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HomeMy WebLinkAboutApproved Minutes - September 6, 2018Finance Committee Meeting Minutes September 6, 2018 Page 1 of 7 CITY OF NEWPORT BEACH FINANCE COMMITTEE SEPTEMBER 6, 2018 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Newport Coast Conference Room, Bay 2E, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Mayor Pro Tem/Chair Will O’Neill, Council Member Diane Dixon, Council Member Scott Peotter, Committee Member William Collopy, and Committee Member Larry Tucker ABSENT: Committee Member Joe Stapleton (excused) and Committee Member (VACANT POSITION) STAFF PRESENT: City Manager Grace K. Leung, Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve Montano, Administrative Specialist to the Finance Director Marlene Burns, and Public Works Administrative Analyst Raymond Reyes OTHER ENTITIES: Jayson Schmitt (Chandler Asset Management) MEMBERS OF THE PUBLIC: Jim Mosher and Jennifer McDonald III. PUBLIC COMMENTS Chair O’Neill opened public comments. Jim Mosher acknowledged various employee transitions in the City, including the new City Manager, and suggested review of the appropriate maximum dollar amount for administrative authorization for contracts and services, consideration of performance-based budgeting, and review of pension costs utilizing the case scenario of the former City Manager and current City Manager. Noting there were no other members of the public who elected to speak on this item, Chair O’Neill closed public comments. IV. CONSENT CALENDAR A. MINUTES OF JUNE 28, 2018 Recommended Action: Approve and file. MOTION: Committee Member Tucker moved, and Committee Member Collopy seconded, to approve the minutes, as amended. The motion carried with 3 ayes – 0 noes, 2 abstentions (O’Neill and Peotter), and 1 absence (Stapleton). Finance Committee Meeting Minutes September 6, 2018 Page 2 of 7 V. CURRENT BUSINESS A. ANNUAL REVIEW OF INVESTMENT POLICY Summary: Review Investment Policy Recommended Action: Receive and file. Chair O’Neill introduced the item and noted there were no recommended changes to the policy at this time. Chair O’Neill opened public comments. Jim Mosher noted the Committee would be reviewing the Investment Performance in Item 5B; however, any policy changes should be made during this item, and that appeared counterintuitive. He noted there were no recommended changes at this time, although he mentioned the historic change from multiple advisors to one advisor. In his opinion, there seemed to be lack of motivation to change back to multiple advisors. He noted the policy was adopted via the City Council Consent Calendar and he expressed concern the practice does not allow for appropriate City Council vetting and public discussion. The item was unanimously received and filed by the Committee. There was no further action taken on this item. B. INVESTMENT PERFORMANCE REVIEW Summary: Staff and/or the investment advisor will describe the performance of the City’s investment portfolio. Recommended Action: Discuss and provide direction regarding policy recommendations as appropriate. If applicable, direct staff to propose changes to City Council for consideration at a future date. Committee Member Collopy inquired as to the proper protocol for staff presentations on agenda items. He noted the staff presentations may stimulate questions or further discussion by the Committee. Chair O’Neill acknowledged the point and stated he would encourage presentations for items with additional information, or information that had not yet been reviewed or received by the Committee. He will call for questions or input from the Committee and the public on “receive and file” items; however, if there is an absence of new information to present, a staff presentation will not be required. Committee Member Tucker inquired as to the duration of the portfolio, as is it is his understanding it was leaning more toward the three-year range. Finance Director Matusiewicz responded, at the advice of the City’s investment advisor, the City is still using a one-to-three year strategy; however, staff prefers to move to a one-to-five year strategy at an appropriate time but especially when the yield curve steepens. Discussion ensued regarding the appropriate yield thresholds that would trigger review of the City’s investments. Jayson Schmitt, representing Chandler Asset Management, responded relative to the upcoming Federal Reserve meeting and proposed changes to rates. In the next six months, it is likely that the Federal Reserve will consider increasing interest rates and noted the average Finance Committee Meeting Minutes September 6, 2018 Page 3 of 7 maturity of the portfolio is 1.8 years. Based upon the upcoming meeting, the City will be in a better position in approximately six months to address the yield curve. Committee Member Collopy inquired as to the steepness of the yield curve over the next two- to-three years. Mr. Schmitt noted the impacts of inflation and Federal Reserve decreases to its balance funds sheets. Committee Member Collopy inquired as to the trigger for the City to change its investment policy from one-to-five years versus five-to-ten years. He recommends allowing staff to pursue a five-to-ten year plan. Chair O’Neill noted discussions by the City Council related to General Liability and Workers’ Compensation that will be required prior to any review of investment performance. Discussion ensued regarding asset liability management and risk mitigation strategy. Committee Member Tucker expressed concern with extending the timeframe out five-to-ten years. Chair O’Neill