the City of
Laguna Niguel, whose contracts are being reviewed by their version of the Finance Committee. The review found no funds were missing, pursuant to a report from their Interim City Manager. He
mentioned it is common for contracts to come back to the Newport Beach City Council for amendments to account for money that had already been spent in relation to the contract and
expressed curiosity of the amendments are a “red flag.” He inquired as to the reason for the numerous instances where contracts are returning to Council for amendments.
Chair Dixon closed public comments.
IV. CONSENT CALENDAR
A. MINUTES OF SEPTEMBER 14, 2017
Recommended Action:
Finance Committee Meeting Minutes October 12, 2017
Page 2 of 11
Approve and file.
MOTION: Committee Member Gorczyca moved and Council Member O'Neill seconded, to
approve the September 14, 2017, Finance Committee Minutes, as amended. The motion carried, (5 – 0, 2 abstentions Muldoon, Collopy).
V. CURRENT BUSINESS A. INVESTMENT PERFORMANCE REVIEW Summary: Staff and/or investment advisor will provide a brief economic update; review the performance
of the City's investment portfolio and potential strategies moving forward. Recommended Action:
Receive and file.
Finance Director Matusiewicz introduced Jayson Schmitt from Chandler Asset Management, who provided an economic update for the period ending September 30, 2017.
He Council Member O’Neill further noted the City’s two current economic advisors alternate each
year in providing the investment report to the Finance Committee.
Committee Member Gorczyca observed that Chandler has provided the economic update the past three times.
Mr. Schmitt displayed a PowerPoint Presentation and provided additional documentation related to
the investment report. Highlights included the Federal Open Market Committee’s notification that it will be raising interest rates, the economy continues to grow, and the Federal Reserve has taken
away some monetary accommodation. The Federal Reserve has started to reduce their balance sheet; in October they will not be reinvesting principal and interest payments, and will increase up
to about $50 billion. They will reduce their balance sheet to around 2.5 to 2 trillion dollars. The unemployment rate is at 4.2 percent and wages rose to 2.9 percent.
He further reviewed the unemployment rate and noted an increasing labor participation rate. The
last report was very healthy and indicative that the Federal Reserve will likely increase rates. The CPI has started to increase and the Federal Reserve will begin looking at personal consumption
expenditures. At the time of the report, they were worried about deflation.
Mr. Schmitt presented further slides related to the economic update which included Nonfarm Payroll, Unemployment Rate, Consumer Price Index, Personal Consumption Expenditures, Retails
Sales YOY % Change, Consumer Confidence, Leading Economic Indicators (LEI), Chicago Fed National Activity Index (CFNAI), Housing Starts S & P/CaseShiller 20 City Composite Home Price
Index, Institute of Supply Management Purchasing Manager Index, and Capacity Utilization, and Gross Domestic Product.
He detailed the current financial market and investment landscape, noting on October 13, 2017,
there will be three vacancies on the Federal Reserve Board, the balance sheet reduction begins October 2017, and Board Chair Yellen’s four-year term will end on February 3, 2018. These
changes will likely reshape the direction of interest rates and Federal Reserve policies visible December 2017 through March 2018.
Collopy inquired as to how the Federal Reserve makes decisions.
Mr. Schmitt responded that Chair Yellen has traditionally been the voice of the Committee and the
meetings are not recorded. They follow a more free flowing discussion model where they review a theme they are already testing, including the correction of interest rates. The Chair typically has a
larger influence; however, the other Committee members are also influential in final decision-
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making. The Chair is typically the voice to the public and the votes are public. Occasionally,
Committee members will speak out regarding dissenting positions. Mr. Schmitt further noted that dissenting positions are rare, and the most dissenting positions he has seen on any particular issue
is three.
Committee Member Gorczyca inquired as to how the Committee members are appointed.
Mr. Schmitt provided a general overview of the appointment process including Presidential appointments, the non-Presidential appointments of district bank presidents, and concluded the
system has served well over the long history of the Federal Reserve.
He resumed the review of the current financial market and investment landscape noting that interest rates have moved off their extreme historical lows mitigating some of the risks related to rising rates
on bond portfolios. He reviewed the low yields over the last 10 years including the 2-Year US Treasury note that was at 0.16 percent as reported on September 19, 2011, and the 5-Year US
Treasury note that was at 0.54 percent, as reported on July 24, 2012. He explained keeping a shorter-term strategy with the City’s portfolio, which can be stretched for higher potential earnings
from any rate increases.
Mr. Schmitt reviewed the current Federal Open Markets Committee 2017 members and alternate members and their responsibilities. He also reviewed the Federal Reserve’s balance sheet and
noted the balance sheets are big.
Finance Director Matusiewicz commented that a bounce back in interest rates is an opportunity to regain investment earnings, which have been slumping for the past decade.
Council Member O’Neill stated the earnings could offset the potential reduction in property taxes
as a result of any increase in interest rates.
Mr. Schmitt reviewed various bond yields including the US Treasury Note yields and then shifted toward the City’s portfolio review. He highlighted the components of the total portfolio, including the
liquidity portfolio and the reserve portfolio, each which have separate characteristics. The liquidity portion of the portfolio is composed of LAIF and money market funds, matching maturities to known
expenditures. These are ultra-short-term investments. The reserve portion of the portfolio is targeted to a higher duration to enhance the potential to increase earnings. He noted the
opportunities are better than they were three to five years ago.
Finance Director Matusiewicz stated the City’s investment goal of the ultra-short-term portfolio is to be 30 basis points or more above the LAIF rate.
Committee Member Gorczyca stated the State LAIF is notoriously inexpensive.
Collopy inquired as to how many bonds are held to maturity.
Mr. Schmitt responded that less than 5 percent of the City’s bonds are not held to maturity, further
noting that all securities are subject to price differentials over that period of time. The benchmarks are a good metric by which to measure the investment manager to ensure they are doing a good
job relative to a like set of securities.
Chair Dixon opened public comments. Noting there were no individuals who elected to speak, Chair Dixon closed public comments.
This item was received and filed by the Finance Committee.
B. INVESTMENT ADVISOR CONTRACT DISCUSSION
Summary:
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Committee Member Gorczyca requests that the Finance Committee reconsider its
recommendation to award investment advisor contract, solely, to Chandler Asset Management. Recommended Action:
Receive and file.
Committee Member Gorczyca expressed her desire to reconsider this item, which resulted from reflection after the last meeting. She began by stating that she had received no documentation
regarding the actions that took place in August, in particular referencing the lack of documentation relating to the various numbers in the terms of each bidders final fee proposal.
Finance Director Matusiewicz stated that the original request for proposals required bidders to
provide rates for managing a portfolio of up to $400 million dollars and prospective bidders were aware of the possibility they may wind up managing the entire fund. Bidders were asked specifically
asked to describe the advantages and disadvantages of the City having one versus two investment advisors and bidders. As part of the secondary interview [step in the process], the bidders were
asked whether they would come down in price (once the top three bidders were determined) and were provided with several questions in advance of the interview. Those questions included
inquiring about the City having one versus two advisors. Mr. Matusiewicz expressed confusion as to the assertions made by Committee Member Gorczyca.
Purchasing Agent Anthony Nguyen displayed a PowerPoint Presentation and additional
documentation related to the procurement process overview of Request for Proposal 16-55, Investment Advisory Services. He explained his presentation was provided to evaluate whether the
City was unclear in its RFP documents as to advising potential bidders that the City may retain one or multiple investment advisors and whether the bid proposers understand the City was looking into
retaining one or possibly multiple investment advisors.
Mr. Nguyen provided the history of the process including the utilization of a consultant (Portfolio Services for Government, LLC); the procurement was conducted as a Request for Proposal (RFP),
using a Qualifications-Based Selection (QBS) process, and the process phases included proposal analysis, cost analysis, and interview analysis. Six firms submitted proposals in response to the
procurement, three of which advanced to the interview stage. Chandler Asset Management and PFM Asset Management, LLC, were identified as the most-qualified proposers.
He further stated the process questions, which included whether the City was unclear regarding
the potential of retaining one or possible multiple investment advisors and did the proposers understand the City was looking into retaining one or possibly multiple investment advisors. Mr.
Nguyen acknowledged the model of utilizing two advisors is less common for most municipalities; however, the procurement documents included language that the City reserved the right to return
to that model at its discretion. The RFP questionnaire contained questions regarding the benefits or disadvantages of retaining one versus multiple investment advisors, called for proposers to
submit discretionary fee schedules based on assets under management up to $400 million, and the panel interviews involved a discussion on the merits of a one versus two-investment advisor
model. He displayed slides that reflected the actual questionnaire items along with the actual responses from proposers. He concluded with his confidence that all six proposers were aware of
the City’s intent.
Committee Member Gorczyca commented on the RFP structure and the questions related to how fees would be structured, including categories and amounts.
Mr. Nguyen stated that the City has not yet technically awarded this contract and pursuant to policy,
he is prohibited from discussing particular details of the proposals. He did mention that the City may revisit making the fee structure public further along in the process as to roughly how the basis
points were tiered.
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Discussion ensued among the Committee and staff relative to interpreting the slide entitled
“Proposer Awareness – Cost Phase.”
Mr. Nguyen acknowledged the procurement documents stated that one proposer could ultimately wind up managing a portfolio up to $400 million dollars. Mr. Nguyen stated that at least two, and
possibly three, of the proposers could have successfully served as the City’s investment advisor, and the process was not meant to demonize any particular company. The results were that there
was one excellent proposer, and two great proposers.
Chair Dixon confirmed the technical scores were very close.
Finance Director Matusiewicz further explained the estimated savings of $30,000 per year was derived from a base assumption of $200 million of assets under management. The difference in
pricing between the two top proposers was approximately $20,000. There was also an additional cost savings of $10,000 per year obtained by utilizing just one advisor explaining that more assets
would pierce the lowest tier pricing.
Committee Member Gorczyca stated that PFM’s performance was stronger. She referenced various models utilized by various agencies including the trend to use of in-house advisors. The
models and agencies mentioned included UACC (City of Irvine), FTN (City of Anaheim), and in-house advisors (Santa Ana, Irvine Ranch Water District). Multiple advisors are typically utilized
when there are portfolios of over $100 million (OCTA, CALOptima, Riverside Transportation Authority, Moreno Valley). She requested if staff could ask for a written fee proposal as an
addendum to the procurement process. She also requested if the City elects to move forward with only one advisor, if the City could prequalify an alternate so the City would not be scrambling in the
event the initial advisor did not meet the City’s standards for performance. Ms. Gorczyca also stated that the City could go back out to procurement again at a higher portfolio management number,
such as over $180 million and could see different proposers interested than those who were interested at the $85-90 million portfolio range. In conclusion, she did not expect the Committee to
change its views on selection of the advisor; however, she would like the City to consider prequalifying PFM as an alternative as a proactive approach.
Council Member O’Neill stated the City Council may want to consider prequalification.
Purchasing Agent Nguyen affirmed that after the award of the RFP the information is valid for
eighteen months.
Finance Director Matusiewicz acknowledged that PFM is already qualified to serve as investment advisor.
Collopy inquired whether this would turn the process into an IFB (Invitation for Bid).
Mr. Nguyen stated the City is not utilizing an IFB in this procurement for an investment advisor
because it is a professional service and the City Council can move forward with any of the top three proposers as a result of the RFP process.
C. DEBT POLICY Summary: Staff and a municipal advisor from KNN will present a brief history of debt issued by the City
and discuss proposed changes to current Debt Policy F-6. Most proposed changes are required per Senate Bill No. 1029 (SB 1029), but the Committee may also wish to address any
issues concerning the City’s debt policy. Note that SB 1029 changes require approval by City Council before any new debt can be issued including pending assessment district financings. Recommended Action: Review, comment and provide further staff direction, if appropriate.
Finance Committee Meeting Minutes October 12, 2017
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Council Member O’Neill reported the City Council discussed the City’s Debt Policy on Tuesday and
requested this discussion due to the issues that developed during the recent COP process. Rating agencies knocked agencies our City for not having a comprehensive Debt Policy in place. He
distributed a copy of the redlined version of the Debt Policy for discussion purposes.
Chair Dixon introduced Mark Young, municipal advisor from KNN Public Finance, LLC.
A PowerPoint Presentation was displayed. Council Member O’Neill outlined several matters related to potential modifications to the City’s Debt Policy including modifications that will be
required by SB 1029 (provisions that must be included in the Debt Policy prior to the issuance of any new debt, including pending assessment district financings). He further mentioned that he
would like to see the Debt Policy include the terms under which the authorized individuals can sign, a prescriptive policy, process and restrictions, and allow for more public input into debt
issuance terms. Mr. O’Neill noted that the circumstances post-COP issuance were largely a question of transparency into the process by which the terms were signed.
Discussion ensued among the Committee and staff related to the timing of negotiations and terms
when issuing bonds. Restrictions due to the California Brown Act may prohibit an impromptu meeting of the policy makers to be called and whether there is a vehicle, perhaps through the Debt
Policy resolution, that could provide parameters of how decisions related to debt issuance will be made.
Council Member O’Neill expressed a desire for a resolution that would express the policy and
“force” the City Council to take an affirmative action and choose the opposite action if they so desired. This would ensure transparency into the decision-making process as the City Council
would have to explicitly choose an alternate to the resolution requirements.
Discussion ensued regarding structuring policy to ensure transparency, which could be at the expense of flexibility in decision-making that could impact costs when negotiating and making final
bond purchases. The transparency provision may hurt the City’s ability to go out on the market to obtain the best prices and deal.
Discussion ensued among Committee Members and staff regarding policy restrictions to not allow
“make-whole” call provisions or “lock-out” periods greater than ten years without explicit authorization in the authorizing bond resolution.
Chair Dixon inquired as to how to other agencies handle “fill or kill” orders.
Mr. Young stated there is variability in how various agencies handle “fill or kill” orders. The prior
Council’s resolution was structured to be broad to include a tax-exempt piece for refunding. The resolution needed to be very broad to accommodate the decisions of elected officials and
authorized staff.
Committee Member Gorczyca inquired as to what month the resolution was authorized.
Mr. Young responded it was November 10, 2010. In 2010, “BABS” were authorized for two years (2009, 2010) because they were attractive investments. At that time there was a rush to market,
between October and December, where it became a “buyers” market. Major issuers who issue more debt and utilize a more sophisticated approach were incorporating PAR calls.
Committee Member Gorczyca noted that the State had large offerings in market at around the same
time.
Mr. Young confirmed that it was a buyer’s market and savvy local investors, such as PIMCO, made sure to have bonds in their portfolios for the 30-year terms; the “make whole or call” provisions got
them to write a $70 million dollar check. In hindsight, the City did not have another option except to
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delay the process or potentially use reserves to get started. Cities are not supposed to be making
interest rate bets.
Discussion ensued among the Committee and staff about having a policy in place that would prevent situations such as that whichwhat happened with the Civic Center debt financing and the
structure of such a policy. Inquiries were made regarding having a default policy that requires more participation before decisions are made and whether a “make-whole call” provision needs to be
included.
It was stated that there are timing limitations when looking at spread to treasuries for best yield, to lock-it in.to lock in interest rates, where even a two-hour delay may have negative impacts on the
City’s ability to obtain the best rates.
Committee Member Tucker commented he was convinced that the Civic Center debt issuance circumstance is exactly what would have happened even if all the information was known and the
process completely transparent. He stated the resolutions should be as broad as possible to give as many opportunities as possible and all the decision-makers should have the information.
Discussion ensued among the Committee and staff regarding having a “callable” provision within
the resolution. Comments were also made regarding the ability for the City Council to meet in a timely way to maximize pricing.
Council Member O’Neill reiterated his desire to structure the resolution where the City Council must
act affirmatively to waive any callable feature outlined as the default policy. This would set a situation where the City Council has to be very clear and transparent about the action they are
taking at the time. He also spoke about including cost parameters within the body of the resolution.
Mr. Young verified the City Council authorized the issuance of the POS, which cannot “hit the street” until it has been officially authorized. The City Council has fiduciary responsibility in their capacity
as elected officials, and that responsibility is not on the staff. He discussed the timing required for the POS to be on the market for review especially to appeal to entities like PIMCO, who receive
multiple offerings every day, every hour. He described a scenario, which could be outlined in the resolution, whereby the City Council could have oversight/approval of the pricing process via a two-
meeting cycle. The first meeting would entail getting the resolution approved, authorizing the POS, and to set the pricing day. He further described the after-authorization process including the
underwriters’ responsibilities. Any offer would come back to the City Council to be ratified. He did note that after a verbal award, it would still take the attorneys and staff three to four hours to
memorialize the appropriate documents.
Discussion ensued regarding “clean-up” language in the resolution, the provision of process language, and the possibility of a charter amendment.
Committee Member Gorczyca provided historical perspective regarding the timing of the Civic
Center debt issuance circumstance, noting there were other bad deals done that had call provisions, where some had as much as 12-15 percent net present value savings. She stated the
market was very crowded at that time, it was not perfect market timing, and would prefer resolution language that would provide stricter guidance on market timing for any future debt financing
opportunities going forward.
City Manager Kiff mentioned they wanted to go to sooner than later fearing a significant downturn in the labor and materials market.
Council Member O’Neill suggested the formation of a Finance Committee subcommittee to bring
back clean up language and inquired whether any of the other members had suggestions. He suggested himself, Committee Member Tucker, and Committee Member Gorczyca as the
temporary subcommittee membership.
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Discussion ensued regarding various elements that could be considered in the resolution language including consideration of the utilization reserve funds (page no. 5), various means of lease
financings and the impacts on the General Fund, an internal debt service fund, the various “call” provisions, and the process for COP’s.
Mr. Young stated that the revised debt policy will need to comply with SB 1029, and suggested that
it be drafted and approved as soon as possible.
Discussion ensued regarding flexibility requirements when “make-whole” decisions are being considered. Comments were made regarding how the City Council would be notified regarding
each option at each point in time during the offering process and ensuring the offering was as marketable as possible.
Mr. Young confirmed that in a typical tax exempt transaction, the normal structure with bonds held
over ten years, is to have an option to prepay after ten years. He cited an example of the City of Long Beach making a loan to the Aquarium, who had the option to prepay the loan at any time.
That type of situation would have an additional cost. Bonds that are callable have a higher yield than those that are non-callable.
Mr. Young described various short-term financing solutions, such as a short-term commercial paper
program, to finance certain opportunities. With pure variable rate debt, the City is in a better position to keep terms short and not use derivatives. He would prefer that staff come to the City Council
and explain the derivative process and to have the City Council adopt a derivative policy.
Discussion ensued among the Committee and staff regarding variable rate loans, the City acting as guarantor in certain situations, included property as assets, and cities’ “moral” obligations to
make right any negative impacts of assessment district financing.
