HomeMy WebLinkAboutFinance Committee - February 9, 2022CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA - Final
Friends Room - Newport Beach Central Library 1000 Avocado Avenue,
Newport Beach, CA 92660
Wednesday, February 9, 2022 - 3:00 PM
Finance Committee Members:
Will O'Neill, Chair
Noah Blom, Mayor Pro Tem
Brad Avery, Council Member
William Collopy, Committee Member
John Reed, Committee Member
Nancy Scarbrough, Committee Member
Joe Stapleton, Committee Member
Staff Members:
Grace K. Leung, City Manager
Scott Catlett, Finance Director/Treasurer
Marlene Burns, Administrative Specialist to the Finance Director
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
Director/Treasurer 24 hours prior to the scheduled Finance Committee meeting.
NOTICE REGARDING PUBLIC PARTICIPATION
Questions and comments may also be submitted in writing for the Finance Committee’s consideration by sending them
to Scott Catlett Finance Director/Treasurer, at scatlett@newportbeachca.gov. To give the Finance Committee adequate
time to review your questions and comments, please submit your written comments by no later than 5 p.m. the day
prior to the Finance Committee meeting. All correspondence will be made part of the record.
NOTICE TO THE PUBLIC
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.
It is the intention of the City of Newport Beach 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, the
City of Newport Beach will attempt to accommodate you in every reasonable manner. If requested, this agenda will be
made available in appropriate alternative formats to persons with a disability, as required by Section 202 of the
Americans with Disabilities Act of 1990 (42 U.S.C. Sec. 12132), and the federal rules and regulations adopted in
implementation thereof. Please contact the City Clerk’s Office 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) 644-3127 or
scatlett@newportbeachca.gov.
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Finance Committee 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
MINUTES OF JANUARY 13, 2022A.
Recommended Action:
Approve and file.
DRAFT MINUTES 01132022
4A1_CORRESPONDENCE DRAFT MINUTES 01132022
V.CURRENT BUSINESS
CAPITAL IMPROVEMENT PROGRAM (CIP) UPDATEA.
Summary:
Staff from Public Works will provide an update on what is planned for inclusion in the
Fiscal Year 2022-23 CIP.
Recommended Action:
Receive and file.
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Finance Committee Meeting
FACILITIES FINANCIAL PLAN (FFP) AND HARBOR & BEACHES MASTER
PLAN
B.
Summary:
Staff will provide an update on the current status of FFP and Harbor & Beaches
Master Plan funding.
Recommended Action:
Review and discuss this report, provide feedback and recommendations regarding
the presented options for assumed long-term funding for the FFP, concur with staff’s
recommended funding level for the HBMP in Fiscal Year 2022-23, and provide any
other related recommendations for consideration by the City Manager and City
Council.
STAFF REPORT
ATTACHMENT A
ATTACHMENT B
5B1_STAFF PRESENTATION
SECOND QUARTER BUDGET UPDATEC.
Summary:
Staff will provide a presentation regarding the year-to-date and projected Fiscal Year
2021-22 budget performance.
Recommended Action:
Receive and file.
STAFF REPORT
5C1_STAFF PRESENTATION
INTERNAL SERVICE FUNDS UPDATED.
Summary:
Staff will provide the Committee with an update on the health of the City's insurance,
vehicle, equipment, and other internal service funds.
Recommended Action:
Receive and file.
STAFF REPORT
5D1_STAFF PRESENTATION
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Finance Committee Meeting
INTERNAL AUDIT PROGRAM REPORTS (PART 2)E.
Summary:
Presentation of reports, findings, and recommendations from the Fiscal Year
2020-21 audit program.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
ATTACHMENT B
5E1_STAFF PRESENTATION
WORK PLAN REVIEWF.
Summary:
Staff and Finance Committee to review the proposed work plan and identify matters
that members would like placed on a future Agenda for discussion, action, or report.
Recommended Action:
Receive and file.