noted he shared the same concern; therefore, preferring a shorter-term investment policy. The item was unanimously received and filed by the Committee. There was no further action taken on this item. C. RESERVE POLICY Summary: Further discussion and consideration of reserve policy pursuant to findings in Draft Report: GFOA Risk Based Analysis of General Fund Reserve Requirements. Recommended Action: Discuss and provide staff direction to revise the reserve policy as appropriate and bring changes to Council for consideration at a future date. Chair O’Neill thanked the Committee, consultant, and staff for their efforts related to this item. Finance Director Matusiewicz provided a brief overview of the item as related to various exposures, such as, revenue volatility and recession but noted only the short-term impact of the pension expense volatility was considered. GFOA stated that this is a policy choice; however, there is a two-year lag between valuation and when rates will commence. This matter is a budgetary concern. There may be a potential for very large numbers, in particular the assets currently with CalPERS, and analysis shows various loss scenarios in monetary figures. Once the City becomes fully-funded, there will be more volatility in the investment return. Committee Collopy reviewed the losses presented in the documents provided. He noted the significant gain to be realized in 2018; however, he noted it was still undetermined what the loss would be in 2019. He inquired how the Committee would be informed and what potential actions they could take once advised of losses. Committee Member Tucker noted the impacts of pensions are more ambiguous and the City continues to have exposure to other types of risk. Committee Member Collopy stated he previously considered the City’s reserve policies as too conservative; however, given the recent study and analysis, he is in favor of keeping the money in the current reserve structure. Committee Member Tucker inquired whether the funds, if transferred from reserves, would be spent toward specific projects. Finance Committee Meeting Minutes September 6, 2018 Page 4 of 7 Finance Director Matusiewicz confirmed that staff would advise the Committee as soon as possible regarding potential losses. If a loss was incurred in 2018 the impact would be estimated, and built into the recommendation for contributions during the 2019-2020 budget year. Council Member Peotter inquired whether the Committee would be reviewing the General Fund Operating Budget and other funds. Finance Director Matusiewicz confirmed the Committee would be presented with deeper information on the various funds and specific project funding for sea walls, as an example, and other projects. He spoke regarding the short-term and long- term investments related to asset liability management and capital projects. Discussion ensued related to the various Master Plans, the Facilities Financial Plan, and the City’s general long-term capital project finance strategy. Chair O’Neill expressed support to modify the reserve policy to reflect the City’s current practice over the past several years. Finance Director Matusiewicz stated that interfund transfers are excluded from operating fund expenditures. Interfund transfers tend to be exceptions. Due to the new Master Plans and pension discretionary payments, the City would prefer to continue funding these items to stay the course. Those payments should be included in the cap, to provide a soft landing during leaner years, so that the City can continue payments and weather-out the storm. Committee Member Collopy stated he is opposed to changing the contribution reserve formula to be based off of revenue, because it generates a bigger number. He is confident in the current amount of reserves, and prefers to stay the course at 25%. He requested discussions and analysis related to risk situations and liens against the reserves in the upcoming years. Discussion ensued regarding data related to earnings losses and upcoming payment schedules. Finance Director Matusiewicz suggested the target payment to CalPERS should be between $32 to $35 million, and with that large commitment, the City needs to be aware of potential risk exposures. He suggested using the reserve to stay the course. Chair O’Neill stated the City Council policy is a directive to the City Manager, and it is the responsibility of the City Manager to explain the rationale of why a request for waiver of any Council policy is suggested at any particular time. He suggested to either keep the current policy as-is or modify the existing policy to reflect the City’s actions over the past several years, as this seems to be the understood best practice at this time. He wants to avoid requests for waivers each year. Council Member Dixon prefers the existing plan of 25%. However, if there is a plan to reach $32 to $35 million pension payment, she inquired as to whether the reserves can be increased to ensure the pension payment going forward. Discussion ensued regarding projected revenues, use of budget surplus, building them into the reserves, and whether discretionary payments should be sent directly to CalPERS. Chair O’Neill opened public comments. Jim Mosher commented there is a capital improvement project mechanism in the City Charter for making firm and permanent commitments towards a particular project. He expressed indifference on the reserve policy, although he did comment the distributed handout has an assumption of a 7% average investment return, with +/- of 12%. He inquired as to how likely the percentage of the investment