Mr. Young cautioned that city-wide use of a “Mello-Roos” type financing could impact debt ratios and the City should not consider any actions or policies that would negatively impact the image and
rating of the City.
Chair Dixon opened public comments.
Jim Mosher expressed concerns with the authorization resolutions not being mentioned (page no. 6 of the policy) and referenced Resolution No. 2010-126 and City Charter Section 421. He
expressed concern on whether the Mayor/Clerk had to sign off on certain aspects of the debt financing. He referenced “backstop” provisions and commented that under the City’s form of
government, certain officials had ministerial responsibilities to authorize certain actions via signing off.
Chair Dixon closed public comments.
MOTION: Committee Member O’Neill moved, and Committee Member Stapleton seconded, to
form an ad-hoc subcommittee to review the existing debt policy and bring recommendations back to the Finance Committee for consideration. The subcommittee would be comprised of Committee
Member Tucker, Committee Member Gorczyca and Council Member O’Neill. The motion carried, unanimously.
Discussion ensued among the Committee regarding the role of public participation in the debt policy
and debt financing process, the potential for a charter amendment or ordinance change, whether this is the appropriate role for the Finance Committee, and the requirements and ramifications of
voter approval and participation, or lack thereof. Comments were made regarding the Finance Committee’s role versus the City Council’s role in debt financing decisions, how particular
improvements are financed, balance sheet risks, the debt issuance transparency needs, the size
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and scope of the type of projects that will be financed, and what issues should be analyzed by the
Finance Committee.
There was consensus among the Committee members that residents are not likely going to want or need to “sign off” or have voter approval elections on smaller projects and financing. They are
mostly concerned with large-scale financing and projects.
Council Member O’Neill suggested the elimination of option no. 2, making the point that people are informed about the amounts being financed and obligated, inquired as to what the threshold amount
should be, and requested that staff return in the next one or two meetings with an analysis of the pros and cons of options one and three.
Mr. Young stated it would be relatively unique to place a self-imposed restriction on the ability to
utilize lease financing. As an advisor, he would recommend that if there would be a debt restriction it would limit the City’s ability to act in the event of an unforeseen event, such as the Santa Rosa
fires.
Discussion ensued among the Committee and staff regarding the goal of ensuring the public is thoroughly aware of large debt financing prospects and allowing for public participation, emergency
situations which require immediate financing, not restricting the options available to future City Councils, and to put forth realistic recommendations for the City Council’s consideration.
Comments were made regarding which options should be analyzed by staff and brought back to the Finance Committee for consideration.
Chair Dixon opened public comments.
Jim Mosher stated that his intuition tells him that the public would appreciate analyzing all three
options, especially option no. 2, as they are concerned about discretionary projects and the amount of money that is being committed for future obligations. He believed the public should have a
mandatory voice, rather than relying on their elected representatives in this matter.
Chair Dixon closed public comments.
D. BUDGET AMENDMENTS Summary:
Receive and file a staff report on the budget amendments for the prior quarter. Recommended Action:
Receive and file.
Chair Dixon introduced this item.
Finance Director Matusiewicz presented a brief review of the quarterly budget amendments and the one item worthy of discussion was actually a budget transfer rather than a new allocation.
Council Member O’Neill stated when the City purchased the Fire Station property without using
current General Fund money.
Chair Dixon opened public comments.
Jim Mosher expressed his support of City staff notifying the public when there are amendments to the budget. He did express concern about the City Council reviewing a tree contract on Tuesday
and was puzzled how the amount considered ($400,000) was not described as a budget amendment. He stated the online budget seems to be running over and that the amount for this
contract was already expended. He inquired how work above and beyond the scope of the contract would not be considered a budget amendment.
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Chair Dixon requested staff to provide a response to Mr. Mosher on this matter.
Chair Dixon closed public comments.
The subcommittee will return to the Finance Committee within the next one or two meetings with
recommendations related to the debt policy and staff will begin analysis of all three options. E. PENSION DISCUSSION Summary:
Agenda item reserved for discussion regarding the status of the City's pension liability, payment strategies, CalPERS policy updates and or advocacy efforts. Recommended Action: Discussion if applicable. John Bartel, Bartel Associates, displayed a PowerPoint Presentation. He provided information
related to the history of CalPERS and the institution of retirement plans and formulas, noting that the members of the CalPERS board who are elected by CalPERS members are usually the more
vocal. He provided details as to the historical types of investments that CalPERS has allowed for retirement funds. He also stated that pension reform has been instituted at various points in time
and also eliminated.
Discussion ensued among the Committee members and Mr. Bartel relative to the 3% @ 50 and other retirement formulas. Retroactivity was also discussed, including noting there was some
dispute about how the retroactivity provision was to be interpreted. He further commented that every retirement formula is a result of negotiations between bargaining units and the respective
agency.
Mr. Bartel stated the City instituted the 3% @ 50 formula in 2000.
Committee Member Gorczyca inquired whether an actuarial study was conducted to estimate the long-term costsof the costs was completed prior to instituting retroactivity with the formula.
Mr. Bartel affirmed it is mandatory to do an actuarial analysis and at the time it was determined the
increase in liability would be covered by the excess in assets.
In January 2017, there was a report on the cost of divestment and the analysis came back with over thirty years of impact to the system at approximately 7.9 billion dollars. The primary causes
included divesting from tobacco and gun stocks, and not investing in South Africa. There has been a recent decision to divest of some coal stocks, but that impact was not included in the last report.
Mr. Bartel reported that typically divestment requirements are set by legislative action.
Chair Dixon commented on the high turnover of investment staff at CalPERS and inquired as to how CalPERS investments compare with the S&P index. Mr. Bartel responded that CalPERS falls
a bit below what the market does.
Mr. Bartel reported the City has three options to address the unfunded pension liability including making payments, setting up an internal service fund, or set up a supplemental pension trust via
Section 115. He stated that if the City wants flexibility, a Section 115 trust is a good option, but there is a cost for the flexibility in that there will be a lower return on investment. The cost relative
to the higher return in CalPERS investing is that you do not have as much flexibility with the funds. He outlined the process involved in setting up the Section 115 trust, noting that more than 100
agencies in California have set up a trust, half of which are municipalities.
Mr. Bartel further stated that the City should not expect to do better than CalPERS did and would not recommend setting up a trust with that expectation.
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Mr. Young stated he does not like Section 115 trusts. CalPERS is slowly getting more flexibility and
would prefer the City utilize an internal pension stabilization fund.
Discussion ensued among the Committee and staff regarding studying the utilization of pension stabilization funds, the use of reserves, and studying Section 115 trusts.
Chair Dixon opened public comments.
Mr. Mosher requested an update on the Finance Committee’s work plan for the next six months.
Chair Dixon closed public comments.
Chair Dixon noted the time and requested that all remaining agenda items that were not discussed
at this meeting be carried over to the next regular meeting. F. LONG-TERM FINANCIAL FORECAST Summary:
Review of potential forecast scenarios that may be considered in the development of the FY 2018-2019 budget and beyond. Staff will provide a brief revenue update, review pension
funding scenarios including less aggressive payment plans and other financial updates that are relevant to the current and future budgets. Recommended Action: Receive and file.
G. REVIEW OF FINANCE COMMITTEE WORKPLAN Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the
calendar year. Recommended Action:
Receive and file. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-
DISCUSSION ITEM) VII. ADJOURNMENT
The Finance Committee adjourned at 5:54 p.m. to the next regular meeting of the Finance Committee on Thursday, November 9, 2017, at 3:00 p.m.
Filed with these minutes are copies of all materials distributed at the meeting.
The agenda for the Regular Meeting was posted on October 9, 2017, at 2:27 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:
___________________________________ _____________________
Diane Dixon, Chair Date Finance Committee
Proposed changes by Committee Member Patti Gorczyca.Received into the record February 21, 2018, for the February 15, 2018 meeting.
Item No. 4A1Draft Minutes of October 12, 2017CorrespondenceFebruary 15, 2018Received February 21, 2018
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CITY OF NEWPORT BEACH FINANCE COMMITTEE JANUARY 11, 2018 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 Pro Tem Will O'Neill,
Council Member Kevin Muldoon, Committee Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton,
and Committee Member Larry Tucker
ABSENT: None.
STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director, Finance Steve
Montano, Budget Manager Susan Giangrande, Rukshana Virany, Anthony Nguyen, Chief Chip Duncan, Jamie Copeland, and Administrative
Specialist to the Finance Director Marlene Burns
OUTSIDE ENTITIES: Shayne Kavanagh (Government Finance Officials Association), Sam Savage (Probability Management), and Ken Brown and David Schey (HdL
Companies)
MEMBERS OF THE PUBLIC: Mr. Jim Mosher
III. PUBLIC COMMENTS
Chair Dixon opened public comments.
Jim Mosher suggested the Finance Committee reflect upon their accomplishments, item still
pending, and their work plan for the upcoming hear. He is interested in a Finance Committee review and discussion of the City’s Comprehensive Annual Financial Report.
Chair Dixon stated many of Mr. Mosher’s inquiries may be answered as part of the items on today’s
agenda.
There were no further public comments.
IV. CONSENT CALENDAR A. MINUTES OF NOVEMBER 9, 2017 Recommended Action:
Approve and file.
MOTION: Gorczyca moved, and O’Neill seconded, to approve the minutes, as amended. The motion carried, (6 – 0, 1 abstention “Muldoon”).
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V. CURRENT BUSINESS A. RISK BASED RESERVE ANALYSIS OVERVIEW Summary: Consultant will provide an update and overview of the Risk-based Reserve Analysis. Recommended Action: Receive and file. Chair Dixon introduced consultants Shayne Kavanagh and Sam Savage, presenters of this
item. The Risk Based Reserve Analysis Overview was a Finance Committee work plan project approved the past June. The project began in November after the RFP was approved and was
understood to be a five to six month project.
Mr. Kavanagh acknowledged the opportunity to work with the City and displayed a PowerPoint Presentation focused on providing a “high-level” overview of the project scope. As reflected in
the first slide, the project is focused on whether the City’s reserves are adequate for the City’s risk strategy, and noted “risk-modeling” would be a recurring theme in the scope of work. The
risk analysis would determine the optimal amount of reserves.
Mr. Kavanagh further provided a definition of “risk” and the likelihood of the occurrence of loss/undesirable events. He further spoke regarding the impact and magnitude of such events
and how reserves and other mitigation strategies could structure the City’s ability to quickly and effectively respond to such events.
A slide was displayed which illustrated the “normal distribution,” or bell curve representation of
various incident frequencies. Various examples were provided, including bell curve representations of male height and annual snowfall. Mr. Kavanagh also described “lognormal”
distributions, such as earthquakes, which have varying degrees (large earthquakes versus tremors).
As part of the average snowfall example, Mr. Kavanagh relayed that although snowfall is a
relatively frequent event in certain geographical areas, there are outlier incidences where magnitude of snowfall could have such negative impact it would not be cost-effective to utilize
reserves. There are other risk-mitigation tools that would be more effective in such outlier cases.
Mr. Kavanagh displayed a slide which portrayed “confidence” levels, which the City may
consider in terms of funding reserves to mitigate most losses the City, could anticipate occurring. He provided an example where increasing confidence level incrementally may not
provide the most cost-effective solution for the amount of additional “confidence.” In this example, for an increase from 90% confidence to 95% confidence, the City would have to
spend a relatively large amount to receive only a 5% increase. The incremental funds may be better utilized by funding other risk mitigation strategies. He further described combined
distributions, defined as the likelihood of two or more major large-scale risk events (i.e., hazardous material incident and major wildfire) occurring at the same time. He noted that
without analysis of the distributions of the events together, there could be a tendency toward overestimating the risk to which the City is subject.
The method of the project was described, which includes a statement that uncertainty is
inevitable, however utilizing various tools such as reference cases, developing analogous situations, and historical community and regional data detailing risks/impacts of extreme
events, natural disasters, recessions, and other uncertain events will assist in developing the City’s risk/reserve strategy. In reference to the normal distributions, Mr. Kavanagh mentioned
addressing “tail” end of the distribution is where the study would be focused.
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Mr. Kavanagh stated Sam Savage invented the proposed open-source risk modeling method
and the City has access to the same technology. Mr. Savage mentioned the method’s “open standards,” and that it could work to aggregate risks and make modeling much easier to do.
Mr. Kavanagh described the “Monte Carlo” analysis that allows the model to be bombarded with iterations of an event to assess the magnitude of damage related to an event.
Mr. Kavanagh spoke in detail regarding the ability of their analysis to recommend various
strategies including confidence levels of reserves, the type of risk mitigation responses required, including insurance, which will inform the City and by which the City can formulate an
appropriate reserve/risk policy.
In summary, Mr. Kavanagh described the four Phases of the project including, revenue and stability, break down to different categories, dependencies (how different risks can impact each
other), and multi-year analysis to be more explicit about time periods (one year versus five year outlooks).
Mr. Collopy inquired whether the consultants were working with staff, in a questionnaire
scenario, to determine the City’s own opinion of individual risks.
Mr. Kavanagh responded affirmatively that staff was interviewed, the disaster management plan was provided, and that various inquiries were made to understand the City’s particulars
as related to risk.
Mr. Collopy stated although he did not see tsunamis and airplane crashes specifically mentioned in the distributed materials, he assumed they would be included in the scope of the
project.
Mr. Kavanagh responded affirmatively that items such as earthquakes, floods, wildfires, landslides, and highway incidences would be included in the review.
Mr. Collopy commented that risk analysis appears to him to be principally “disaster”
management, mitigating the cost impacts of a disaster, and inquired regarding revenue volatility.
Mr. Kavanagh responded the two “halves” of disasters are disasters, such as earthquakes,
etc., and revenue volatility. There are also secondary factors, including debt levels, which could constrain the City’s ability to financially respond to a disaster.
Mr. Collopy inquired whether a “parametric” insurance policy would be recommended in
particular, or was it mentioned in the scope of work as a mitigation factor the City should consider.
Mr. Kavanagh defined a “parametric” insurance policy as one which provides payout if some
particular given event, or threshold, comes to pass. He provided an example from the New York Transit System, where a parametric policy provides payout should water gauges reach
certain thresholds. In relation to the City’s strategy, it may not be cost effective to utilize reserves in certain scenarios. A parametric policy may be a better response depending on the
magnitude of a certain event.
Mr. Collopy stated this particular project was called for last summer as a response to the Finance Committee reviewing the City budgets line-by-line. The Committee probed whether
the reserves were adequate and it is his belief that this analysis will be very valuable. He is of the impression this analysis will provide, on an “expected value” basis, five or six categories of
the types of reserves the City should hold and it will cover a certain “confidence” or probability of events/incidences.
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Mr. Savage responded by stating the City will need to determine its comfort level with risk and
their risk modeling will help assess how increasing reserves reduces the chance of going over-budget.
Ms. Gorczyca commented pursuant to her understanding of the scope of work the consultant
would provide a recommendation of the types of reserves required and an associated funding number. She would like to see a “system” of reserves, such as cash reserves, to address
different risks. She would also like to see mitigation measures such as the use of insurance and cross-collateralization. She expressed support for the scope of work to include the various
risk mitigation measures such as cash, insurance, and debt and how these methods would work together to address the City’s risk strategy. In summary, she mentioned the City does
have debt service and pension obligations that are not flexible and may also be considered as risks.
Mr. Collopy responded his understanding of the consultant’s role was to provide the City with
a series of choices on how to deal with its analyzed risk and the value/probability of the risk. However, it is the Finance Committee’s role to provide recommendations to the City Council of
how to select among those choices. He inquired whether the Finance Committee will make those choices or whether the consultant would provide a series of choices, such as insurance,
cash, debt, and/or parametric policies.
Mr. Kavanagh referenced Slide 9 of the PowerPoint Presentation, detailing “cumulative probability.” His firm will provide tools such as this and present “confidence” level strategies to
the City for final decision-making. The firm provides the tools to assist the City in deciding what their final strategy will be. They provide “decision support” to navigate through the complexities
of probability distributions.
Mr. Savage stated that “risk is in the eye of the beholder” and their firm can assist the City in understanding the uncertainties that exist. They provide models to help the City assess risks
and the City makes the final decision as to how to mitigate the risk. The models provided will help the City to perceive risk and uncertainty.
Ms. Gorczyca stated she hoped to see better identification of the tools that the City can use to
understand risks and how do they apply to the City’s particular situation. Then the City would make final decisions on the particular strategy.
Mr. Savage responded that the tools provided by his firm would allow the City to experiment
with the various types of debt strategies and see the results of various mitigation measures quantitatively.
Chair Dixon inquired whether the decisions and recommendations would come from the
Finance Committee or would this matter be taken to the public discourse.
Mr. Kiff responded his view is that the Finance Committee would review the materials and data and make a recommendation in the form of a policy to the City Council.
Mr. Savage stated part of this is a learning experience as to how to perceive risks, probabilities
and distributions, and the tool will allow the Committee to experiment with various levels of reserves.
Mr. Stapleton inquired as to the budget of the project ($25,000) and how many firms responded
to the RFP.
Mr. Matusiewicz stated the RFP was sent out to 600 companies, with ultimately only two responding formally to the RFP.
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Ms. Gorczyca stated the consultant’s analytic capability must be based upon a significant
database. She commented the magnitude and frequency of climactic risks are increasing. She inquired as to whether these incidences have been noted by the firm and how recently has
their database been updated.
Mr. Kavanagh reported their data includes historical data and recent climactic events. It is also important to look at the data in an informed fashion with knowledge of the context.
Chair Dixon opened public comments. Noting there was no one who elected to speak, Chair
Dixon closed public comments.
Mr. Matusiewicz referenced the project schedule was included in the packet and inquired of the consultants as to the overall status of the project.
Mr. Kavanagh stated the project was currently in Phase I/Phase II and it was likely the final
project would be complete in April, ahead of the project schedule. He also affirmed materials and data would be presented to the City as they were completed.
Chair Dixon inquired whether any members of the Finance Committee would be in favor of
working alongside staff on this project, in order to track along with the process.
Mr. Collopy and Ms. Gorczyca expressed interest in participating alongside staff.
Chair Dixon affirmed the participation by the Finance Committee members would not include oversight, but rather to track along the project and provide the full Committee with updates to
gain further understanding of the process.
Mr. Matusiewicz confirmed that staff could move along with the project if scheduling with the participating Finance Committee members became complex.
Mr. Collopy affirmed that the participating members would just sit in on meetings or stop by,
however, would be mindful if scheduling became burdensome.
Mr. Savage expressed support for additional members observing and understanding the process and would send a link from GFOA.
Ms. Gorczyca suggested the project include infrastructure, utilities, utility failures, and the
resulting business interruptions.