ATTACHMENT A
VI.ADJOURNMENT
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CITY OF NEWPORT BEACH FINANCE COMMITTEE JANUARY 13, 2022 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:03 p.m. in the Civic Center Community Room. II. ROLL CALL PRESENT: Chair Will O’Neill, Mayor Pro Tem Noah Blom, Council Member Brad
Avery, Committee Member William Collopy, Committee Member Nancy Scarbrough, and Committee Member Joe Stapleton ABSENT: Committee Member John Reed (Excused Absence)
STAFF PRESENT: City Manager Grace K. Leung, Finance Director/Treasurer Scott Catlett,
Administrative Specialist to the Finance Director Marlene Burns, and Accounting Manager Trevor Power MEMBERS OF THE
PUBLIC: Laura Curran, Jim Mosher
OTHER ENTITIES: Mark Davis, Davis Farr LLP (via teleconference) III. PUBLIC COMMENTS
Laura Curran inquired about deferred compensation contributions for Key and Management Employees (K & M). She noted her understanding is K & M Employees have a current pension plan
and inquired if the proposed contributions are replacing an existing plan.
Finance Director/Treasurer Scott Catlett clarified it is a deferred compensation type plan which is
a defined contribution plan which is separate from CalPERS and similar to a 401k. He confirmed it is 100% funded.
Ms. Curran commented there has been no staff discussion of the reasoning behind adding 2% deferred compensation to K & M Employees and requested more context.
IV. CONSENT CALENDAR MINUTES OF NOVEMBER 4, 2021 Recommended Action:
Approve and file.
Chair O’Neill called for public comments and hearing none, closed the public comments. MOTION: Committee Member Collopy moved to approve the minutes, as amended, seconded by Committee Member Scarborough. The motion carried 6 ayes – 0 noes, 1 absence
(Committee Member Reed)
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V. CURRENT BUSINESS Per Finance Director/Treasurer Scott Catlett’s recommendation, Items B and C were heard prior to Item A. B. INTERNAL AUDIT PROGRAM REPORTS Summary: Presentation of reports, findings, and recommendations from the Fiscal Year 2020-21 audit program. Recommended Action: Receive and File.
Finance Director/Treasurer Catlett reported five topics were identified for review and advised Moss Adams conducted three reviews, Macias, Gini, & O’Connell (MGO) conducted the Procurement Review, and the City Manager’s Office conducted the Inventory Management Review. He advised the completion of two reviews was delayed and those items will be brought
forward to the Finance Committee at the next meeting.
Finance Director/Treasurer Catlett provided a brief overview of the Procurement Operations Review, which included reviewing existing policies, procedures, and workflows and conducting interviews with staff. He highlighted the key findings of the review and recommended changes. He advised staff concurs with the findings and noted policy recommendations will be presented
to the Finance Committee in September 2022.
In response to Committee Member Collopy’s inquiry regarding purchasing thresholds, Finance Director/Treasurer Catlett advised there is no recommendation on the specific amount to
increase the purchasing thresholds at this time. He reported staff will make recommendations in consultation with the City Manager’s Office to balance efficiency and maintain appropriate
levels of control. Committee Member Collopy requested any proposed policy changes be forward to the Finance Committee in advance of the September 2022 meeting for review.
Chair O’Neill recommended if the recommendation is to increase purchasing thresholds that
examples of past purchases be provided for context.
Finance Director/Treasurer Catlett provided a brief overview of the Fiscal Policies Review and advised Moss Adams identified a series of high-risk gaps in Inventory, Procurement, and
Revenue and Accounts Receivable and recommended actions. He advised staff concurred with the findings and recommendations and has developed a work plan to implement the
required policy revisions over the next few years. He advised desk procedures will also be developed.
Finance Director/Treasurer Catlett provided a brief overview of the Inventory Management
Review and recommendations. He reported the majority of the improvement recommendations have already been implemented and provided highlights of those changes. He noted staff is
continuing to evaluate keeping inventory in-house versus ordering on-demand through service and maintenance contracts.