portfolio return would be, in that range. Finance Director Matusiewicz responded the likelihood is two standard deviations from the mean expected return. Finance Committee Meeting Minutes September 6, 2018 Page 5 of 7 Chair O’Neill expressed support for a motion to modify the City Council policy to maintain the reserves at 25% of the total operating budget, with the exception of discretionary payments toward the City’s unfunded pension liability, until the net pension costs fall below 8% of the general fund revenues. Discussion ensued regarding whether the statement, “until the net pension costs fall below 8%...” should be included in the reserve policy and various matters related to the discretionary payments towards the unfunded pension liability. Finance Director Matusiewicz stated the language was included in an effort to get to a point where the unfunded pension liability was paid off. FINAL MOTION: Chair O’Neill moved, and Council Member Dixon seconded, to modify the current City Council reserve policy to maintain the reserves at 25% of the total operating budget, with the exception of discretionary payments toward the City’s unfunded pension liability. The motion carried with 4 ayes – 1 no (Peotter), and 1 absence (Stapleton). D. REVIEW OF FINANCE COMMITTEE PURPOSE AND RESPONSIBILITIES Summary: Review City Council Resolution 2017-58 (Finance Committee Purpose and Responsibilities), suggest and recommend changes as needed for submission to the City Council for final approval. Recommended Action: Discuss and recommend changes as appropriate. Chair O’Neill noted Committee Member Tucker’s contribution to this item. Committee Member Tucker noted his desire to reflect the actual actions and activities of the Finance Committee. Chair O’Neill opened public comments. Jim Mosher, in reference to Page 3 of 5 of the document distributed with this item, stated if the Finance Committee’s goals are to encourage public participation, he suggested scheduling future meetings later in the evening and not in conflict with any other scheduled City public meeting. In reference to the handout from Committee Member Tucker, he inquired as to the plan and desire of the Finance Committee to place on their annual agenda a discussion related to maximizing City revenues and minimizing costs. Council Member Dixon supports the changes proposed by Committee Member Tucker and notes the Finance Committee’s regular review of operations, financial policies, and various other items through analysis and deep-dives into revenues and expenditures. Committee Member Tucker noted the non-discretionary nature of most sources of City revenues. He does not see this as an annual activity for the Finance Committee; however, it could be conducted on an as-needed basis. FINAL MOTION: Committee Member Tucker moved, and Council Member Dixon seconded, to modify the purposes and responsibilities section of the Finance Committee document, as proposed in the document distributed by Committee Member Tucker. The motion carried with 5 ayes – 0 noes, and 1 absence (Stapleton). Finance Committee Meeting Minutes September 6, 2018 Page 6 of 7 E. BUDGET AMENDMENTS (QUARTER ENDED JUNE 30, 2018) Summary: Receive and file a staff report on the budget amendments for the prior quarter. Recommended Action: Receive and file. Chair O’Neill introduced the matter and noted this is a review and file item. Council Member Peotter inquired as to the purpose of the April 13, 2018, transfer for Capital Improvements. Budget Manager Giangrande responded the transfer was to close-out completed Public Works projects in the 2018 fiscal year and includes information through March 2018. All balances remaining are returned to the original fund to allow for reappropriation, if necessary. Chair O’Neill opened public comments. Noting there were no members of the public who elected to speak, Chair O’Neill closed public comments. There was no further action taken on this item. F. 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: Discuss and comment as necessary. Chair O’Neill introduced this matter. Discussion ensued regarding the Workplan structure and items currently listed on the document. Chair O’Neill noted that the October meeting will include a detailed discussion on City Council Policy F-14 and Workers’ Compensation/General Liability Actuarial Valuation Update, and Fiscal Sustainability. Committee Member Tucker requested a standing item regarding pensions, not to necessarily be discussed at every meeting, but to ensure that there is a placeholder on the Agenda if the matter arises. Chair O’Neill would work with the City Attorney regarding the required noticing for such items. In response to an inquiry from Council Member Dixon, Finance Director Matusiewicz confirmed the City can consult with Mr. John Bartel of Bartel and Associates on an hourly basis, as needed. Chair Dixon wants to ensure the continuity of his knowledge on various items. Council Member Peotter suggested the inclusion of a status or resolution column on the Workplan to inform as to the action taken on any particular matter. He would like to add “Section 115 Trusts” as an additional Workplan item. Discussion ensued regarding Section 115 Trusts. Chair O’Neill noted his suggested item on discretionary pension contributions would include a Section 115 Trust component, and is scheduled for the November meeting. In response to an inquiry from Council Member Dixon, Finance Director Matusiewicz stated, that, generally, information related to any year-end surplus funds will be provided once they are more polished and reviewed by the City Manager.