Chair Dixon inquired whether infrastructure was part of the original scope of work.
Mr. Montano stated the charge from the Finance Committee was to focus on the General Fund.
Mr. Collopy commented the statement of work provided by the consultant makes reference to infrastructure, water, and wastewater and if such risks exist, would the General Fund pay in
the event of an incident or does the District pay for their part?
Mr. Matusiewicz responded there would need to be a scope of work change as the City initially signed on for a study of the General Fund reserve only for the $25,000. The City can always
add on to the project. There is a possibility of bringing in Public Sector Digest to look at all of the City’s current master plans and “fill in the cracks.” He inquired whether the infrastructure
program is comprehensive and how far does the Finance Committee want to go with this project.
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Mr. Collopy preferred to see what product the Committee gets for the General Fund
recommendation and whether at that point it is worth pursuing further study. He does not clearly understand how infrastructure risk can be separated from the initial study.
Chair Dixon inquired whether the City is supplying all master plans for the consultant’s analysis.
Mr. Matusiewicz responded they have not provided them as to date.
Mr. Kiff stated there are similar situations in other cities. In reference to the sea wall collapse,
those may not always be related to earthquakes or floods. They would add this to be added to Phase II, if necessary. He believes that much of the costs related to infrastructure risks will
appear in the initial project results.
Mr. Collopy stated the Finance Committee would seek to understand the model and what it does. It is a tool to come up with the best risk-adjusted budget for the Committee to endorse to
the City Council.
Ms. Gorczyca commented claims against the City seem to be escalating.
Chair Dixon inquired if the project will review legal claims.
Mr. Kavanagh responded legal claims are covered in the scope of work.
Chair Dixon thanked the consultants for their presentation.
There was no further action taken on this item.
B. CONSULTANT OVERVIEW OF PROPERTY AND SALES TAX REVENUES Summary:
Consulting specialists in Property and Sales Tax will provide an overview of revenue prospects. Recommended Action:
Receive and file.
Chair Dixon introduced this item as a follow up to the economic study session held earlier in the week. She introduced consultants David Schey and Ken Brown.
David Scheyy displayed a PowerPoint Presentation and stated that property taxes in California
boil down to three aspects: taxable value within the City, 1% General Levy allowed under Proposition 13, and the City’s share of the General Levy.
The first table distributed included detailed valuations within Newport Beach and was broken
down by Land Use categories. Residential property makes up 84% of the City’s total value, followed by Commercial, and then Unsecured value (boats, computer equipment, etc.). The
total increase in value this year was $3.3 billion. There are portions of the City that exist within the Orange County/Santa Ana Heights Redevelopment Project Area for which the City receives
revenue from the base year value. The City does not receive revenue directly for “increment.” The growth incremental value is approximately $1.2 billion dollars and the revenue for that is
diverted to various entities.
A slide was presented detailing the tax rate area and illustrated how the 1% tax rate is broken up among the taxing entities.
Chair Dixon affirmed the City receives approximately 17% from the 1% tax.
Mr. Schey responded the chart detailed all 1% revenue and also included information from a
small lighting district.
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Chair Dixon commented the average property tax payer would understand this is the 1% property tax and how that money is ultimately allocated.
Mr. Schey commented the City is divided into “tax rate areas,” and if you take everyone’s 1%
tax, the chart illustrates how the shares are allocated.
Ms. Gorczyca stated Orange County is unique in that there are so many regional agencies getting a share of the property tax. Orange County made a decision to allocate property taxes
among various agencies and there is dilution of the property tax due to that decision.
Mr. Schey commented all of California operates under the same revenue and taxation codes. He presented a slide that illustrated the City’s share of the property tax revenue to give a sense
of where the revenue is coming from. Eighty-four percent comes from residential property tax, 10.7% from commercial, and the remainder from the unsecured rolls, which include kiosks,
equipment inside retail stores, and computer systems.
Mr. Matusiewicz stated we do not receive the unsecured property tax directly. The funds go into a pool and the City receives a proportion of it.
Mr. Schey detailed how unsecured property taxes and supplemental taxes are distributed
based the City’s Assessed Value (AV) expressed as a relative percentage of AV of the entire County. The tax dollars do not flow directly to the City of Newport Beach; however, the City
will receive a share of supplemental value of certain property taxes collected, for example, of a hotel built in Costa Mesa, since it is within the County.
Mr. Schey displayed a table that shows directly how revenues are allocated. This slide
illustrated that the City’s portion of secured/unsecured value, excluding out RDA portion, is $52.5 billion. Of note, there was an airplane registered in the City, which is allocated differently.
For that, one-third of the property tax value comes to the City.
Ms. Gorczyca inquired as to how the portion of the airport that is within the RDA impacts the City’s tax revenues.
Mr. Schey responded that the incremental revenue includes some aircraft value. The project
area base year value is $124 million. There is additional revenue of $860,000 per year related to utilities collected by the State Board of Equalization, derived by a formula, and then allocated
by the County to the various cities within it and other taxing agencies. This number increases nominally each year. There is also property tax “in-lieu” of the Vehicle License Fee that is not
really connected with the Vehicle License Fees, which was derived to ease the burden on cities.
Mr. Schey stated that after dissolution of redevelopment the City now receives a small amount of “pass through” funds and in addition, a share of the “residual” revenue in the former RDA
area. This amounts to approximately $2 million per year and will continue to increase as values in the former project area go up.
Chair Dixon inquired if there are any risk elements to that distribution or pending legislation
related to how that amount is calculated.
Mr. Schey confirmed there is no pending legislative action. He stated there are revenues for which the City can project well; however, there will be some fluctuations in the ultimate
revenues due to supplemental revenues, prior year collections from delinquencies, and deductions for refunds. The City’s projected amount is a conservative number.
Chair Dixon confirmed that it is likely the City will bring in more than budgeted, as the number
is not a full representation of the entire property tax categorization.
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Ms. Gorczyca inquired whether the tax arrangement with the former RDA project area concludes when the bonds mature.
Mr. Schey stated once the bonds are paid off the arrangement dissolves.
Ken Brown, HdL company, displayed a PowerPoint Presentation providing a status update on
the City’s sales tax revenues. Graphs were presented that illustrated the City’s per capita taxable sales as compared to Orange County as a whole, and the State of California. The
projections show great strength and a vibrancy of the economy, however, there are some vulnerabilities. The City has a large portion of its sales tax revenue generated from the auto
transportation sector. If there is a stumble in that industry, the City’s revenues will be impacted.
Chair Dixon stated it could also be impacted if the auto industry changes its source.
Ms. Gorczyca stated that ownership converting to a preference for leasing could also impact revenues in this category.
Mr. Brown affirmed leases are handled differently. Year-over-year there is a significant
slowdown in sales tax revenue statewide. Newport Beach is still growing; however, it is experiencing a slowdown. The top three sales tax generators in the City are auto (30%),
restaurants/hotels, and then general consumer goods. He provided an overview an overview of the main revenue generators and trends related to growth. He stated he could not review
individual business performance, as that information is confidential pursuant to State law.
Overall, in auto and transportation, total national registrations were increasing through 2016, but have experienced subsequent decline. Traditional car sales are being impacted. Projected
are for flat growth to slightly negative growth. Mr. Brown stated rising interest rates and increases in gas prices are impacting growth in this area.
In the restaurant and hotel category, year-after-year this is one of the strongest performing
categories, showing growth even during periods of recession. Currently, it is below the average in the recent quarter, and this is likely due to saturation in the restaurant industry. People are
eating out less frequently and also working from home. There are also more service models that provide home meal delivery. There is still a positive trend in Newport Beach and it is
expected to continue.
In the consumer goods category, the consultants are seeing the impact of internet sales on traditional brick-and-mortar establishments. In 2000, the internet comprised approximately 4%
of overall sales and now it is at 13%. Most of the revenue from internet sales goes to the County pool if it is generated out-of-state, from which the City would get a proportionate share.
Statewide, department stores sales are decelerating significantly and these sales account for
30% of consumer good sales in Newport Beach. The City experienced strong growth in this category through 2014-2015; however, the growth has notably trailed off.
Chair Dixon inquired whether the tax revenue generated or the allocation of revenue generated
from on-line purchases might be impacted due to any pending legislation.
Mr. Brown stated this matter is scheduled to be reviewed by Congress. It would be beneficial to the City to capture more of this revenue. He stated the League of California Cities and his
firm have individuals assigned to track this legislation. In summary, the State of California has an antiquated tax system that is not keeping up with the new service-based economy.
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Ms. Gorczyca inquired whether HdL has the ability to assess the “down on the ground,” matters,
citing examples as the particular hotels which are scheduled to be “off-line” due to refurbishment and current vacancies in the mall and along PCH/Corona del Mar.
Mr. Brown affirmed he works with staff to take a “bottom-up” approach and confirmed he
personally monitors the area to include as much real-time data in the projections as possible.
Mr. Collopy expressed concern about the modest growth projections and the auto sales revenue being flat at best. He inquired as to what is the best advice that can be given to staff
in order to make accurate projections for the City’s budget.
Mr. Brown summarized that restaurant revenues are increasing, gas prices are increasing, and building and construction is one of the strongest current categories. Business and industry are
relatively stable, and with all factors combined, there is still a projection for slow, but modest, growth.
Mr. Muldoon confirmed if a Newport Beach resident orders an item and it is shipped to a
residential address in the City, the sales tax goes to the County pool and it is distributed among the various cities based upon their proportional share.
Chair Dixon confirmed the consumer now gets charged sales tax in California for that purchase,
where years ago, it did not.
Mr. Brown confirmed that based upon population, the City receives a portion based upon a share of the overall internet sales.
Mr. Collopy stated in November the Finance Committee received data indicating a smaller
increase than projected and inquired if the information was still accurate. In the large categories, will the General Fund still be ahead?
Mr. Brown confirmed he attended three different economic meetings recently that did not
indicate the projection of any recession. HdL is cautious and mindful of the trends, and has noted the trends toward increases in interest rates and gas prices. In summary, they are still
projecting slow growth and a cautious outlook.
There was no further action taken on this item.
C. LONG RANGE FINANCIAL FORECAST (LRFF) Summary:
City staff will provide an update on efforts to improve the City’s Long Range Financial Forecast and provide a comparative review of best practices to other cities. Recommended Action: Receive and file.
Steve Montano provided a brief update on the City’s Long Range Financial Forecast and
introduced the software that was recently purchased for this purpose. He reviewed the forecasting model utilized by the City of Sunnyvale, as requested previously by the Finance
Committee. Their City policy requires a 10-year forecast and also includes a 20-year financial plan, which is presented each year with the annual budget. It includes all revenue and
expenditure categories and is a detailed model, which informs budget projects, develops schedules, and plans for pay back of funds. The City of Sunnyvale also has a “Resource
Allocation Plan” in place that is a reserve to stabilize service levels during years with revenue instability.
Ms. Gorczyca inquired whether this functions similar to a rate stabilization fund.
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Mr. Montano responded the fund is utilized for stabilization and will cover deficits. Concurrently,
they have built-in structures to plan for recession-type events, include an agreed upon plan to cut certain programs and services, as well as revenue enhancements (i.e., higher fees) which
can be immediately mobilized if necessary. There is an understanding and fiscal strategy for cuts.
Mr. Montano also presented a brief review of the strategies employed by the Cities of Palo Alto
and San Clemente. Palo Alto employs a 10-year forecast, over 52 pages long, which includes 10 staff contributors and this process has been in place since 1997. They utilize trend
projections on revenues and expenditures, along with various narratives in a reader-friendly format. The City of San Clemente employs a 5-year financial forecast, over 378 pages long,
and includes 15 staff contributors. They provide detailed information and review all funds, including the General Fund and reserve funds. This process is updated each year.
The City of Newport Beach provides a financial forecast based upon standards and best
practices recommended by professional organizations such as the GFOA. A slide was presented which illustrated the recommended steps in the development of a long-term financial
plan and compared the City’s practices to the recommendations.
Mr. Collopy stated he was impressed as to how the City was following the recommended process and inquired as to the areas the City could improve upon.
Mr. Montano stated the City launched its first long-range financial plan last year and
traditionally, has not completed 10 to 20 year type of financial forecasting. The best time to conduct such a process would be prior to the commencement of budget review, as the long-
range financial forecast informs the budget recommendations.
Mr. Montano detailed the new software tool, a PFM product, which was built for collaboration purposes. It provides better graphing and chart illustrations. It was implemented in December
and full implementation is projected for February.
Ms. Gorczyca noted the importance of reliable data on pension and capital cost projections. She suggested utilizing a number of sources including John Bartel’s projections for “what-if”
analyses.
There was no further action on this item.
Chair Dixon left this meeting at this juncture and turned the meeting over to Vice Chair Muldoon.
D. REVIEW OF FINANCE COMMITTEE RESOLUTION Summary:
The Committee will review its objectives as set forth in Council Resolution 94-110 as amended by Council Resolution 2017-58.
Recommended Action: Receive and file.
This item was continued to a future meeting.
E. BUDGET AMENDMENTS
Summary: Receive and file a staff report on the budget amendments for the prior quarter.
Recommended Action: Receive and file.
Vice Chair Muldoon briefly inquired regarding two accounting shifts in the Retiree Medical Fund
and Fund 1130 ($4 million in wastewater fund decreases).
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Page 11 of 12
Mr. Kiff explained for Fund 1130, Public Works closes out projects. If they did not spend as
much as projected, the remainder return back to the Fund from which it was originally allocated for accounting purposes. Ms. Giangrande also commented the shifts were for accounting
purposes. Ms. Gorczyca inquired whether the purchase of the McDonald’s site was moving forward.
Mr. Kiff affirmed the escrow; however, it would not be reflected as a budget amendment. Staff
confirmed the purchase was allocated in the budget.
F. REVIEW OF FINANCE COMMITTEE WORKPLAN
Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the fiscal
year and highlight those work plan items that were carried forward from the prior fiscal year. Recommended Action:
Receive and file.
This item was continued to a future meeting.
G. PENSION DISCUSSION Summary:
Agenda item reserved for discussion regarding the status of the City’s pension liability, payment strategies, CalPERS policy updates and/or advocacy efforts.
Recommended Action: Discussion if applicable.
This item was continued to a future meeting.
VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE
PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM)
Mr. O’Neill inquired as to the possibility of the formation of a subcommittee to review Council “F”
policies. Members O’Neill, Stapleton, and Tucker expressed interest in participating. Mr. Kiff stated
this item is not on the agenda for today’s meeting; however, it can be agendized for the next
meeting.
Pursuant to Committee discussion, the upcoming meeting schedule was agreed to be February 15, March 15, April 12, May 10 and 31, and either a June 21 or 28 meeting. It was agreed upon that the reserve study would not likely be completed in time to incorporate recommendations into the
2018-2019 budget could help inform staff and Council prior to the preparation of the following year’s budget.
VII. ADJOURNMENT
The Finance Committee adjourned at 5:00 p.m. to the next regular meeting of the Finance
Committee. Filed with these minutes are copies of all materials distributed at the meeting.
The agenda for the Regular Meeting was posted on January 8, 2018, at 1:59 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.
Finance Committee Meeting Minutes January 11, 2018
Page 12 of 12
Attest:
___________________________________ _____________________ Diane Dixon, Chair Date
Finance Committee
Proposed changes by Committee Member Patti Gorczyca.
Received into the record February 21, 2018, for the February 15, 2018 meeting.
Item No. 4B1Draft Minutes of January 11, 2018CorrespondenceFebruary 15, 2018Received February 21, 2018
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5B
February 15, 2018
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director (949) 644-3123, danm@newportbeachca.gov
SUBJECT: Update on Risk Based Analysis of General Fund Reserve
Requirements
The Government Financial Officers Association (GFOA) was selected to assist staff with
analyzing risks through an analytical framework intended to determine reserve levels appropriate for the City of Newport Beach. GFOA, working closely with staff, will facilitate
staff’s thorough examination of the City’s primary and secondary risk factors that
generally influence the amount of reserves the City should hold. Since the last Finance
Committee meeting, we participated in a conference call with GFOA and Committee Members Collopy and Gorczyca on February 10 to review an example report that
describes the range of possible financial reserve levels needed to cover first year cost of
a major earthquake, their relationship to confidence levels and basic strategies to reduce
cash reserve requirements. Later in the week, we met with Fire Chief Duncan to further
explore the City’s financial exposure to wildfires and received preliminary reports from GFOA related to financial exposure to floods and revenue volatility related to recessions.
GFOA is in the second phase (analysis of risk) of five and is making good progress. GFOA
will later provide staff statistical models to assess the additive nature and multi-year
impact associated with these financial risks. They will also provide recommendations on new, or changes to existing, financial policies, risk management methods, and ideas to
support the General Fund Reserve strategy over the long-term.
A draft excerpt from the extreme events section of the report is provided as an attachment
for the Committee’s review.
Update on Risk Based Analysis of General Fund Reserve Requirements February 15, 2018
Page 2 Prepared by: Submitted by:
/s/ Steve Montano
_____________________________
/s/ Dan Matusiewicz
_____________________________
Steve Montano Deputy Finance Director Dan Matusiewicz Finance Director
Attachment:
A. Draft Excerpt from the Extreme Events Section of: Risk-Based Analysis of General Fund Reserve Requirements
ATTACHMENT A
DRAFT EXCERPT FROM THE EXTREME EVENTS SECTION OF: RISK-BASED ANALYSIS OF GENERAL FUND RESERVE REQUIREMENTS
1
Draft Excerpt from the Extreme Events Section of: Risk Based
Analysis of General Fund Reserve Requirements
A Study Commissioned by the City of Newport Beach, California, from the
Government Financial Officers Association
Extreme Events
Although Newport Beach has received
reimbursement from insurance and public
agencies in the past for natural disasters,
and has insurance coverages that would
help in recovery from future disasters,
having adequate reserves in place is
important to quickly and decisively
respond to extreme events. For example,
FEMA reimbursement will not over all the
costs the City incurs and it could months,
if not years, to receive reimbursement. As
the City’s hazard mitigation plan indicates,
earthquakes, floods, wildfires, landslides,
and strong winds are potentially the most
costly natural disasters for Newport
Beach.1 In discussions with City staff, the
first three disasters represent the greatest
risk and will be the focus of this section of the analysis.
1 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016.
FEMA, CalOES, and Reserves
The U.S. Federal Emergency Management
Agency (FEMA) reimburses local governments for
monies spent in response to a federally-declared
disaster. The California Governor's Office of
Emergency Services (CalOES) provides
assistance to local governments for State of
California-declared disasters.
In both cases, reimbursement is only partial
(typically 75 percent for FEMA) and is often not
immediate. Therefore, local governments must
have the financial capacity to respond quickly and
decisively, independent of other governmental
financial support.