Committee Member Collopy inquired why three different entities were used to conduct the reviews. City Manager Leung advised the Assistant City Manager was utilized to conduct the Inventory Management Review as she has a background in finance and felt it would be more
cost-effective for the City.
Committee Member Collopy inquired how much the contracts were for Moss Adams and MGO. Finance Director/Treasurer Catlett reported the budget for the internal audit program services is $120,000 per year. City Manager Leung explained each review is being evaluated to ensure the City is getting what it needs and is being conducted by the appropriate entity.
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Finance Director/Treasurer Catlett reported two additional reviews will be brought back to the Finance Committee for review at the next meeting. Chair O’Neill opened public comments. Jim Mosher inquired if there are candid appraisals or controls recommended by the outside
firms who conducted the reviews or were they negotiated between themselves and City staff. He inquired if there were comprehensive reports available for the public record in addition to the summary reports provided in the agenda packet. He advised he read the Internal Control letter provided by Davis Farr and believes it is extremely limited in scope. He recommends the internal administrative policies be posted on the City’s website for public record.
Finance Director/Treasurer Catlett reported there are larger, staff-focused reports provided from Moss Adams and MGO and noted they are public documents. Chair O’Neill closed public comments.
The item was received and filed.
C. INTERNAL AUDIT PROGRAM WORK PLAN REVIEW Summary: Selection of audit topics for the Fiscal Year 2021-22 audit program. Recommended Action: Receive and file.
Finance Director/Treasurer Catlett provided a brief overview of the Internal Audit Program and
advised the goal was to continuously review various areas of City operations with both financial and operational reviews. He advised staff recommends the creation of a panel of audit firms to
facilitate future reviews and noted a Request for Proposals (RFP) is underway to select the firms. He provided an overview of the 13 areas of focus recommended for review in the Moss
Adams report and advised five reviews are complete or nearly completed. He advised staff are recommending initiating two additional reviews from the Moss Adams assessment and will
include Accounts Payable and Disbursements and Payroll. He recommended the Finance Committee select a third area for review from the Miss Adams list or recommend an alternative
topic for consideration.
Committee Member Collopy suggested the Finance Committee recommend Accounts Payable and Disbursements and Fixed Asset Management be reviewed.
Committee Member Scarbrough inquired why Moss Adams recommended Payroll be audited.
Finance Director/Treasurer Catlett clarified this was simply one of the items on the list provided by Moss Adams and staff is running down the list in priority order.
Finance Director/Treasurer Catlett advised staff recommends reviewing Accounts Payable and
Disbursements and Payroll and welcomed feedback from the Finance Committee. He explained the completed reports would be available in approximately January 2023.
Chair O’Neil opened public comments. Mr. Mosher recommended the City conduct an audit to compare the City to how other cities
conduct legal affairs.
Ms. Curran inquired what the payroll review would encompass. Finance Director/Treasurer Catlett explained this would be a review of the payroll controls and processes. Ms. Curran recommended a similar level of scope be applied to the review of Payroll
and Inventory Management.
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Chair O’Neill closed public comments. Chair O’Neill expressed interest in reviewing Police Property and Evidence Internal Controls Testing at some point. He noted if it is selected for review, he recommends adding into scope compliance with the Council Policy dealing with Civil Lawsuit Forfeiture. He recommends staff
review Accounts Payable and Disbursements, Payroll, and Fixed Asset Management. Council Member Avery concurred. Committee Member Collopy noted if the Finance Committee conducts a deep dive of the Police Department the Police Property and Evidence Internal Controls Testing review could be included. Finance Director/Treasurer Catlett reported the deep dive for the Police Department
is on the Work Plan for October. Chair O’Neill recommended reviewing Accounts Payable and Disbursements, Payroll, and Fixed Asset Management first and having Police Property and Evidence Internal Controls
Testing completed before the October deep dive of the Police Department.
The item was received and filed. A. FINANCIAL STATEMENT AUDIT RESULTS AND RELATED COMMUNICATION Summary:
The City’s external auditors will meet with the Finance Committee to discuss the results of their audit for the fiscal year ending June 30, 2021. Recommended Action: Receive and file.