2
Fortunately, Newport Beach has not experienced an actual earthquake in recent history.
Therefore, we have no historical data to suggest what damage an earthquake might do. Instead,
we will rely on historical data for earthquakes that have occurred in other areas in California. We
use these cases to establish the range of potential damage that Newport Beach might experience.
We cannot assume that all the points along the range of potential damages is equally likely – for
example, it is more likely that Newport Beach will experience seismic activity of smaller magnitude
than a large seismic event. Theory suggests, and our examination of the data confirms, that the
range of potential damages
takes the shape of a “power
law” curve, which is simply to
say that Newport Beach is
much more likely to incur
natural disasters of less
severity and lower cost with
greater frequency than higher
cost, more severe natural
disasters.2 For illustrative
purposes, the image on the
right is a power law curve of
seismic activity. The odds of
experiencing tremors is much
greater than the odds of
experiencing earthquakes. It is also significantly more likely that we experience tremors than a
catastrophic event (“The Big One”).
The severity of earthquakes, floods, and wildfires are attributed to several factors. Factors
impacting the severity of earthquakes include magnitude, density of an area, depth of the
earthquake, distance from the epicenter, local geological conditions, secondary effects (e.g.,
floods, landslides, fires), and architecture.3 Factors impacting the severity of floods include
amount of precipitation as well as the size, shape, and land use of the surface area where
rainwater reaches.4 Factors influencing the severity of fires include topography, temperature and
relative humidity, and vegetation.5 In addition, an area’s level of preparedness to respond6 to a
natural disaster affects severity and cost. Controlling for many of these factors is beyond the
scope of our analysis. Therefore, in the following subsections, we analyze the relationship
2 GFOA used standard statistical procedures to turn the data from Exhibit 2 into a lognormal distribution.
3 Sarah Zielinski, “Seven Factors that Contribute to the Destructiveness of an Earthquake,” Smithsonian, February 23, 2011, http://www.smithsonianmag.com/science-nature/seven-factors-that-contribute-to-the-destructiveness-of-an-earthquake-44395116/.
4 Ross Gorte, “The Rising Cost of Wildfire Protection,” (Bozeman, MT: Headwater Economics, 2013), http://headwaterseconomics.org/wphw/wp-content/uploads/fire-costs-background-report.pdf.
5 Becky L. Estes, Eric E. Knapp, Carl N. Skinner, Jay D. Milner, and Haiganoush K. Preisler, “Factors influencing
fire severity under moderate burning conditions in the Klamath Mountains, northern California, USA,” Ecosphere 8: 5 (2017), 1-20, http://onlinelibrary.wiley.com/doi/10.1002/ecs2.1794/pdf. 6 The State of Queensland, Office of the Queensland Chief Scientist, “What factors contribute to floods?,”
http://www.chiefscientist.qld.gov.au/publications/understanding-floods/what-factors-contribute.
Frequency
of Quake
Exhibit 1 – Sample Power Law Curve
Severity of Quake
5%10%15%20%25%30%35%40%45%50%55%60%
"The Big One"
Earthquakes
Tremors
3
between population density and these natural disasters. We will also return to specific factors
affecting Newport Beach’s potential damages from these hazards based on the City’s natural
hazards mitigation plan later in this report when we recommend an overall reserve strategy.
Because the City does not have information on cost of past earthquakes and wildfires, we gather
additional reference cases using publically available data from FEMA-declared disasters.7
Additionally, we use other Southern California FEMA-declared disasters as additional analogues
to the three floods for which the City has cost information. There are two important limitations with
the reference dataset. One is the reference information may represent instances of greater
damage than what the City may experience. The second limitation is the FEMA information
includes all cost reimbursement, including those to the general and enterprise funds.
Earthquakes
Developing a reserve strategy for a severe natural disaster is complicated because a disastrous
earthquake or tsunami is a very low probability event with potentially extreme consequences.
Unlike, for example, a recession that will almost certainly happen within the foreseeable future
due to routine economic cycles, Newport Beach may not experience a severe earthquake for
many years. For a risk factor like revenue volatility (due to a recession) it makes sense to reserve
an amount that is within the relatively well-defined range suggested by the City’s historical
experiences because we know that: A) a recession will happen in the foreseeable future, and B)
certain tax revenues will decline by a roughly predictable amount at that time.
To deal with the unique problems posed by a severe earthquake, we turn to the emerging field of
municipal “resiliency.”8 Resiliency is defined as a government’s ability to absorb an extreme event
and bounce back from it. Further, resiliency is enhanced when a government has multiple options
to respond to an extreme event. When considering financial preparedness to respond, a
municipality has three basic options.
• Reserves. Reserves are under the complete control of a municipality, thus provide the
most flexibility.
• Debt. The municipality could access the debt market to pay for costs of responding.
• Insurance. The municipality could purchase insurance to provide reimbursement of costs incurred.
For a lower probability event with potentially extreme consequences, there are disadvantages to
relying exclusively on reserves. Chief among them include, the length of time to accumulate
sufficient reserves to cover the costs associated with a catastrophic event and the important
opportunity costs to holding these monies in reserve – for example, the City could use the money
to lower taxes or provide more services. The resiliency philosophy suggests that we should think
7 FEMA Public Assistance Funded Projects Summary provides information on “Federal disaster grant assistance for debris removal, emergency protective measures, and the repair, replacement, or restoration of disaster-damaged, publicly owned facilities and the facilities of certain Private Non-Profit (PNP) organizations.” Federal Emergency
Management Agency, “FEMA Public Assistance Funded Projects Summary,” http://www.fema.gov/media-library/assets/documents/28344, updated December 8, 2017. 8 See for example, the Rockefeller Foundations “100 Resilient Cities” program, of which GFOA is a partner.
www.100resilientcities.org.
4
about how all three options could be used to create financial preparedness to deal with an extreme
event or a natural disaster.
In order to think about how the three funding mechanisms above might apply to the City’s financial
preparedness strategy for earthquakes, we first need to better define the range of damages the
City could experience. To do this, we draw from earthquake events listed in FEMA’s database for
California cities and towns. The reference examples reflect a similar seismic hazard risk profile
as Newport Beach, according to the U.S. Geological Survey.9 In fact, the Newport Beach
experienced some light shaking from the 2010 Baja California earthquake listed below, but did
not incur damages.10 Exhibit 2 lists the events (including magnitude of earthquake, as applicable),
estimated damages11 adjusted for inflation to 2017 dollars, population density at the year of the
event, and estimated damages per capita.
9 U.S. Geological Survey, “Simplified 2014 Hazard Map (PGA, 2% in 50 years), https://earthquake.usgs.gov/hazards/hazmaps/conterminous/2014/images/HazardMap2014_lg.jpg 10 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016.
11 GFOA estimates the total cost using the typical FEMA reimbursement rate of 75 percent of total cost.
5
Exhibit 2: Estimated Damages from Select California Earthquakes
Estimated
Damages (2017 $)
Population
Density (year of event)
Estimated
Damage per Capita
2003 San Simeon - 6.6 magnitude
Arroyo Grande $30,943 2,849 $11
Atascadero $36,888,800 1,077 $34,248
Morro Bay $380,373 1,960 $194
Pismo Beach $32,552 2,315 $14
San Luis Obispo $9,815 3,464 $3
Guadalupe $948,145 4,975 $191
Santa Maria $52,292 3,855 $14
Subtotal $38,342,920 20,495 $1,871
2010 Baja California - 7.2 magnitude
Brawley $48,205 3,249 $15
Calexico $9,002,756 4,597 $1,958
Calipatria $180,405 2,071 $87
El Centro $2,100,258 3,845 $546
Holtville $3,294,249 5,164 $638
Imperial $695,131 2,518 $276
Subtotal $15,321,004 21,444 $714
2014 South Napa - 6.0 magnitude
American Canyon $71,048 4,229 $17
Calistoga $7,866 2,040 $4
Napa $11,171,809 4,485 $2,491
Yountville $681,714 1,884 $362
Benicia $103,049 2,160 $48
Vallejo $717,781 3,920 $183
Subtotal $12,753,267 18,718 $681
TOTAL $66,417,191 60,657 $1,095
Mean $3,495,642 3,192 $1,095
Median $380,373 3,249 $117
Sources: Federal Emergency Management Agency and U.S. Census Bureau
Compared to earthquakes referenced, the 2010 Baja California earthquake incurred the lowest
damage per capita at $714. However, Calexico’s damages per capita were higher than the other
affected municipalities in the dataset for the event. Atascadero’s damages from the 2003 San
Simeon earthquake is the highest amongst the reference examples and represents an extreme
6
case due to high cost related to repair its historic city hall building.12 For the purpose of the
analysis, we remove Atascadero from the sample cost per capita and will return to it at the end of
this subsection.
Because the estimated damages reflect total cost and this analysis focuses on the general fund
only, we need to further adjust these figures to estimate general fund damages only. In each city’s
most recent comprehensive annual financial report, we identify the share of capital assets for
governmental activities relative to the total, excluding land. This ratio is shown in the exhibit below
as general fund’s share of total assets. We apply this ratio to the estimated damages per capita
figures shown in Exhibit 2. Exhibit 3 lists the estimated general fund damage per capita.13
To arrive at a general fund reserve recommendation, we first translate the reference cost per
capita in Exhibit 3 and apply it to Newport Beach’s current population density of 3,641 residents
per square mile. This results in total estimated cost ranging from $6,000 to $7.3 million.14 Second,
we must account for eventual FEMA reimbursement. It is unlikely that the City will need financial
resources amounting to a natural disaster’s total estimated cost immediately. It is more plausible
that the City will spend resources over time, but enough to cover the assumed lag time between
when a natural disaster occurs and when reimbursement is received. Using references from other
governments GFOA has worked with, local governments typically spend about 79.5 percent of a
natural disaster’s eventual total cost within the first year after the natural disaster. Applying this
percentage to the total estimated ranges earlier identified, the Newport Beach might need
between $5,000 and $5.8 million in the first year after a natural disaster.
12 Creig P. Sherbune, “Financing City Hall: A look at who’s paying the $34 million,” Atascadero News, September
23, 2011, http://www.atascaderonews.com/v2_news_articles.php?heading=0&story_id=4237&page=72.
13 According to Holtville’s FY 2016 CAFR, it does not maintain a complete accounting of capital assets. Thus, the relative share of capital assets for governmental activities is unavailable and we exclude it from the reference set as well.
14 The difference from the cost per capita listed in Exhibit 3 and the actual figures is due to rounding.
7
Exhibit 3: Estimated General Fund Damages Per Capita from Select California Earthquakes
General Fund’s Share of Total Assets Estimated General Fund Damage Per Capita
2003 San Simeon - 6.6 magnitude
Arroyo Grande 54% $6
Atascadero 81% $27,581
Morro Bay 51% $99
Pismo Beach 60% $8
San Luis Obispo 48% $1
Guadalupe 42% $81
Santa Maria 63% $9
2010 Baja California - 7.2 magnitude
Brawley 35% $5
Calexico 64% $1,256
Calipatria 57% $50
El Centro 40% $218
Holtville N/A N/A
Imperial 46% $127
2014 South Napa - 6.0 magnitude
American Canyon 82% $14
Calistoga 31% $1
Napa 77% $1,915
Yountville 71% $258
Benicia 51% $25
Vallejo 61% $112
Sources: Federal Emergency Management Agency, U.S. Census Bureau, each cities’ respective CAFR
The range of over $5,000 to $5.8 million is far too vast to be of much help in making decisions
about Newport Beach’s financial strategy. Therefore, we assume potential earthquake take the
shape of a power law distribution, where the City is much more likely to experience a minor rather
than an extreme earthquake.15
Exhibit 416 provides a distribution of the potential cost the City would incurred in the first year
following an earthquake. The horizontal axis represents the percent likelihood of earthquakes
covered. The vertical axis represents the amount of reserves that are required to cover first-year
cost. For example, the 85 percent mark vertical axis intersects with the orange line at a general
fund reserve of $850,000. As the graph moves closer to the right, a greater amount in reserves is
needed to cover the less probable and more severe earthquakes.
15 GFOA used standard statistical procedures to turn the data from Exhibit 3 into a normal distribution. 16 Exhibit 4 does not graph the amount required to cover 99.9% of earthquakes in order to focus on more probable
scenarios. To cover 99.9% of earthquakes would require $302.3 million from the general fund.
8
Exhibit 4 - Percent of First-Year Cost of an Earthquake Covered by Varying Reserve
Levels13
As we move to the right of the graph, the amount Newport Beach needs to reserve to
cover the first-year cost of an earthquake increases.
Of course, the City can be more confident by setting aside more reserves. But to be completely
confident, the City would need to reserve a very high amount and, as we discussed earlier, there
are significant opportunity costs in doing so. Instead, Newport Beach might consider how
reserves, debt, and insurance can work together. First, let us consider establishing some basic
principles.
• Reserves make the most sense at the left-hand side of the curve. Here the City gets
the most “bang for the buck” because each extra dollar of reserves buys the greatest increases in confidence.
• Debt is probably the most useful closer to the middle of the curve. The middle of the
curve represents severe but not catastrophic damage. Here, the City would likely need to fund a significant response to a disaster but the City’s tax base would not be so impaired
(e.g., stores closed and residents dislocated on a long-term basis) that paying back the
debt would be problematic.
• Insurance is probably most useful closer to the right-hand side of the curve. The
right-hand side of the curve represents catastrophic damage. In this case, the City’s tax base might be impaired for a significant duration making repayment of debt difficult.
Further, the premium payments for insurance coverage for only a catastrophic event would
be less than for coverage that includes both severe and catastrophic events. Insurance can also complement the City’s risk mitigation strategy should it decide to reserve an
amount closer to the left-hand side of the curve.
Exhibit 4 shows the “value” the City gets from reserves. Where the curve is flatter, the value of
reserves is high because a relatively modest increase in the size of reserves “buys” a substantial
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%
Mi
l
l
i
o
n
s
9
increase in the confidence the City can have that its reserves will be adequate for an earthquake.
Where the curve gets steeper, the City needs to put aside more money to gain less confidence.
In Exhibit 4, we can see that the “value” provided by reserves starts to decrease significantly after
about $850,000. For example, the City can be 80 percent confident of covering the damage from
an earthquake at $590,000. It can “buy” an extra 5 percentage points of confidence to get to 85
percent with a reserve of $850,000 – a difference of $260,000. By way of comparison, going to
90 percent confidence, requires a reserve of $1.6 million. In other words, to increase confidence
from 85 percent to 90 percent requires nearly doubling the reserve amount, and to go from 90 to
95 percent requires over two and a half times the reserve. This pattern suggests the following
range for reserves:
• On the low end, $850,000. This is the point up to which the curve is flattest. That means it is where each additional 5 percent of confidence requires an approximately similar
increase in reserves. $850,000 provides the City with an 85 percent likelihood of being
able to cover all first year damages from an earthquake with reserves. • On the high end, $1.6 million. This is the point where the City can be 90 percent
confident it could cover all first year damages from an earthquake with reserves. It is also
the point right before the curve turns much more sharply upwards, where much greater levels of reserve are necessary to be more confident.
Choosing a number within the range suggested above will depend on the City’s appetite for risk.
In considering these numbers, we must also remember that the City of Newport Beach itself has
not incurred large costs from an earthquake and that the numbers above are all based on
analogues generated from the experience of other cities. Hence, it is useful to consider how
Newport Beach’s vulnerability to earthquakes might compare to other cities. First, all of the cities
used as analogues in this report have a similar seismic hazard risk profile to Newport Beach,
according to the U.S. Geological Survey. So, the analogues should be basically comparable.
However, the cities might differ in some of their specific characteristics that make them more
vulnerable or less vulnerable to damages. To gain more insight on this point, we compared the
disaster management plans of different cities in the region to see the potential earthquake
damages that were contemplated for each city.18 We found, for example, that Newport Beach’s
17 Excludes the cities of Atascadero and Holtville. 18 We reviewed only disaster management plans produced by the same consultant as the consultant used by Newport Beach for its disaster management plan. The intent was to compare plans that were developed using similar
methodologies and assumptions.
What are the Implications for the Whole City?
The focus of our report is Newport Beach’s general fund. Our method can also deliver an
estimate of what the cost of earthquake might be across the entire City government.
• At 85 percent confidence level, a reserve of $2.6 million.
• At 90 percent confidence level, a reserve $5.1 million.17
10
plan contemplated slightly lower damages19 from an earthquake at the San Andreas fault,
compared to the average for the plans we examined.20 However, we also found that Newport
Beach’s “worst case scenario” from activity along the San Joaquin Hills fault was considered to
be more severe than that of the other cities’.21 As we saw in Exhibit 4, using reserves for the most
severe possible earthquake is not economical. Hence, this suggests that the City might wish to
give special consideration to financial risk management strategies for damages in excess of
reserves.
For potential damages in excess of the reserve target the City selects, Newport Beach should
consider other financing tools like debt and insurance. The scope of this analysis is limited to
general fund reserves, so GFOA cannot provide more specific guidance on the exact points on
the curve in Exhibit 4 at which the City should consider debt versus insurance, but we can provide
the following recommendations to help the City develop a more robust strategy.
• Develop a contingent capital arrangement. For damage levels at which the City chooses to use debt, the City should arrive at pre-arranged terms with a lender to be able
to access a loan when the need arises. This will eliminate the need to negotiate terms during high-stress periods in the aftermath of an extreme event, and the City will have a much more favorable negotiating position before an event than immediately after.
• Consider inter-fund borrowing. A loan does not necessarily have to come from an
external creditor. If the City has resources in other funds that are not likely to be
compromised by a severe disaster, the City could use inter-fund borrowing to provide the resources needed by the general fund. Similar to a contingent capital agreement with an
external lender, the City should develop a robust internal borrowing policy prior to an event to govern the terms of the loan.
• Consider “parametric” insurance in addition to traditional indemnity insurance. Indemnity insurance is the type of insurance that most governments have traditionally
purchased, where the insurance corresponds to the value of the assets being insured and reimbursement is paid out after a certain deductible has been met. The advantage of traditional indemnity insurance is that there is a known damage threshold past which the
City is covered.
Parametric insurance is a newer type of insurance for providing coverage for extreme
events, having increased in popularity in the last 15 years or so. Parametric coverage provides the policyholder (the City) with a payment amount that is defined ahead of time,
should a defined event come to pass (an earthquake of a certain magnitude). Parametric
19 Because the disaster management plans do not estimate costs that would be incurred by the municipal governments
themselves in the event of an earthquake, we compared the reports using building-related economic losses. Building losses include structural and non-structural damage buildings as well as their contents. Income losses relate to the inability to operate during a period because of damages sustained during a disaster as well as money spent on
temporary living expenses due to displacement. Presumably the costs incurred by the municipal governments would be proportional. 20 Damages were scaled to population to increase comparability.
21 These plans contemplated damages to the entire community, including private property, overlapping governments, and more. So, the plans did not offer insight into the potential cost of an earthquake to the municipal government. However, it reasonable to assume that the cost to municipal government would be roughly proportionate to the damage
done to the entire community.
11
insurance could be more useful for providing an injection of liquidity because the holder of the policy receives the defined payment immediately upon verification by a third party that
the given event occurred, which usually would be within a matter of days. As a simple
illustration, a parametric policy might provide the City of Newport Beach with $5 million upon the occurrence of a 7.0 magnitude earthquake, after the U.S. Geological Survey
verifies the magnitude of the quake. This feature of parametric insurance also eliminates much of the administrative hassle that would be associated with a traditional indemnity policy (e.g., working with claims adjusters). A final advantage is that the proceeds from
the policy payout are completely fungible – the City could use them to fund whatever service it deems necessary whereas indemnity policies might require the policyholder to use the funds to repair or replace the asset that was insured. An important disadvantage
of parametric insurance is that the policy is triggered by the magnitude of the event, not the damages incurred by the City. Therefore, if the City were to experience a 6.9
magnitude quake, to continue our previous example, it would receive nothing from a
parametric policy regardless of the damages it experienced. Additionally, parametric insurance is still a relatively new insurance instrument, and fewer insurance companies
sell parametric policies compared to indemnity policies.
A robust insurance strategy could make use of both traditional indemnity and parametric
insurance. For example, traditional indemnity insurance could be used to protect against
loss of the City’s assets, while parametric insurance could be used to compensate the City for the losses in tax revenue it would experience from an impaired tax base, for instance.
As mentioned earlier in this subsection, the estimated damages recorded by Atascadero from the
2003 San Simeon earthquake represent an extreme case. For these extreme events, alternative
financing tools aside from reserves may be prudent. Additionally, Atascadero’s example highlights
additional strategies for Newport Beach to explore. As seen with Atascadero’s city hall, historic
buildings are vulnerable when seismic activity occurs. To help mitigate risk associated with
historic buildings, the City could explore retrofitting, insurance, and other mitigation strategies for
buildings that poise the greatest risk as identified in the City’s disaster management plan.
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5C
February 15, 2018
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director (949) 644-3123, danm@newportbeachca.gov
SUBJECT: Debt Management Policy, F-6 Revisions
Please see the proposed revisions to Debt Management Policy, F-6 for Committee
consideration.
Prepared by: Submitted by:
/s/ Steve Montano
_____________________________
/s/ Dan Matusiewicz
_____________________________
Steve Montano
Deputy Finance Director
Dan Matusiewicz
Finance Director
Attachments:
A.Redlined Version of Proposed Change to Debt Management Policy, F-6
B.Proposed Changes to Debt Management Policy, F-6 (without redline)
ATTACHMENT A
REDLINED VERSION OF PROPOSED CHANGE TO DEBT MANAGEMENT POLICY, F-6
F-6
1
DEBT MANAGEMENT POLICY
A. PURPOSE
The purpose of this policy is to establish guidelines and parameters for the effective
governance, management and administration of City debt. This Debt Policy is intended
to comply with Government Code Section 8855(i) and shall govern all debt undertaken
by the City.
The City hereby recognizes that a fiscally prudent debt policy is required in order to:
1. Maintain the City’s sound financial position.
2. Ensure the City has the flexibility to respond to changes in future service priorities,
revenue levels, and operating expenses.
3. Protect the City’s credit-worthiness., including maintaining the City’s
AAA/Aaa/AAA credit ratings..
4. Ensure that all debt is structured in order to protect both current and future
taxpayers, ratepayers and constituents of the City.
5. Ensure that the City’s debt is consistent with the City’s planning goals and
objectives and capital improvement program or budget, as applicable.
B. BACKGROUND
The City is committed to fiscal sustainability by employing long-term financial planning
efforts, maintaining appropriate reserves levels and employing prudent practices in
governance, management, budget administration and financial reporting.
Debt levels and their related annual costs are important long-term obligations that must
be managed within available resources. A disciplined, thoughtful approach to debt
management includes policies that provide guidelines for the City to manage its debt
program in-line with those resources. Therefore, the objective of this policy is to provide
written guidelines and restrictions concerning the amount and type of debt issued by the
City and the ongoing management of the debt portfolio.
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This debt management policy is intended to improve the quality of decisions, provide
justification for the structure of debt issuance, identify policy goals and demonstrate a
commitment to long-term financial planning, including a multi-year capital plan.
Adherence to a debt management policy signals to rating agencies and the capital
markets that a government is well managed and should meet its obligations in a timely
manner.
C. RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND
BUDGET
The City has established long-term plans for replacing aging physical infrastructure. The
City strives to maintain a level funding plan that will minimize the peaks and valleys in
General Fund support levels and that allows for the cash funding of projects over time.
The City will utilize debt obligations only after giving due consideration to all available
funding sources, including available cash reserves in the City’s Facilities Financial Plan
(FFP), Harbor & Beaches master plan, other strategic savings programs, available current
revenues, potential future revenue sources, potential grants, and all other financial
sources legally available to be used for such purposes. When and if deemed necessary,
the City will issue debt for the purposes stated in this Debt Policy and to implement
policy decisions incorporated in the City’s Facilities Financing, Harbor and Beaches, and
Capital Improvement Plans.
The City shall strive to fund the upkeep and maintenance of its infrastructure and
facilities due to normal wear and tear through the expenditure of available operating
revenues. The City shall seek to avoid the use of debt to fund infrastructure and facilities
improvements that are the result of normal wear and tear.
The City shall integrate its debt issuances with the goals of its capital improvement
program by timing the issuance of debt to ensure the projects are available when needed
in furtherance of the City’s public purposes.
The City shall seek to issue debt in a timely manner to avoid having to make unplanned
expenditures for capital improvements or equipment from its general fund. Long-term
debt will not be used to fund City operations.
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C. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an equitable and cost-effective
means of financing major infrastructure and capital project needs of the City. Debt
will be considered to finance such projects if:
a) It meets the City’s goal of distributing the payments for the asset over itsfor no
longer than its useful life so that benefits more closely match costs for both
current and future residents.
b) It is the most cost-effective funding means available to the City, taking into
account cash flow needs and other funding alternatives.
c) It is fiscally prudent and meets the guidelines of this Policy. Any consideration
of debt financing shall consider financial alternatives, including pay-as-you-go
funding, proceeds derived from development or redevelopment of existing
land and capital assets owned by the City, and use of existing or future cash
reserves, or combinations thereof.
2. Acceptable Uses of DebtPurposes for Which Debt May Be Issued
The City will consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The
primary purpose of debt is to finance one of the following:
a) Acquisition and or improvement of land, right-of-way or long-term easements.
b) Acquisition of a equipment or a capital asset with a useful life of 3 or more
years.
c) Construction or reconstruction of a facility.
d) Refunding, refinancing, or restructuring debt, subject to refunding objectives
and parameters discussed in Section E.
e) Although not the primary purpose of the financing effort, project
reimbursables that include project planning design, engineering and other
preconstruction efforts; project-associated furniture fixtures and equipment;
capitalized interest, original issuer’s discount, underwriter’s discount and
other costs of issuance.
f) Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
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g) Refinancing or advance funding of City pension obligations, but only to the
extent significant financial benefit is achieved and limited by Section FE.
3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a) Financing of operating costs except for anticipation notes with a term of less
than one year.
b) Debt issuance used to address budgetary deficits.
c) Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
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RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND
BUDGET
The City has established long-term plans for replacing aging physical infrastructure. The
City strives to maintain a level funding plan that will minimize the peaks and valleys in
General Fund support levels and that allows for the cash funding of projects over time.
The City will utilize debt obligations only after giving due consideration to all available
funding sources, including available cash reserves in the City’s Facilities Financial Plan
(FFP), Harbor & Beaches master plan, other strategic savings programs, available current
revenues, potential future revenue sources, potential grants, and all other financingcial
sources legally available to be used for such purposes. When and if deemed necessary,
the City will issue debt for the purposes stated in this Debt Policy and to implement
policy decisions incorporated in the City’s Facilities Financing, Harbor and Beaches, and
Capital Improvement Plans.
The City shall strive to fund the upkeep and maintenance of its infrastructure and
facilities due to normal wear and tear through the expenditure of available operating
revenues. The cCity shall seek to avoid the use of debt to fund infrastructure and facilities
improvements that are the result of normal wear and tear.
The City shall integrate its debt issuances with the goals of its capital improvement
program by timing the issuance of debt to ensure the projects are available when needed
in furtherance of the City’s public purposes.
The City shall seek to issue debt in a timely manner to avoid having to make unplanned
expenditures for capital improvements or equipment from its general fund. Long-term
debt will not be used to fund City operations.
D. POLICY GOALS RELATED TO PLANNING GOALS AND OBJECTIVES
The City is committed to long-term financial planning, maintaining appropriate reserve
levels, and employing prudent practices in governance, management, and budget
administration. The City intends to issue debt for the purposes stated in this Debt Policy
and to implement policy decisions incorporated in the City’s Facilities Financing, Harbor
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and Beaches, and Capital Improvement Plans. Adoption of this Debt Policy will help
ensure that debt is issued and managed in a manner that protects the public interest.
It is a policy goal of the City to protect taxpayers, ratepayers (if applicable) and
constituents by utilizing conservative financing methods and techniques so as to obtain
the highest practical credit ratings (If applicable and the lowest practical borrowing
costs.)
The City will comply with applicable state and federal law as it pertains to the maximum
term of debt and the procedures for levying and imposing any related taxes, assessments,
rates, and charges.
E. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an equitable and cost-effective
means of financing major infrastructure and capital project needs of the City. Debt
will be considered to finance such projects if:
a) It meets the City’s goal of distributing the payments for the asset for no longer
than its useful life so that benefits more closely match costs for both current
and future residents.
b) It is the most cost-effective funding means available to the City, taking into
account cash flow needs and other funding alternatives.
c) It is fiscally prudent and meets the guidelines of this Policy. Any consideration
of debt financing shall consider financial alternatives, including pay-as-you-go
funding, proceeds derived from development or redevelopment of existing
land and capital assets owned by the City, and use of existing or future cash
reserves, or combinations thereof.
2. Purposes for Which Debt May Be Issued
The City may consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The
primary purpose of debt is to finance one of the following:
a) Acquisition and or improvement of land, right-of-way or long-term easements.
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b) Acquisition of equipment or a capital asset with a useful life of 3 or more years.
c) Construction or reconstruction of a facility.
d) Refunding, refinancing, or restructuring debt, subject to refunding objectives
and parameters discussed herein.
e) Although not the primary purpose of the financing effort, project
reimbursables that include project planning design, engineering and other
preconstruction efforts; project-associated furniture fixtures and equipment;
capitalized interest, original issuer’s discount, underwriter’s discount and
other costs of issuance.
f) Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a) Financing of operating costs except for anticipation notes with a term of less
than one year.
b) Debt issuance used to address budgetary deficits.
c) Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
4. Approval Process for the Issuance of Debt:
Any issuance of debt, either through a public sale of securities, private placement or
direct purchase is subject to the formal approval of Council as a non-consent item on
the Council agenda. As part of the Council approval, a formal resolution authorizing
the issuance of a specific form of debt will be required as part of the authorizing
documents. The resolution should include, at a minimum, the following:
a) The specific project(s) for which the debt is being raised;
b) The maximum principal amount to be borrowed;
c) The maximum term, which will be no greater than the useful life of the
project(s).
d) The maximum interest rate or True Interest Cost
e) The maximum annual debt service
f) Call Provisions, including specifically identifying any deviation from F(9).
g) Estimated Costs of Issuance
h) Maximum Underwriter’s Discount
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i) A list of all consultants hired for the issuance including, at a minimum, bond
counsel, disclosure counsel, municipal advisor and underwriter(s).
In addition to the authorizing resolution, Council will be provided copies of the
various financing documents including indentures, purchase agreements and
preliminary official statements. For any sale of securities, the City will be required to
retain an Independent Registered Municipal Advisor (“IRMA”) who will serve as the
City’s fiduciary on every sale. The IRMA will provide independent analysis of all
financing scenarios considered with a specific recommendation to the City supported
by the analysis. The recommendation of the IRMA will be a separate document from
the City’s Staff Report.
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F. STRUCTURE OF DEBT (Fixed Rate)
1. Term of Debt – Debt will be structured with the goal of distributing the payments
for the asset over its useful life so that benefits more closely match costs for both
current and future residents. Borrowings by the City should be of a duration that
does not exceed the useful life of the improvement that it finances. The standard
term of long-term borrowing is typically 15-30 years.
2. Rapidity of Debt Payment – Accelerated repayment schedules reduce debt
burden faster and reduce total borrowing costs. The Finance Department will
amortize debt through the most financially advantageous debt structure and to the
extent possible, match the City’s projected cash flow to the anticipated debt service
payments. “Backloading” of debt service will be considered only when one or
more of the following occur:
a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years prohibitive.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City’s aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the project’s operation.
3. Level Payment – To the extent practical, bonds will be amortized on a level
repayment basis, and revenue bonds will be amortized on a level repayment basis
considering the forecasted available pledged revenues to achieve the lowest rates
possible. Bond repayments should not increase on an annual basis in excess of 2%
without a dedicated and supporting revenue fundingrevenue-funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds – For each issuance,
the City will select serial bonds or term bonds, or both. On the occasions where
circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The
decision to use term, serial, or CAB bonds is driven based on market conditions.
5. Reserve Funds – The City shall strive to maintain fund balance in the Facilities
Replacement Plan Reserve at a level equal to or greater than the maximum annual
debt service of existing obligations.
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6. Capitalized Interest - The City will seek to avoid the use of capitalized interest,
which defers debt service by increasing the size of a debt issue to fund interest. On
occasion, capitalized interest will be considered to the extent that the City wishes
to defer the beginning of debt service until project completion, in order to match
project revenues with debt service.
7. Discount Bonds - While discount and deep discount bonds may reduce the
interest cost of the bonds below that of par or premium bonds, they should only
be recommended in limited situations as they reduce the potential for future
savings from refunding of the bonds.
8. Premium Bonds - Premium bonds may provide for a lower overall interest cost
compared to par or discount bonds. An analysis should be prepared comparing
the yield to maturity and yield to call of the premium bond structure compared
to alternative couponing. This comparison should be done on maturity by
maturitymaturity-by-maturity basis. The value of the call option of the higher
coupon with respect to the future ability to refund should be reviewed as well.
9. Call Provisions - In general, the City’s securities will not include an optional
redemption feature that is longer than 10 years or allow a “make-whole” option.
If market conditions exist where a call option greater than 10 Years or a “make-
whole” call would benefit the City, the authorizing bond resolution must
explicitly provide staff the authorization to negotiate these options.In general,
the City’s securities will not include an optional redemption feature that is longer
than 10 years. It is the City’s intent to maximize prepayment flexibility on all
bond issues. Shorter call provisions should be considered on a case-by case basis.
D.G. USE OF ALTERNATIVE DEBT INSTRUMENTS
The City recognizes that there are numerous types of financing structures and funding
sources available, each with specific benefits, risks, and costs. All potential funding
sources are reviewed by management within the context of the Debt Policy and the
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overall portfolio to ensure that any financial product or structure is consistent with the
City’s objectives. Regardless of what financing structure(s) is utilized, due-diligence
review must be performed for each transaction, including the quantification of potential
risks and benefits, and analysis of the impact on City creditworthiness and debt
affordability and capacity. Because fixed rate debt transfers most financial risks to
bondholders, fixed rate debt will always be considered the preferred method of financing
long-term capital needs. Therefore, while permitted for consideration, the following
instruments are disfavored.
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on market conditions. However, the City will seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
a) Purpose
The City shall consider the use of variable rate debt for the purposes of:
i. Reducing the costs of debt issues.
ii. Increasing flexibility for accelerating principal repayment and
amortization.
iii. Enhancing the management of assets and liabilities (matching short-
term “priced debt” with the City’s short-term investments).
iv. Diversifying interest rate exposure.
iv.v. As a short-term source of construction/acquisition financing, i.e.,
commercial paper, to reduce interest cost
b) Considerations and Limitations on Variable-Rate Debt
The City may consider the use of all alternative structures and modes of variable
rate debt to the extent permissible under State law and will make determinations
among different types of modes of variable-rate debt based on cost, benefit, and
risk factors. The Finance Director shall consider the following factors in
considering whether to utilize variable rate debt:
i. Any long-term issuance of variable rate debt should not exceed 20% of
total City General Fund supported debt.
ii. Any long-term issuance of variable rate debt should be fully hedged by
expected future Facility Financing Plan reserves or unrestricted General
Fund reserve levels.
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iii. Whether interest cost and market conditions (including the shape of the
yield curves and relative value considerations) are unfavorable for
issuing fixed rate debt.
iv. The likelihood of projected debt service savings when comparing the
cost of fixed rate bonds.
v. Costs, implementation and administration are quantified and
considered.
vi. Cost and availability of liquidity facilities (lines of credit necessary for
variable rate debt obligations and commercial paper in the event that
the bonds are not successfully remarketed) are quantified and
considered.
vii. Ability to convert debt to another mode (daily, monthly, fixed) or
redeem at par at any time is permitted.
viii. The findings of a thorough risk management assessment.
c) Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate debt
subjects the City to additional financial risks (relative to fixed rate bonds),
including interest rate risk, tax risk, and certain risks related to providing liquidity
for certainliquidity types of variable rate debt.
The City will properly manage the risks as follows:
i. Interest Rate Risk and Tax Risk – The risk that market interest rates
increase on variable-rate debt because of market conditions, changes in
taxation of municipal bond interest, or reductions in tax rates.
Mitigation – Limit total variable rate exposure per the defined limits
and match the variable rate liabilities with short termshort-term assets.
ii. Liquidity/Remarketing Risk – The risk that holders of variable rate
bonds exercise their “put” option, tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider to
repurchase the bonds. This will result in the City paying a higher rate
of interest to the facility provider and the potential rapid amortization
of the repurchased bonds. Mitigation - Limit total direct variable-rate
exposure. Seek liquidity facilities whichfacilities, which allow for longer
(5-10 years) amortization of any draws on the facility. Secure credit
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support facilities that result in bond ratings of the highest short-term
ratings and long-term ratings not less than AA. If the City’s bonds are
downgraded below these levels as a result of the facility provider’s
ratings, a replacement provider shall be sought.
iii. Liquidity/Rollover Risk – The risk that arises due to the shorter term of
most liquidity provider agreements (1-5 years) relative to the longer-
term amortization schedule of the City’s variable-rate bonds. In
particular, (1) the City may incur higher renewal fees when renewal
agreements are negotiated and (2) the liquidity bank market constricts
such that it is difficult to secure third party liquidity at any interest rate.