Accounting Manager Trevor Power reported the Finance Committee was provided a copy of
the City’s Financial Statements in addition to two additional letters from the auditors. He reported the name of government financial statements has been changed to the Annual
Comprehensive Financial Report (ACFR).
Mark Davis, Davis Farr LLP, presented an overview of the results of the external financial audit. He reported an annual financial audit of the City was conducted and a single audit of Federal
financial assistance is underway. He advised they also performed agreed-upon procedures related to the City’s Gann limit. He provided a brief overview of management responsibilities
and auditor responsibilities. He reported an unmodified clean opinion was issued.
Mr. Davis provided an overview of changes in Assets, Deferred Outflows, Liabilities, Deferred Inflows, Net Position, Revenues, and Expenses and advised detailed information could be
found in the Management’s Discussion and Analysis section of the report. He reported two new Governmental Accounting Standards Board (GASB) standards were implemented including
GASB 84 – Fiduciary Activities, and GASB 98 – Term and Acronym for Financial Statements. He advised GASB 84 eliminated the Agency Fund type which are now referred to as Custodial
Funds.
Mr. Davis reported management does use estimates in preparing financial statements and noted some of the significant estimates used this year were estimates used for the Pension Liability, Other Postemployment Benefits (OPEB) liability, and Claims Payable. He noted the estimates are based on actuarial studies done by third parties. He advised the estimates were
found to be sound and reasonable.
Mr. Davis provided an overview of the results of the audit and reported one best practice recommendation was offered but did not rise to the level of an internal control concern. He advised the recommendation was to separate the function of reconciling cash receipts from those who have access to cash receipts as a preventive control in the Harbor Department. He
reported Davis Farr has received a representation letter from the City indicating that all
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documents were provided, all queries were responded to, and any staff needed were made available. He advised they will remain a resource throughout the remainder of the year. Chair O’Neill called for public comments and hearing none, closed public comments. Chair O’Neill applauded staff for an excellent Annual Comprehensive Financial Report. He
encouraged the Finance Committee to review the report. In response to Committee Member Stapleton’s inquiry regarding Certificates of Participation (COP) funds for funding the new fire station. Chair O’Neill advised the Finance Committee unanimously recommended the City Council use COP funds for the fire station new station because at the time interest rates were very low.
Chair O’Neill reopened public comments on the Annual Comprehensive Financial Report. Mr. Mosher noted that he knows Mr. Davis from the Costa Mesa Sanitary District where he
serves as the District Treasurer. He expressed support for discussing the Annual Comprehensive Financial Report along with the audit and noted he has recommended that for
years. He explained the Annual Comprehensive Financial Report makes more sense to financial experts than to the general public and cited specific examples within the report. Chair O’Neill closed public comments.
The item was received and filed.
D. LONG RANGE FINANCIAL FORECAST (LRFF) UPDATE Summary: Staff will brief the Committee regarding the results of the updated LRFF analysis Recommended Action: Receive and file.
Finance Director/Treasurer Catlett provided a brief overview of the Long Range Financial
Forecast and noted it looks beyond the period covered by the budget. He provided an overview of the major assumptions in developing the LRFF. He presented an overview of revenue
assumptions for property tax, sales tax, transient occupancy tax (TOT), and other revenues and detailed the growth assumptions. He presented an overview of expenditure assumptions
for salaries, benefits and non-personnel costs and detailed the growth assumptions.
Finance Director/Treasurer Catlett reported the General Fund is projected to be in a financially sound position over the next 20-year period and that staff has not identified any revenue or
expenditure concerns. He noted any short-term deficits can be absorbed by the contingency reserve. He advised the City may face additional CalPERS pension costs due to future
investment losses and noted staff remains cautious. He explained given that property tax is a large part of the City’s revenue, it is well-positioned to weather a recession. He noted staff is
not seeing any trends in sales tax that would be a cause for concern.