Mitigation – Negotiate longer terms on provider contracts to minimize
the number of rollovers
2. Derivatives
The use of certain derivative products to hedge variable rate debt, such as interest rate
swaps, may be considered to the extent the City has such debt outstanding or under
consideration. The City will exercise extreme caution in the use of derivative
instruments for hedging purposes, and will consider their utilization only when
sufficient understanding of the products and sufficient expertise for their appropriate
use has been developed. A comprehensive derivative policy will be adopted by the
City prior to any utilization of such instruments.
E.H. REFUNDING GUIDELINES
The Finance Director shall monitor at least annually all outstanding City debt obligations
for potential refinancing opportunities. The City will consider refinancing of outstanding
debt to achieve annual savings. Absent a compelling economic reason or financial benefit
to the City, any refinancing should not result in any increase to the weighted average life
of the refinanced debt.
The City will generally seek to achieve debt service savings whichsavings that, on a net
present value basis, are at least 3% of the current debt being refinanced. Any potential
refinancing executed more than 90 days in advance of the outstanding debt optional call
date shall require at least a 53% net present value savings threshold. If there is negative
arbitrage in an advance refunding, the escrow efficiency should at least be 50%. Under
any savings scenario, tThe net present value assessment shall factor in all costs, including
the total cost of issuance, escrow, and foregone interest earnings of any contributed funds
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on hand. Any potential refinancing shall additionally consider whether an alternative
refinancing opportunity with higher savings is reasonably expected in the future.
Any potential refinancing executed more than 90 days in advance of the outstanding debt
optional call date shall require a higher savings threshold. Consideration of this method
of refinancing shall place greater emphasis on determining whether an alternative
refinancing opportunity with higher savings is reasonably expected in the future.
F.I. MARKET COMMUNICATION, ADMINISTRATION AND
ADMINISTRATION, AND REPORTING, AND INTERNAL CONTROL
PROCEDURES
1. Rating Agency Relations and Annual or Ongoing Surveillance – The Finance
Director shall be responsible for maintaining the City's relationships with
Standard & Poor's Ratings Services, Fitch Ratings and Moody’s Investor’s Service.
The City is committed to maintaining its existing rating levels. In addition to
general communication, the Finance Director shall:
a) Ensure the rating agencies are provided updated financial information of
the City as it becomes publically available.
b) Communicate with credit analysts at each agency at least once each year, or
as may be requested by the agencies.
c) Prior to each proposed new debt issuance, schedule meetings or conference
calls with agency analysts and provide a thorough update on the City’s
financial position, including the impacts of the proposed debt issuance.
2. Council and Finance Committee Communication – The Finance Director should
report feedback from rating agencies, when and if available, regarding the City's
financial strengths and weaknesses and recommendations for addressing any
weaknesses as they pertain to maintaining the City’s existing credit ratings.
Continuing Disclosure Compliance – The City shall remain in compliance with
Security and Exchange Commission Rule 15c2-12 by filing its annual financial
statements and other financial and operating data for the benefit of its bondholders
within 270 days of the close of the fiscal year, or as required in any such agreement
for any debt issue. The City shall maintain a log or file evidencing that all
continuing disclosure filings have been made promptly.Arbitrage Rebate – The
use of bond proceeds and their investments must be monitored to ensure
compliance with all Internal Revenue Code Arbitrage Rebate Requirements. The
Finance Director shall ensure that all bond proceeds and investments are tracked
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in a manner which facilitates accurate calculation; and, if a rebate payment is due,
such payment is made in a timely manner.
3.
3. Debt Issue Record-Keeping – A copy of all debt-related records shall be retained
at the City’s offices. At minimum, these records shall include all official
statements, bond legal documents/transcripts, resolutions, trustee statements,
leases, and title reports for each City financing (to the extent available).
4. Compliance - When issuing debt, in addition to complying with the terms of this
Debt Policy, the city shall comply with any other applicable policies regarding
initial bond disclosure, continuing disclosure, post-issuance compliance, and the
investment of bond proceeds in accordance with applicable bond indentures and
City Administrative Procedures (AP-009), concerning tax compliance with tax
exempt bonds and Build America Bonds (BABs). Without limiting the foregoing,
the City will periodically review the requirements of and will remain in
compliance with the following:
a. Continuing Disclosure – The City will comply with federal securities law,
including any continuing disclosure undertakings entered into by the City in
accordance with Securities and Exchange Commission Rule 15c2-12. The City
will file by filing its annual financial statements and other financial and
operating data for the benefit of its bondholders within 270 days of the close of
the fiscal year, or as required in any such agreement for any debt issue. The
City shall maintain a log or file evidencing that all continuing disclosure filings
have been made promptly.
b. Arbitrage Rebate – The use of bond proceeds and their investments will be
monitored to ensure compliance with all Internal Revenue Code Arbitrage
Rebate Requirements. The Finance Director shall ensure that all bond proceeds
and investments are tracked in a manner that facilitates accurate calculation;
and, if a rebate payment is due, such payment is made in a timely manner.
c. Government Code section 8855(k) and the annual reporting requirements
therein.
d. Other compliance requirements imposed by regulatory bodies.
5. Proceeds Administration - Proceeds of debt will be held either (a) by a third-party
trustee or fiscal agent, which will disburse such proceeds to or upon the order of
the City upon the submission of one or more written requisitions by the Finance
Director/City TreasurerCity Manager (or his or her written designee), or (b) by
the City, to be held and accounted for in a separate fund or account, the
expenditure of which will be carefully documented by the City. On a quarterly
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basis, the City Treasurer shall monitor the proceeds and the disposition of
unexpended proceeds. [Probably should expand the monitoring of proceeds and
the disposition on any unexpended proceeds.]
4.
5.1.Arbitrage Rebate – The use of bond proceeds and their investments must be
monitored to ensure compliance with all Internal Revenue Code Arbitrage Rebate
Requirements. The Finance Director shall ensure that all bond proceeds and
investments are tracked in a manner which facilitates accurate calculation; and, if
a rebate payment is due, such payment is made in a timely manner.
G.J. CREDIT RATINGS
The City will consider published ratings agency guidelines regarding best financial
practices and guidelines for structuring its capital funding and debt strategies to maintain
the highest possible credit ratings consistent with its current operating and capital needs.
H.K. LEGAL DEBT LIMIT
Newport Beach Charter section 1109 indicates that the City shall not incur an
indebtedness evidenced by general obligation bonds whichbonds, which shall in the
aggregate exceed the sum of fifteen percent (15%) of the total assessed valuation, for
purposes of City taxation, of all the real and personal property within the City. While
this limit defines the absolute maximum legal debt limit for the City, it is not an effective
indicator of the City’s affordable debt capacity.
I.L.AFFORDABILITY
Prior to the issuance of debt to finance a project, the City will carefully consider the
overall long-term affordability of the proposed debt issuance. The City shall not assume
more debt without conducting an objective analysis of the City’s ability to assume and
support additional debt service payments. The City will consider its long-term revenue
and expenditure trends, the impact on operational flexibility and the overall debt burden
on the tax payers. The evaluation process shall include a review of generally accepted
measures of affordability and will strive to achieve and or maintain debt levels consistent
with its current operating and capital needs. The Finance Director shall review
benchmarking results of other California cities of comparable size with the City’s Finance
Committee prior to any significant project financing.
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1. General Fund-Supported Debt – General Fund Supported Debt generally include
Certificates of Participation (COPs) and Lease Revenue Bonds (LRBs) which are
lease obligations that are secured by an installment sale or by a lease-back
arrangement between the City and another public entity. The general operating
revenues of the City are pledged to pay the lease payments, which are, in turn,
used to pay debt service on the bonds or Certificates of Participation. These
obligations do not constitute indebtedness under the state constitutional debt
limitation and, therefore, are not subject to voter approval.
Payments to be made under valid leases are payable only in the year in which use
and occupancy of the leased property is available, and lease payments may not be
accelerated. Lease financing requires the fair market rental value of the leased
property to be equal to or greater than the required debt service or lease payment
schedule. The lessee (City) is obligated to place in its Annual Budget the rental
payments that are due and payable during each fiscal year the lessee has use of
the leased property.
The City should strive to maintain its net General Fund-backed debt service at or
less than 8% of available annually budgeted unrestricted revenue. This ratio is
defined as the City’s annual debt service requirements on Certificates of
Participation and Lease Revenue Bonds compared to total General Fund
Revenues. net of interfund transfers. This ratio, which pertains to only general
fund backed debt, is often referred to as “lease burden.”
2. Revenue Bonds – Long-term obligations payable solely from specific pledged
sources, in general, are not subject to a debt limitation. Examples of such long-
term obligations include those which achieve the financing or refinancing of
projects provided by the issuance of debt instruments that are payable from
restricted revenues or user fees (Enterprise Revenues) and revenues generated
from a project.
In determining the affordability of proposed revenue bonds, the City will perform
an analysis comparing projected annual net revenues (exclusive of depreciation
whichdepreciation, which is a non-cash related expense) to estimated annual debt
service. The City should strive to maintain a coverage ratio of at least 125% using
historical and/or projected net revenues to cover annual debt service for bonds.
The City may require a revenue rate increase or reduce operating costs so that
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revenues to cover both operations and debt service costs, and create debt service
reserve funds to maintain the required coverage ratios.
3. Special Districts Financing – The City’s Special Districts primarily consist of
Community Facilities Districts (CFDs) and 1913/1915 Act Assessment Districts
(Assessment Districts). The City will consider requests for Special District
formation and debt issuance when such requests address a public need or provide
a public benefit. Each application will be considered on a case by casecase-by-case
basis, and the Finance Department may not recommend a financing if it is
determined that the financing could be detrimental to the debt position or the best
interests of the City.
4. Conduit Debt – Conduit financing provides for the issuance of securities by a
government agency to finance a project of a third party, such as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and are consistent with the
City’s overall service and policy objectives. Unless a compelling public policy
rationale exists, such conduit financings will not in any way pledge the City’s faith
and credit.
J. [ I would suggest we move this up before we discuss debt
alternatives]STRUCTURE OF DEBT
1. Term of Debt – Debt will be structured with the goal of distributing the payments
for the asset over its useful life so that benefits more closely match costs for both
current and future residents. Borrowings by the City should be of a duration that
does not exceed the useful life of the improvement that it finances. The standard
term of long-term borrowing is typically 15-30 years.
2. Rapidity of Debt Payment – Accelerated repayment schedules reduce debt
burden faster and reduce total borrowing costs. The Finance Department will
amortize debt through the most financially advantageous debt structure and to the
extent possible, match the City’s projected cash flow to the anticipated debt service
payments. “Backloading” of debt service will be considered only when one or
more of the following occur:
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a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years prohibitive.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City’s aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the project’s operation.
3. Level Payment – To the extent practical, bonds will be amortized on a level
repayment basis, and revenue bonds will be amortized on a level repayment basis
considering the forecasted available pledged revenues to achieve the lowest rates
possible. Bond repayments should not increase on an annual basis in excess of 2%
without a dedicated and supporting revenue funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds – For each issuance,
the City will select serial bonds or term bonds, or both. On the occasions where
circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The
decision to use term, serial, or CAB bonds is driven based on market conditions.
5. Reserve Funds – The City shall strive to maintain fund balance in the Facilities
Replacement Plan Reserve at a level equal to or greater than the maximum annual
debt service of existing obligations.[This is a little confusing given the fact that you
did not fund a DSR in the 2010 financing, Is this meant to be an internal reserve.
The
Adopted – May 14, 2013
Amended – _____________
ATTACHMENT B
PROPOSED CHANGES TO DEBT MANAGEMENT POLICY, F-6 (WITHOUT REDLINE)
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DEBT MANAGEMENT POLICY
A. PURPOSE
The purpose of this policy is to establish guidelines and parameters for the effective
governance, management and administration of City debt. This Debt Policy is intended
to comply with Government Code Section 8855(i) and shall govern all debt undertaken
by the City.
The City hereby recognizes that a fiscally prudent debt policy is required in order to:
1. Maintain the City’s sound financial position.
2. Ensure the City has the flexibility to respond to changes in future service priorities,
revenue levels, and operating expenses.
3. Protect the City’s credit-worthiness.
4. Ensure that all debt is structured in order to protect both current and future
taxpayers, ratepayers and constituents of the City.
5. Ensure that the City’s debt is consistent with the City’s planning goals and
objectives and capital improvement program or budget, as applicable.
B. BACKGROUND
The City is committed to fiscal sustainability by employing long-term financial planning
efforts, maintaining appropriate reserves levels and employing prudent practices in
governance, management, budget administration and financial reporting.
Debt levels and their related annual costs are important long-term obligations that must
be managed within available resources. A disciplined, thoughtful approach to debt
management includes policies that provide guidelines for the City to manage its debt
program in-line with those resources. Therefore, the objective of this policy is to provide
written guidelines and restrictions concerning the amount and type of debt issued by the
City and the ongoing management of the debt portfolio.
This debt management policy is intended to improve the quality of decisions, provide
justification for the structure of debt issuance, identify policy goals and demonstrate a
commitment to long-term financial planning, including a multi-year capital plan.
Adherence to a debt management policy signals to rating agencies and the capital
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markets that a government is well managed and should meet its obligations in a timely
manner.
C. RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND
BUDGET
The City has established long-term plans for replacing aging physical infrastructure. The
City strives to maintain a level funding plan that will minimize the peaks and valleys in
General Fund support levels and that allows for the cash funding of projects over time.
The City will utilize debt obligations only after giving due consideration to all available
funding sources, including available cash reserves in the City’s Facilities Financial Plan
(FFP), Harbor & Beaches master plan, other strategic savings programs, available current
revenues, potential future revenue sources, potential grants, and all other financial
sources legally available to be used for such purposes. When and if deemed necessary,
the City will issue debt for the purposes stated in this Debt Policy and to implement
policy decisions incorporated in the City’s Facilities Financing, Harbor and Beaches, and
Capital Improvement Plans.
The City shall strive to fund the upkeep and maintenance of its infrastructure and
facilities due to normal wear and tear through the expenditure of available operating
revenues. The City shall seek to avoid the use of debt to fund infrastructure and facilities
improvements that are the result of normal wear and tear.
The City shall integrate its debt issuances with the goals of its capital improvement
program by timing the issuance of debt to ensure the projects are available when needed
in furtherance of the City’s public purposes.
The City shall seek to issue debt in a timely manner to avoid having to make unplanned
expenditures for capital improvements or equipment from its general fund. Long-term
debt will not be used to fund City operations.
D. POLICY GOALS RELATED TO PLANNING GOALS AND OBJECTIVES
The City is committed to long-term financial planning, maintaining appropriate reserve
levels, and employing prudent practices in governance, management, and budget
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administration. The City intends to issue debt for the purposes stated in this Debt Policy
and to implement policy decisions incorporated in the City’s Facilities Financing, Harbor
and Beaches, and Capital Improvement Plans. Adoption of this Debt Policy will help
ensure that debt is issued and managed in a manner that protects the public interest.
It is a policy goal of the City to protect taxpayers, ratepayers (if applicable) and
constituents by utilizing conservative financing methods and techniques so as to obtain
the highest practical credit ratings (If applicable and the lowest practical borrowing
costs.)
The City will comply with applicable state and federal law as it pertains to the maximum
term of debt and the procedures for levying and imposing any related taxes, assessments,
rates, and charges.
E. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an equitable and cost-effective
means of financing major infrastructure and capital project needs of the City. Debt
will be considered to finance such projects if:
a) It meets the City’s goal of distributing the payments for the asset for no longer
than its useful life so that benefits more closely match costs for both current
and future residents.
b) It is the most cost-effective funding means available to the City, taking into
account cash flow needs and other funding alternatives.
c) It is fiscally prudent and meets the guidelines of this Policy. Any consideration
of debt financing shall consider financial alternatives, including pay-as-you-go
funding, proceeds derived from development or redevelopment of existing
land and capital assets owned by the City, and use of existing or future cash
reserves, or combinations thereof.
2. Purposes for Which Debt May Be Issued
The City may consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The
primary purpose of debt is to finance one of the following:
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a) Acquisition and or improvement of land, right-of-way or long-term easements.
b) Acquisition of equipment or a capital asset with a useful life of 3 or more years.
c) Construction or reconstruction of a facility.
d) Refunding, refinancing, or restructuring debt, subject to refunding objectives
and parameters discussed herein.
e) Although not the primary purpose of the financing effort, project
reimbursables that include project planning design, engineering and other
preconstruction efforts; project-associated furniture fixtures and equipment;
capitalized interest, original issuer’s discount, underwriter’s discount and
other costs of issuance.
f) Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a) Financing of operating costs except for anticipation notes with a term of less
than one year.
b) Debt issuance used to address budgetary deficits.
c) Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
4. Approval Process for the Issuance of Debt:
Any issuance of debt, either through a public sale of securities, private placement or
direct purchase is subject to the formal approval of Council as a non-consent item on
the Council agenda. As part of the Council approval, a formal resolution authorizing
the issuance of a specific form of debt will be required as part of the authorizing
documents. The resolution should include, at a minimum, the following:
a) The specific project(s) for which the debt is being raised;
b) The maximum principal amount to be borrowed;
c) The maximum term, which will be no greater than the useful life of the
project(s).
d) The maximum interest rate or True Interest Cost
e) The maximum annual debt service
f) Call Provisions, including specifically identifying any deviation from F(9).
g) Estimated Costs of Issuance
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h) Maximum Underwriter’s Discount
i) A list of all consultants hired for the issuance including, at a minimum, bond
counsel, disclosure counsel, municipal advisor and underwriter(s).
In addition to the authorizing resolution, Council will be provided copies of the
various financing documents including indentures, purchase agreements and
preliminary official statements. For any sale of securities, the City will be required to
retain an Independent Registered Municipal Advisor (“IRMA”) who will serve as the
City’s fiduciary on every sale. The IRMA will provide independent analysis of all
financing scenarios considered with a specific recommendation to the City supported
by the analysis. The recommendation of the IRMA will be a separate document from
the City’s Staff Report.
F. STRUCTURE OF DEBT (Fixed Rate)
1. Term of Debt – Debt will be structured with the goal of distributing the payments
for the asset over its useful life so that benefits more closely match costs for both
current and future residents. Borrowings by the City should be of a duration that
does not exceed the useful life of the improvement that it finances. The standard
term of long-term borrowing is typically 15-30 years.