Chair O’Neill reported the City’s unfunded pension actuarial liability being eliminated in Fiscal Year 2030 allows future City Councils to do great things in the City. Committee Member Collopy noted it is only eight years away.
Committee Member Scarbrough inquired about the State’s mandates for cities to build more affordable housing, thus increasing density, and how it impacts City services. Finance
Director/Treasurer Catlett agreed that more density will certainly impact City services and deferred to City Manager Leung. City Manager Leung reported staff is looking at additional costs of serving new development
should there be an increase in density. She noted staff will need to investigate this in more
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detail once the General Plan Housing Element is completed. Chair O’Neill agreed it needs to be addressed as offering additional City services will be expensive. Chair O’Neill opened public comments. Ms. Curran inquired what percentage of the overall budget is dedicated to salaries and benefits.
Finance Director/Treasurer Catlett advised it is a sizable portion of the budget. She inquired when the public will have any additional opportunities to review the LRFF. Chair O’Neill advised it is discussed in detail by the Finance Committee and will be discussed as an underlying assumption during the budget process. Ms. Curran noted the City tends to have a higher headcount than other cities due to having
lifeguards and other unique services. She advised knowing headcount is important for the discussion and the public. Chair O’Neill advised the detailed headcount she is looking for would not be part of the LRFF
but is available to the public. Ms. Curran suggested having headcount scenarios as part of the online-budget tool so the public can review them.
Mr. Mosher expressed concern regarding the projection of the increase of revenue exceeding expenses as the government is not supposed to be a profit-making business. He inquired if the Facility Finance Plan (FFP) projections are part of the projections shown and if the projected
revenue is enough to cover the FFP obligations expected in the future.
Finance Director/Treasurer Catlett explained the FFP contributions are $8.5 million now and $12.5 million later. He clarified there is adequate funding in the FFP based on the current
assumptions to pay for scheduled projects. He noted staff will adjust that contribution when the need arises.
Committee Member Collopy noted he thought the police station was in the FFP and it appears
it is not. Chair O’Neill recommended tabling the FFP discussion until the meeting next month’s when the item will be presented.
The item was received and filed.
E. TIDELANDS FUND BUDGET PRESENTATION OPTIONS
Summary: Staff will provide the Committee with an overview of the current method of reflecting cost
allocations to the Tidelands Fund in the City's budget and several recommended options to improve transparency in the budget document relative to these interfund allocations. Recommended Action: Receive and file.
Finance Director/Treasurer Catlett provided a brief overview of the Tidelands Operating Fund
and reported the General Fund provides a net subsidy of $6.6 million annually. He explained that currently the cost allocation and subsidy are presented differently in the City’s budget and
financial statements. He provided an overview of the proposed change staff recommends making to the budget and financial statements. He advised the change will be incorporated into the upcoming budget in May.
Committee Member Stapleton inquired how Police and Fire services are tied to Tideland Fund expenses. Finance Director/Treasurer Catlett reported there is a cost allocation conducted in
consultation with those departments to determine what is allocated to the Tideland Fund as an expense.
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Committee Member Collopy inquired if there is a map of what constitutes Tidelands. Finance Director/Treasurer Catlett advised a map is available and that he will provide it to Committee Member Collopy electronically after the meeting. Committee Member Scarbrough expressed support for the change and noted it would be helpful to highlight the subsidy when having discussions with the California Coastal
Commission. Chair O’Neill opened public comments. Ms. Curran requested clarification on the current budget and the revised budget reflecting the proposed change. Chair O’Neill clarified how the net impact is the same and how the subsidy
would be reflected to show more transparency. She expressed support for using any funds available to support additional headcount for the Harbor Department as its creation has provided additional benefits to the community.
Chair O’Neill closed public comments. MOTION: Committee Member Stapleton moved to approve staff’s recommendation, seconded by Committee Member Collopy. The motion carried 6 ayes, 0 noes, 1 absence (Committee Member Reed) F. BUDGET AMENDMENTS FOR QUARTER ENDING DECEMBER 31, 2021 Summary:
Staff will report on the budget amendments from the prior quarter. Recommended Action:
Receive and file.
There were no comments from the Finance Committee.
Chair O’Neill called for public comments and hearing none, closed public comments.
The item was received and filed. G. WORK PLAN REVIEW Summary:
Staff and Finance Committee to review the proposed work plan and identify matters that members would like placed on a future Agenda for discussion, action, or report. Recommended Action: Receive and file.
Chair O’Neill reported the next meeting of the Finance Committee will be February 9, 2022,
where the FFP and Internal Audit program will be discussed. He advised the Fee Study Update will be reviewed in March along with an overview of the revenue projections for next fiscal year.
He reported the draft budget will be discussed in April and May. He advised it is important all members of the Finance Committee be available for the May 26th meeting as they need to
make a formal recommendation to the City Council regarding the budget. He noted the citizen terms of the Finance Committee end at the end of the fiscal year. Chair O’Neill called for public comments and hearing none, closed public comments.
The item was received and filed.
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VI. ADJOURNMENT The Finance Committee adjourned at 4:30 p.m. to the next regular meeting of the Finance Committee. The agenda for the Regular Meeting was posted on January 10, 2022, at 10:45 a.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:
___________________________________ _____________________ Will O’Neill, Chair Date
Finance Committee
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February 9, 2022, Finance Committee Item IV.A Comments
These comments on an item on the Newport Beach Finance Committee agenda are submitted by: Jim
Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229)
Item IV.A. MINUTES OF JANUARY 13, 2022
Changes to the draft minutes passages shown in italics are suggested in strikeout underline format.
Page 1 (agenda packet page 5), Item III, paragraph 2: “Finance Director/Treasurer Scott Catlett
clarified it is a deferred compensation type plan which is a defined contribution plan which is
separate from CalPERS and similar to a 401k 401(k).”
Page 1 (agenda packet page 5), Motion at bottom of page: “MOTION: Committee Member
Collopy moved to approve the minutes, as amended, seconded by Committee Member
Scarborough Scarbrough.”
Page 2 (agenda packet page 6), Item B, paragraph 3, last sentence: “Committee Member
Collopy requested any proposed policy changes be forward forwarded to the Finance
Committee in advance of the September 2022 meeting for review.”
Page 3 (agenda packet page 7), paragraph 3: “Jim Mosher inquired if there these are candid
appraisals or of controls recommended by the outside firms who conducted the reviews or were
they negotiated between themselves and City staff.”
Page 3 (agenda packet page 7), Item C, paragraph 1, last sentence: “He recommended the
Finance Committee select a third area for review from the Miss Moss Adams list or recommend
an alternative topic for consideration.”
Page 4 (agenda packet page 8), paragraph 3, sentence 1: “Committee Member Collopy noted if
the Finance Committee conducts a deep dive of the Police Department, the Police Property and
Evidence Internal Controls Testing review could be included.” [add comma]
Page 5 (agenda packet page 9), full paragraph 3, sentence 2: “Chair O’Neill advised the
Finance Committee unanimously recommended the City Council use COP funds for the fire
station new station because at the time interest rates were very low.”
Page 6 (agenda packet page 10), paragraph 2 before Item E, sentence 2: “Chair O’Neill
recommended tabling the FFP discussion until the meeting next month’s month when the item
will be presented.”
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CITY OF NEWPORT BEACH
FINANCE COMMITTEE
STAFF REPORT
Agenda Item No. 5B
February 9, 2022
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Scott Catlett, Finance Director/Treasurer
949-644-3123, scatlett@newportbeachca.gov
SUBJECT: FACILITIES FINANCIAL PLAN (FFP) AND HARBOR & BEACHES
MASTER PLAN
SUMMARY:
The Finance Committee is charged with a variety of tasks, including, but not limited to,
reviewing with staff on an annual basis the timing, means of financing, and fiscal impacts
associated with funding the projects included in the Facilities Financial Plan (FFP) and
Harbor & Beaches Master Plan (HBMP). This year, in addition to presenting these plans
to the Finance Committee for review, staff is seeking feedback from the Committee
regarding the appropriate level of General Fund contributions to these plans.