2. Rapidity of Debt Payment – Accelerated repayment schedules reduce debt
burden faster and reduce total borrowing costs. The Finance Department will
amortize debt through the most financially advantageous debt structure and to the
extent possible, match the City’s projected cash flow to the anticipated debt service
payments. “Backloading” of debt service will be considered only when one or
more of the following occur:
a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years prohibitive.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City’s aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the project’s operation.
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3. Level Payment – To the extent practical, bonds will be amortized on a level
repayment basis, and revenue bonds will be amortized on a level repayment basis
considering the forecasted available pledged revenues to achieve the lowest rates
possible. Bond repayments should not increase on an annual basis in excess of 2%
without a dedicated and supporting revenue-funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds – For each issuance,
the City will select serial bonds or term bonds, or both. On the occasions where
circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The
decision to use term, serial, or CAB bonds is driven based on market conditions.
5. Reserve Funds – The City shall strive to maintain fund balance in the Facilities
Replacement Plan Reserve at a level equal to or greater than the maximum annual
debt service of existing obligations.
6. Capitalized Interest - The City will seek to avoid the use of capitalized interest,
which defers debt service by increasing the size of a debt issue to fund interest. On
occasion, capitalized interest will be considered to the extent that the City wishes
to defer the beginning of debt service until project completion, in order to match
project revenues with debt service.
7. Discount Bonds - While discount and deep discount bonds may reduce the
interest cost of the bonds below that of par or premium bonds, they should only
be recommended in limited situations as they reduce the potential for future
savings from refunding of the bonds.
8. Premium Bonds - Premium bonds may provide for a lower overall interest cost
compared to par or discount bonds. An analysis should be prepared comparing
the yield to maturity and yield to call of the premium bond structure compared to
alternative couponing. This comparison should be done on maturity-by-maturity
basis. The value of the call option of the higher coupon with respect to the future
ability to refund should be reviewed as well.
9. Call Provisions - In general, the City’s securities will not include an optional
redemption feature that is longer than 10 years or allow a “make-whole” option.
If market conditions exist where a call option greater than 10 Years or a “make-
whole” call would benefit the City, the authorizing bond resolution must explicitly
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provide staff the authorization to negotiate these options. It is the City’s intent to
maximize prepayment flexibility on all bond issues. Shorter call provisions should
be considered on a case-by case basis.
G. USE OF ALTERNATIVE DEBT INSTRUMENTS
The City recognizes that there are numerous types of financing structures and funding
sources available, each with specific benefits, risks, and costs. All potential funding
sources are reviewed by management within the context of the Debt Policy and the
overall portfolio to ensure that any financial product or structure is consistent with the
City’s objectives. Regardless of what financing structure(s) is utilized, due-diligence
review must be performed for each transaction, including the quantification of potential
risks and benefits, and analysis of the impact on City creditworthiness and debt
affordability and capacity. Because fixed rate debt transfers most financial risks to
bondholders, fixed rate debt will always be considered the preferred method of financing
long-term capital needs. Therefore, while permitted for consideration, the following
instruments are disfavored.
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on market conditions. However, the City will seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
a) Purpose
The City shall consider the use of variable rate debt for the purposes of:
i. Reducing the costs of debt issues.
ii. Increasing flexibility for accelerating principal repayment and
amortization.
iii. Enhancing the management of assets and liabilities (matching short-
term “priced debt” with the City’s short-term investments).
iv. Diversifying interest rate exposure.
v. As a short-term source of construction/acquisition financing, i.e.,
commercial paper, to reduce interest cost
b) Considerations and Limitations on Variable-Rate Debt
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The City may consider the use of all alternative structures and modes of variable
rate debt to the extent permissible under State law and will make determinations
among different types of modes of variable-rate debt based on cost, benefit, and
risk factors. The Finance Director shall consider the following factors in
considering whether to utilize variable rate debt:
i. Any long-term issuance of variable rate debt should not exceed 20% of
total City General Fund supported debt.
ii. Any long-term issuance of variable rate debt should be fully hedged by
expected future Facility Financing Plan reserves or unrestricted General
Fund reserve levels.
iii. Whether interest cost and market conditions (including the shape of the
yield curves and relative value considerations) are unfavorable for
issuing fixed rate debt.
iv. The likelihood of projected debt service savings when comparing the
cost of fixed rate bonds.
v. Costs, implementation and administration are quantified and
considered.
vi. Cost and availability of liquidity facilities (lines of credit necessary for
variable rate debt obligations and commercial paper in the event that
the bonds are not successfully remarketed) are quantified and
considered.
vii. Ability to convert debt to another mode (daily, monthly, fixed) or
redeem at par at any time is permitted.
viii. The findings of a thorough risk management assessment.
c) Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate debt
subjects the City to additional financial risks (relative to fixed rate bonds),
including interest rate risk, tax risk, and certain risks related to providing liquidity
types of variable rate debt.
The City will properly manage the risks as follows:
i. Interest Rate Risk and Tax Risk – The risk that market interest rates
increase on variable-rate debt because of market conditions, changes in
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taxation of municipal bond interest, or reductions in tax rates.
Mitigation – Limit total variable rate exposure per the defined limits
and match the variable rate liabilities with short-term assets.
ii. Liquidity/Remarketing Risk – The risk that holders of variable rate
bonds exercise their “put” option, tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider to
repurchase the bonds. This will result in the City paying a higher rate
of interest to the facility provider and the potential rapid amortization
of the repurchased bonds. Mitigation - Limit total direct variable-rate
exposure. Seek liquidity facilities, which allow for longer (5-10 years)
amortization of any draws on the facility. Secure credit support facilities
that result in bond ratings of the highest short-term ratings and long-
term ratings not less than AA. If the City’s bonds are downgraded
below these levels as a result of the facility provider’s ratings, a
replacement provider shall be sought.
iii. Liquidity/Rollover Risk – The risk that arises due to the shorter term of
most liquidity provider agreements (1-5 years) relative to the longer-
term amortization schedule of the City’s variable-rate bonds. In
particular, (1) the City may incur higher renewal fees when renewal
agreements are negotiated and (2) the liquidity bank market constricts
such that it is difficult to secure third party liquidity at any interest rate.
Mitigation – Negotiate longer terms on provider contracts to minimize
the number of rollovers
2. Derivatives
The use of certain derivative products to hedge variable rate debt, such as interest rate
swaps, may be considered to the extent the City has such debt outstanding or under
consideration. The City will exercise extreme caution in the use of derivative
instruments for hedging purposes, and will consider their utilization only when
sufficient understanding of the products and sufficient expertise for their appropriate
use has been developed. A comprehensive derivative policy will be adopted by the
City prior to any utilization of such instruments.
H. REFUNDING GUIDELINES
The Finance Director shall monitor at least annually all outstanding City debt obligations
for potential refinancing opportunities. The City will consider refinancing of outstanding
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debt to achieve annual savings. Absent a compelling economic reason or financial benefit
to the City, any refinancing should not result in any increase to the weighted average life
of the refinanced debt.
The City will generally seek to achieve debt service savings that on a net present value
basis are at least 3% of the current debt being refinanced. Any potential refinancing
executed more than 90 days in advance of the outstanding debt optional call date shall
require at least a 3% net present value savings threshold. If there is negative arbitrage in
an advance refunding, the escrow efficiency should at least be 50%. Under any savings
scenario, the net present value assessment shall factor in all costs, including the total cost
of issuance, escrow, and foregone interest earnings of any contributed funds on hand.
Any potential refinancing shall additionally consider whether an alternative refinancing
opportunity with higher savings is reasonably expected in the future.
Consideration of this method of refinancing shall place greater emphasis on determining
whether an alternative refinancing opportunity with higher savings is reasonably
expected in the future.
I. COMMUNICATION, ADMINISTRATION AND REPORTING, AND INTERNAL
CONTROL PROCEDURES
1. Rating Agency Relations and Annual or Ongoing Surveillance – The Finance
Director shall be responsible for maintaining the City's relationships with
Standard & Poor's Ratings Services, Fitch Ratings and Moody’s Investor’s Service.
The City is committed to maintaining its existing rating levels. In addition to
general communication, the Finance Director shall:
a) Ensure the rating agencies are provided updated financial information of
the City as it becomes publically available.
b) Communicate with credit analysts at each agency at least once each year, or
as may be requested by the agencies.
c) Prior to each proposed new debt issuance, schedule meetings or conference
calls with agency analysts and provide a thorough update on the City’s
financial position, including the impacts of the proposed debt issuance.
2. Council and Finance Committee Communication – The Finance Director should
report feedback from rating agencies, when and if available, regarding the City's
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financial strengths and weaknesses and recommendations for addressing any
weaknesses as they pertain to maintaining the City’s existing credit ratings.
3. Debt Issue Record-Keeping – A copy of all debt-related records shall be retained
at the City’s offices. At minimum, these records shall include all official
statements, bond legal documents/transcripts, resolutions, trustee statements,
leases, and title reports for each City financing (to the extent available).
4. Compliance - When issuing debt, in addition to complying with the terms of this
Debt Policy, the city shall comply with any other applicable policies regarding
initial bond disclosure, continuing disclosure, post-issuance compliance, and the
investment of bond proceeds in accordance with applicable bond indentures and
City Administrative Procedures (AP-009), concerning tax compliance with tax
exempt bonds and Build America Bonds (BABs) Without limiting the foregoing,
the City will periodically review the requirements of and will remain in
compliance with the following:
a. Continuing Disclosure – The City will comply with federal securities law,
including any continuing disclosure undertakings entered into by the City in
accordance with Securities and Exchange Commission Rule 15c2-12. The City
will file its annual financial statements and other financial and operating data
for the benefit of its bondholders within 270 days of the close of the fiscal year,
or as required in any such agreement for any debt issue. The City shall
maintain a log or file evidencing that all continuing disclosure filings have been
made promptly.
b. Arbitrage Rebate – The use of bond proceeds and their investments will be
monitored to ensure compliance with all Internal Revenue Code Arbitrage
Rebate Requirements. The Finance Director shall ensure that all bond proceeds
and investments are tracked in a manner that facilitates accurate calculation;
and, if a rebate payment is due, such payment is made in a timely manner.
c. Government Code section 8855(k) and the annual reporting requirements
therein.
d. Other compliance requirements imposed by regulatory bodies.
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5. Proceeds Administration - Proceeds of debt will be held either (a) by a third-party
trustee or fiscal agent, which will disburse such proceeds to or upon the order of
the City upon the submission of one or more written requisitions by the City
Manager (or his or her written designee), or (b) by the City, to be held and
accounted for in a separate fund or account, the expenditure of which will be
carefully documented by the City. On a quarterly basis, the City Treasurer shall
monitor the proceeds and the disposition of unexpended proceeds.
J. CREDIT RATINGS
The City will consider published ratings agency guidelines regarding best financial
practices and guidelines for structuring its capital funding and debt strategies to maintain
the highest possible credit ratings consistent with its current operating and capital needs.
K. LEGAL DEBT LIMIT
Newport Beach Charter section 1109 indicates that the City shall not incur an
indebtedness evidenced by general obligation bonds, which shall in the aggregate exceed
the sum of fifteen percent (15%) of the total assessed valuation, for purposes of City
taxation, of all the real and personal property within the City. While this limit defines
the absolute maximum legal debt limit for the City, it is not an effective indicator of the
City’s affordable debt capacity.
L. AFFORDABILITY
Prior to the issuance of debt to finance a project, the City will carefully consider the
overall long-term affordability of the proposed debt issuance. The City shall not assume
more debt without conducting an objective analysis of the City’s ability to assume and
support additional debt service payments. The City will consider its long-term revenue
and expenditure trends, the impact on operational flexibility and the overall debt burden
on the tax payers. The evaluation process shall include a review of generally accepted
measures of affordability and will strive to achieve and or maintain debt levels consistent
with its current operating and capital needs. The Finance Director shall review
benchmarking results of other California cities of comparable size with the City’s Finance
Committee prior to any significant project financing.
1. General Fund-Supported Debt – General Fund Supported Debt generally include
Certificates of Participation (COPs) and Lease Revenue Bonds (LRBs) which are
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lease obligations that are secured by an installment sale or by a lease-back
arrangement between the City and another public entity. The general operating
revenues of the City are pledged to pay the lease payments, which are, in turn,
used to pay debt service on the bonds or Certificates of Participation. These
obligations do not constitute indebtedness under the state constitutional debt
limitation and, therefore, are not subject to voter approval.
Payments to be made under valid leases are payable only in the year in which use
and occupancy of the leased property is available, and lease payments may not be
accelerated. Lease financing requires the fair market rental value of the leased
property to be equal to or greater than the required debt service or lease payment
schedule. The lessee (City) is obligated to place in its Annual Budget the rental
payments that are due and payable during each fiscal year the lessee has use of
the leased property.
The City should strive to maintain its net General Fund-backed debt service at or
less than 8% of annually budgeted unrestricted revenue. This ratio is defined as
the City’s annual debt service requirements on Certificates of Participation and
Lease Revenue Bonds compared to total General Fund Revenues. This ratio, which
pertains to only general fund backed debt, is often referred to as “lease burden.”
2. Revenue Bonds – Long-term obligations payable solely from specific pledged
sources, in general, are not subject to a debt limitation. Examples of such long-
term obligations include those which achieve the financing or refinancing of
projects provided by the issuance of debt instruments that are payable from
restricted revenues or user fees (Enterprise Revenues) and revenues generated
from a project.
In determining the affordability of proposed revenue bonds, the City will perform
an analysis comparing projected annual net revenues (exclusive of depreciation,
which is a non-cash related expense) to estimated annual debt service. The City
should strive to maintain a coverage ratio of at least 125% using historical and/or
projected net revenues to cover annual debt service for bonds. The City may
require a revenue rate increase or reduce operating costs so that revenues cover
both operations and debt service costs, and create debt service reserve funds to
maintain the required coverage ratios.
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3. Special Districts Financing – The City’s Special Districts primarily consist of
Community Facilities Districts (CFDs) and 1913/1915 Act Assessment Districts
(Assessment Districts). The City will consider requests for Special District
formation and debt issuance when such requests address a public need or provide
a public benefit. Each application will be considered on a case-by-case basis, and
the Finance Department may not recommend a financing if it is determined that
the financing could be detrimental to the debt position or the best interests of the
City.
4. Conduit Debt – Conduit financing provides for the issuance of securities by a
government agency to finance a project of a third party, such as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and are consistent with the
City’s overall service and policy objectives. Unless a compelling public policy
rationale exists, such conduit financings will not in any way pledge the City’s faith
and credit.
Adopted – May 14, 2013
Amended – _____________
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N E W P O R T B E A C H P O L I C E D E P A R T M E N T
TRAINING COURSE REQUEST
NBPD Form 1.65 (rev. 08/14)
1 REQUESTOR DATE OF REQUEST:
REQUESTING EMPLOYEES ID # NEEDED FOR
CPT HOURS?
COURSE TITLE:
(ATTACH FLIER)
1. Y N POST PLAN (CIRCLE)I II III IV NONE COURSE LENGTH: (HRS)
2. Y N COURSE PROVIDER:
3. Y N
1st
CHOICE
STARTING & ENDING DATES:
4. Y N LOCATION:
5. Y N CONTACT PERSON: PHONE:
6. Y N
2nd
CHOICE
STARTING & ENDING DATES:
7. Y N LOCATION:
8. Y N CONTACT PERSON: PHONE:
2 SUPERVISOR
REASON:
MANDATORY FOR CURRENT POSITION
ESSENTIAL FOR CURRENT POSITION
DESIRED FOR TRANSFER/CAREER DEVELOPMENT
OTHER:
RECOMMENDATION:
APPROVE DENY
SUPERVISOR COMMENTS:
SIGNATURE:
ID # DATE:
EMPLOYEE HAS READ THE TRAVEL GUIDELINES
3 TRAINING PROGRAM
TRANSPORTATION ESTIMATE FUNDING AVAILABLE? ACCOUNT BUDGET BALANCE
PRIVATE VEHICLE CITY VEHICLE $ Y N $
RENTAL CAR SHUTTLE/TAXI $ RECOMMENDATION:
APPROVE
DENY
OTHER (SEE COMMENTS)
COMMENTS:
AIRFARE $
PARKING $
LODGING ESTIMATE
COMMUTE OVERNIGHT STAY $
OTHER COSTS ESTIMATE
TUITION/REGISTRATION $
PER DIEM $
TOTAL COST $ SIGNATURE: ID # DATE:
4 APPROVALS
SIGNATURE ID # DATE COMMENTS
REQUESTOR’S LIEUTENANT
REQUESTOR’S DIVISION COMMANDER
SUPPORT SERVICES ADMINISTRATOR
DATE RECEIVED
STAMP
Item No. 5D2
Review of Police Department Budget to Actual Results
Staff Presentation
February 15, 2018
NBPD Form 1.65 (rev. 08/14)
TRAINING STAFF USE ONLY
COURSE ARRANGEMENTS TRAVEL ARRANGEMENTS
DATE INITIALS CITY VEHICLE PERSONAL VEHICLE - MILEAGE $
REGISTRATION EMAIL FAX ONLINE AIRFARE:
$
AIRLINE: CONFIRMATION #
COURSE CONFIRMATION RECEIVED
WAIT LISTED
RENTAL CAR CONFIRMATION # LODGING CONFIRMATION #
REQUESTOR AND SUPERVISOR NOTIFIED NOTES:
ENTERED IN SCHEDULE
REQUESTOR FINAL NOTICE AND MEMO
TRR PROCESSED
ADVANCE REQUESTED: $
TRAVEL GUIDELINES
TRAVEL ARRANGEMENTS:
Training staff will make course and travel reservations for attendees
Attendees’ travel preferences will be considered in the following conditions:
o Travel preferences must be communicated within a reasonable timeframe
o Travel preferences must not unduly increase costs or create problems
Travel arrangements cannot be changed without prior approval
o Employees will be responsible for hotel charges for untimely cancellations
o Per diem must be repaid to the City when scheduled travel does not occur
Conference/Training host hotels will be used whenever possible to take
advantage of reduced room rates and conference meals
Training Staff has the discretion to use airports other than John Wayne (SNA)
The Support Services Administrator has final discretion on travel
arrangements, with the advice/consent of the Chief of Police as appropriate
GROUND TRANSPORTATION:
Taxis or airport shuttles should be used for airport transfers and minor local travel
A rental car may be authorized when distance and circumstances require one
DRIVING TIME/OVERNIGHT STAYS:
The guiding criterion for authorization of overnight stay(s)is one hour of driving time to or from the training site
o Driving time will be calculated using Google Maps, Bing Maps or other similar method
o Driving time is from the home of the attendee or from the NBPD station, whichever is closer
o Traffic conditions are a factor in calculating driving time (the “with traffic” ETA will be used to determine driving time)
NON-POST COMMUTER CLASSES
In order to maximize the training budget, the following policies for non-POST training/travel are in effect until further notice:
o There is no reimbursement for mileage on personal vehicles or commuter lunch on non-POST commuter courses
o A city vehicle will be used wherever possible to reduce costs and better utilize the Department’s fleet
TRAVEL EXPENSE FORMS MUST BE SUBMITTED WITHIN 10 DAYS OF THE COMPLETION OF TRAINING/TRAVEL
POST REIMBURSEMENT PLANS
PLAN I
SUBSISTENCE
COMMUTER LUNCH
TRAVEL
TUITION
BACKFILL SALARY
PLAN II
SUBSISTENCE
COMMUTER LUNCH
TRAVEL
BACKFILL SALARY
PLAN III
SUBSISTENCE
COMMUTER LUNCH
TRAVEL
TUITION
PLAN IV
SUBSISTENCE
COMMUTER LUNCH
TRAVEL
SUBSISTENCE = RESIDENT ATTENDEES’ LODGING/MEALS
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5E
February 15, 2018
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director (949) 644-3123, danm@newportbeachca.gov
SUBJECT: Year-End Closing Results
EXECUTIVE SUMMARY:
The City of Newport Beach Finance Department has prepared this preliminary fiscal year 2016-2017 year-end update for the Finance Committee to review the status of revenues,
expenditures, and fund balance for the City’s General Fund.
General Fund revenues overall finished the year at $204.4 million, $4.7 million (2.4 percent) higher than budgeted and $5.2 million (2.6 percent) higher than the prior year.
Consistent and vigorous demand for coastal property has allowed the City to enjoy long-term growth trends with its number one revenue source. Value changes along with infill
development in Newport Beach result in continued appreciation in property values
through Fiscal Year 2016-2017. This translated to a nearly $3 million positive secured
property tax revenue variance from the budget. Sales tax receipts were lower than projected due to the slower growth of high-end auto sales, an increase in the number of
General Fund Revenues Prior Year
Actual 2015-16
Budget
2016-17 Actual 2016-17
2016-17 Budget to Actual $
Variance
2016-17 Budget to Actual %
Variance
Percent of 2016-17 Budget
Realized
Year-Over-Year
$ Change
Year-Over-Year
% Change
Taxes and assessments: Property 91,516,611$ 93,985,344$ 96,964,060$ 2,978,716$ 3.17%103.17%5,447,449$ 5.95%
Sales 33,937,986 34,612,648 33,702,895 (909,753) -2.63%97.37%(235,091) -0.69% Sales tax in-lieu 2,870,474 - - - --(2,870,474) -100.00%
Transient occupancy 21,083,199 22,578,447 22,382,361 (196,086) -0.87%99.13%1,299,162 6.16% Other taxes 8,398,979 8,322,120 8,533,230 211,110 2.54%102.54%134,251 1.60%
Intergovernmental 2,127,317 2,370,072 2,284,666 (85,406) -3.60%96.40%157,349 7.40%
Licenses, permits and fees 4,384,210 4,415,215 5,222,315 807,100 18.28%118.28%838,105 19.12% Charges for services 18,817,193 19,259,767 19,191,209 (68,558) -0.36%99.64%374,016 1.99%
Fines and forfeitures 3,678,982 3,552,124 3,587,151 35,027 0.99%100.99%(91,831) -2.50% Investment income 584,068 352,045 585,152 233,107 66.22%166.22%1,084 0.19%
Net increase in fair value of investments 376,310 - - - (376,310) -100.00%
Property income 9,189,593 9,207,258 10,002,773 795,515 8.64%108.64%813,180 8.85% Donations 198,129 134,608 148,855 14,247 10.58%110.58%(49,274) -24.87%
Other 1,966,056 855,684 1,769,677 913,993 106.81%206.81%(196,379) -9.99%TOTAL 199,129,107$ 199,645,332$ 204,374,344$ 4,729,012$ 2.37%102.37%5,245,237$ 2.63%
Year-End Closing Results February 15, 2018
Page 2
auto leases which results in lower sales tax when compared to auto sales, negative audit corrections and an increase in on-line shopping overall. In Fiscal Year 2015-2016, approximately $2.8 million of the sales tax increase is due to a one-time true-up payment
from the state known as the “triple-flip.” This prior-year one-time revenue receipt makes
overall sales tax revenue growth appear smaller in Fiscal Year 2016-2017. Transient
occupancy tax receipts were $196,000 lower than anticipated due to the confluence of simultaneous hotel renovations in Fiscal Year2016-2017. These renovations continue in Fiscal Year 2017-2018 and are expected to conclude in Fiscal Year 2018-2019.
Traditional TOT revenue growth should resume afterward barring any significant
downturn in the economy.
General Fund expenditures overall finished the year at $168.9 million, $12.6 million (6.9 percent) lower than budgeted and $6.2 million (3.8 percent) higher than the prior year.
Lower than budgeted expenditures in Fiscal Year 2016-2017 are largely due to
approximately $5 million in salary savings. Of this amount, $3.4 million was related to
pension UAL payments that up until Fiscal Year 2017-2018, were collected based on a
percentage of salary. Newport Beach was instrumental in recently getting this CalPERS pension payment policy changed to a flat annual dollar amount. Consequently, there will
no longer be a budget to actual variance in the pension UAL object line item. There were
nearly $7 million in savings associated with maintenance and operations including:
OBJECT CATEGORY AMOUNT
Contracts (instructors, parks, facilities, etc.) 1,250,000
Services (professional services, printing, janitorial etc) 1,900,000
Outside Counsel 300,000
Utilities (Electric, Gas, Water, Phone, etc) 900,000
Supplies & Material 830,000
Maintenance & Repairs 613,000
Training 153,000
Gen Expenses (postage, software, publication ) 468,000
Equipment 275,000
Miscellaneous Other 400,000
Total M & O and Office Equipment $ 6,689,000
Net income (revenues net of expenditures) prior to transfers and other sources of revenue
amounted to $35.4 million. Of this net income amount, there were $27.8 million of net
transfers out to other funds which include both routine and non-routine transfers associated with the prior year surplus. See Attachment A for an explanation of the transfers.
Year-End Closing Results February 15, 2018
Page 3
Expenditures in Fiscal Year 2016-2017 increased from the prior year as the result of increasing pension costs, inflation and a focus on programs and activities that support a
high quality physical environment, community safety and investments in information
technology. With a strong economy and the associated uptick in revenues, the City
continues its ongoing commitment to improve the quality of streets, sidewalks, alleys, and
other infrastructure through the increase in Public Works expenditures and capital outlay. Increased expenditures from the prior year were also the result of negotiated bargaining
unit increases in salary and benefits.
General Fund Reserves
This section provides balances of the City’s General Fund Reserves at the end of Fiscal
Year 2016-2017. This information is useful in assessing the City’s net resources available
for spending at the end of the fiscal year. Contributions to the reserve are established by
prudent fiscal policies and as part of the annual budget process, or as conditions change.
The positive underlying economic factors in Newport Beach in recent years has allowed for the accumulation of General Fund reserves at the end of Fiscal Year 2016-2017 in the
amount of $89.4 million, a gross fund balance increase of $7.5 million from the prior year.
Year-End Closing Results February 15, 2018
Page 4
The non-spendable and restricted categories of fund balance are for resources that are not in spendable form or are legally or contractually required to remain intact. The
committed and assigned portion of fund balance includes amounts that are constrained
by the City’s intent to be used for specific purposes but are still within the City's full
discretion. Appropriation and/or access to the contingency funds are generally reserved
for emergency or unforeseen situations but may be accessed by Council by simple budget appropriation. The unassigned “surplus” category is the residual portion of available fund
balance that is not otherwise non-spendable, restricted, committed or assigned.
There are a myriad of “moving parts” that impact and change the level of surplus fund
balance from one year to the next. Thus, the sum of positive variances in the budget to actual comparison of revenues and expenditures do not typically equal the amount of
surplus in a given year. This has to do with the change in all of the restricted categories
as compared to the unrestricted or “surplus” category. For example, if we had several
million in the committed or assigned category for pension UAL payments, but it went
unspent during the year and it otherwise wasn’t encumbered or carried forward in some manner, it would revert to unassigned surplus. Another example would include a payment received that reduces a long-term receivable. This type of transaction does not flow
through the income statement but does reduce the non-spendable portion of fund
balance. Ultimately, the increase in our unassigned fund balance (surplus) is the best
measure of annual operating surplus.
Reserve Category Audited
2016
Audited
2017 Change
Non-Spendable $15.2 $14.4 -$0.8
Restricted $3.1 $3.8 $0.7
Committed $2.7 $10.6 $7.8
Assigned $4.2 $0.6 -$3.6
Contingency $45.8 $47.5 $1.8
"Surplus"$10.9 $12.5 $1.6
TOTAL $81.8 $89.4 $7.5
General Fund Reserves (in millions)
Year-End Closing Results February 15, 2018
Page 5
Prepared by: Submitted by:
/s/ Steve Montano
_____________________________
/s/ Dan Matusiewicz
_____________________________
Steve Montano Deputy Finance Director Dan Matusiewicz Finance Director
Attachment:
A. Interfund Transfers
ATTACHMENT A
INTERFUND TRANSFERS
Finance Department
CITY OF NEWPORT BEACH
100 Civic Center Drive
Newport Beach, California 92660
949 644-3123 | 949 644-3339 FAX newportbeachca.gov/finance
February 12, 2018
Mr. Richard Costigan
Chair, Finance & Administration Committee California Public Employees’ Retirement System
Lincoln Plaza North 400 Q Street, Suite 3340
Sacramento, CA 95811
RE February 13th Finance and Administration Committee (FAC) Agenda Item 7a. – Amortization Policy
Dear Chair Costigan and Members of the Committee:
I am writing to you today to support the Chief Actuary’s recommendation for a 20-year, level dollar amortization policy. I understand and am sympathetic to your dilemma to adopt policies that are
accommodating to all of your constituents. I argue that the vocal minority represent 10% of your constituents on either end of the spectrum. There are the top 5% most able to accommodate a shorter
amortization period and the less fortunate bottom 5% with less financial flexibility.
I am NOT writing to you on behalf of Newport Beach nor the other top 5% affluent local agencies. As some will argue, the affluent cities have the resources and analytical fire-power to do something other than make
the minimum payment to CalPERS. The problem with this argument is that the remaining 90% of local agencies in the middle are actually being harmed by the extremely accommodating amortization policy.
1.It is extremely difficult and unpopular with labor groups and elected officials to send more money
to CalPERS even though it is absolutely necessary. Instead, labor groups continue to put pressureon local agency boards, which in turn, continue to give larger raises than the community probably
can afford, if they were making appropriate contributions to CalPERS. It is all too easy for electedofficials to accept the Actuarially Determined Contribution (ADC) as a responsible option, continue
to pay the minimum required contribution and spend the remaining portion of their budget on labordemands or non-essential projects. For Finance Directors, generating the political will to send
more money to CalPERS is a very difficult obstacle to overcome so most simply don’t fight thisbattle. This problem is best exemplified by the number of local agencies that are choosing not to
send their extra money to CalPERS but to participate, in privately run S115 prefunding pensiontrusts. These plans do not have the economy of scale nor the long-term investment horizon of the
Public Employers’ Retirement Fund (PERF). Again, this demonstrates that many agencies havethe extra money but are politically paralyzed by the dilemma of sending more money to CalPERS
unless absolutely necessary. With a few rare exceptions, the flexibility promised by these plans area myth and are exposing local agencies, to more risk, lower long-term returns and higher
administrative costs, only adding to their current problem. So why are agencies sending their extramoney to S115 pension prefunding plans instead of CalPERS? It is simply politically more popular
than to make the appropriate contributions to CalPERS. Just wait until the market or economy
Item No. 5F1
Pension Discussion
Correspondence
February 15, 2018
takes a down turn. We will see how inflexible the S115 strategy can be. By allowing an extremely accommodating amortization policy, I argue that CalPERS Board and Finance and Administration
Committee are harming more agencies than they are helping them. By shortening the amortization policy, it will make the ADC a more responsible payment to CalPERS and you will be doing most
Finance Directors a favor.
2. It is not fair to compare the current policies to the difference between a 30-yr and 15-yr mortgage. A traditional 30-year mortgage doesn’t negatively amortize for 17-18 years like the current
CalPERS Gain/Loss amortization policy. This policy significantly “kicks-the-can” down the road and only makes the problem worse for local agencies. I believe this policy and former amortization
policies significantly contributed to the current problem we have today. The current policy is more like credit card debt than a 30-year mortgage.
3. During years CalPERS earned 18.4% and 11.2% investment earnings, these gains were actually LARGER than the change in assumptions that occurred during those years and could have FULLY
offset the change in assumptions. Instead, because the current policies amortize assumption-changes over 20 years and the investment gains are being amortized over 30 years, local agencies
are actually paying more today than they would have had to otherwise and have large credits accumulating 20-30 years out.
4. The California Actuarial Advisory Panel and the Government Finance Officers’ Association best
practices recommend amortization policies to be closer to 15 years, commensurate with the remaining working-life of future annuitants so I believe 20 years to be a compromise by the actuarial
office.
5. There a number of capital market financing options for cities to consider financing capital needs or short-term operating loans at a much lower tax exempt rate than the CalPERS discount rate. Why
is CalPERS acting as the banker of last resort?
By rejecting the recommendation of your staff, you would be rejecting:
o The recommendations of your Chief Actuary o The recommendations of the California Actuarial Advisory Panel
o The best practice recommendations of the Government Finance Officers Association (GFOA).
o The best financial interest of 90% of your constituents o Your fiduciary duty to the plan
In my 30 years of local government experience, some of the worst decisions I’ve witnessed boards make
have seen been to ignore the professional recommendations of their staff that are independent of politics and other external forces. I believe it is incumbent on you and your duties as fiduciaries to strongly consider
the recommendations of staff that are doing the job you have hired them to do.
Respectfully submitted,
Dan Matusiewicz
Finance Director/Treasurer
Cc: Priya Mathur, CalPER Board Chair
I:\Users\FIN\Shared\Admin\Finance Committee\WORKPLAN\2018\2018 FC Workplan 1
Updated 2/12/2018
Scheduled Date Agenda Title Agenda Description
Tuesday, January 09, 2018 Council Study Session 9th - Economic Overview (Optional)Broad Local Economic Overview to be provided by Beacon Economics.
Thursday, January 11, 2018 Risk Based Reserve Analysis Overview Consultant will provide an update and overview of the Risk -based Reserve
Analysis.
Consultant Overview of Property and Sales Tax Revenues Consulting specialists in Property and Sales Tax will provide an overview of
revenue prospects.
Long Range Financial Forecast (LRFF)City staff will provide an update on efforts to improve the City's Long Range
Financial Forecast and provide a comparative review of best practices to other
cities.
Review of Finance Committee Resolution The Committee will review its objectives as set forth in Council resolution 94-
110 as amended by 2017-58.
Review of Finance Committee Workplan Staff will review with the Committee the agenda topics scheduled for the
remainder of the fiscal year and highlight those work plan items that were
carried forward from the prior fiscal year. The Committee will also consider
setting up a subcommittee to review finance related Council Policies.
Monday, January, 29, 2018 Council Goal Setting Session - (FYI Only)
Thursday, February 15, 2018
Create a Subcommittee to Review Council Finance Policies
The Finance Committee will consider the creation of a Finance Subcommittee
to review Council Finance policies,discuss membership,scope of work and
timeline.
Risk-Based Reserve Subcommitte Update Discuss Finance Committee progress since the last meeting.
Debt Policy Review Subcommittee Update Subcommittee will discuss revisions of Debt Policy and discuss next steps.
Review of Police Department Budget to Actual Results
In preparation of the 2018-2019 Budget,staff will review budget assumptions
against actual results for Fiscal Year 2016-2017 and pertinent updates
concerning the Fiscal Year 2017-2018 to date.
Year-End Closing Results Staff will present year-end closing results for Fiscal Year 2016-2017.
Pension Discussion
Agenda item reserved for discussion regarding the status of the City's pension
liability, payment strategies, CalPERS policy updates and or advocacy efforts.
Review of Finance Committee WorkPlan
Staff will review with the Committee the agenda topics scheduled for the
remainder of the fiscal year and highlight those work plan items carried forward
from the prior fiscal year.The Committee will also consider setting up a
subcommittee to review finance related Council Policies.
MARCH
Thursday, March 15, 2018 Audit Closing The City’s external audit firm, White Nelson Diehl Evans LLP will meet with the
Finance Committee to discuss the audit findings for the fiscal year ending
6/30/2017. The committee will have an opportunity to discuss any potential
areas of concern and the auditors can discuss any changes in accounting
standards or disclosures that were relevant for the audit year.
Review of the Harbor Operations Division Review Harbor Operation Division activities
Harbor & Beaches Master Plan Review Harbor & Beaches Master Plan for financial solvency based on known
Council Priorities
January
FEBRUARY
City of Newport Beach Finance Committee Work Plan 2017-18 - DRAFT
I:\Users\FIN\Shared\Admin\Finance Committee\WORKPLAN\2018\2018 FC Workplan 2
Updated 2/12/2018
Scheduled Date Agenda Title Agenda Description
City of Newport Beach Finance Committee Work Plan 2017-18 - DRAFT
Review of Fire Department Budget to Actual Results In preparation of the 2018-19 Budget, staff will review budget assumptions
against actual results for fiscal year 2016-17.
Facilities Financial Plan Review Facilities Financial Plan for financial solvency based on known Council
Priorities
APRIL
Thursday, April 5, 2018 Submit Budget Documents to Finance Committee - Information
Only ** NOT A MEETING DATE **
Information Only - Not a meeting date.
Thursday, April 12, 2018 Finance Committee Budget Review
May
Thursday, May 10, 2018 Finance Committee Budget Review
Agreed Upon Audit Procedures for Internal Control The Finance Department is working with the City’s audit firm, White Nelson
Diehl Evans LLP, to develop agreed upon procedures for the audit of the City’s
internal control processes and procedures. Staff will present these agreed
upon procedures for the Finance Committee’s review.
Tuesday May 22, 2018 Council Budget Study Session (Joint FC Study Session ?)
Thursday, May 31, 2018 Reserve For Policy Discussion(s)Date moved to Thursday May 31 per L. Tucker Suggestion
June
Tuesday, June 12, 2018 Council Budget Adoption Decision needed for Finance Committee meeting June date.
Thursday June 21, 2018 Reserve For Policy Discussion(s)June 21 Selected per J. Stapleton Preference
OR
Thursday June 28, 2018 Reserve For Policy Discussion(s)