RECOMMENDED ACTION:
Review and discuss this report, provide feedback and recommendations regarding the
presented options for assumed long-term funding for the FFP, concur with staff’s
recommended funding level for the HBMP in Fiscal Year 2022-23, and provide any other
related recommendations for consideration by the City Manager and City Council.
DISCUSSION:
Each year, as part of the budget process, staff prepares updates to the FFP and HBMP.
Updates to the HBMP were reviewed by the Harbor Commission at their meeting on
January 12, 2022, and preliminary discussions with the City Council regarding the Fiscal
Year 2022-23 capital improvement program and FFP were held at the planning session
on January 29, 2022.
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Facilities Financial Plan (FFP) And Harbor & Beaches Master Plan
February 9, 2022
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Facilities Financial Plan
In addition to the annual capital improvement program ("CIP"), and in accordance with
Council Policy F-28 – Facilities Financial Planning Program, the City has established a
long-term plan for major renovation or replacement of City facilities that have reached the
end of their useful life, as well as for the addition of new facilities. The emphasis is on
structures and adjacent grounds, rather than transportation, environmental, or other
projects funded either in whole or in part by the General Fund via the routine CIP.
The details regarding changes to the projects included in the FFP and the third-party and
federal funding available for projects will be provided by the Public Works Department as
part of the prior item on today’s Finance Committee agenda. This report is focused on
the adequacy of the funding allocations from the General Fund to the FFP Fund and
several alternative funding scenarios for the Finance Committee’s consideration.
Under current policy, the annual contribution from the General Fund to the FFP is set at
$8.5 million until such time as 3% of General Fund revenues exceeds this amount. At
that time, the annual contribution will increase and remain indexed to the 3% amount.
Adequacy of Debt Service Contributions – The debt service for the Civic Center is paid
from the FFP Fund, which funds both cash-funded and debt-financed facilities projects.
That debt service varies by year, but is currently approximately $7.7 million. The City
recently executed an additional 10-year debt financing for the construction of Fire Station
No. 2 during the early days of the pandemic in order to preserve cash in the uncertain
economic situation. Principal payments on this new debt are now coming due of
approximately $0.9 million per year, which increases the annual debt service paid from
the FFP Fund to approximately $8.6 million. In an effort to ensure that at a minimum the
General Fund contributes the amount needed for debt service to avoid a drawdown on
FFP fund balance, staff recommends that the contribution for Fiscal Year 2022-23 be
increased accordingly to $8.6 million. Further, in an effort to increase transparency and
highlight the fact that all or a portion of the transfer from the General Fund to the FFP
Fund is dedicated to debt service, staff proposes showing two FFP transfers in the City’s
budget document and presentation materials – one for debt service, and a second, if
approved in a given fiscal year, for a contribution to the FFP fund balance.
Reliance on Fees Generated by Development Agreements – Currently, staff annually
prepares a projection of fees related to development agreements that are expected to be
received in future fiscal years, as well as park impact fees from new development. These
funds are deposited into the FFP Fund when received under current policy, and are then
available to fund FFP projects including both new and replaced/renovated facilities.
Under current policy, with the slight adjustment to increase the minimum annual
contribution from the General Fund to the FFP Fund to $8.6 million from $8.5 million to
accommodate the increased debt service described above, adequate funding is available
for the projects contemplated in the latest iteration of the FFP. The City’s Reserve Policy
(F-2) also sets a minimum reserve target for the FFP Fund equal to the maximum annual
debt service amount, in this case $8.6 million. Under current policy, the latest iteration of
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Facilities Financial Plan (FFP) And Harbor & Beaches Master Plan
February 9, 2022
Page 3
the FFP also maintains a reserve balance that equals or exceeds the level required by
the Reserve Policy in each year.
In an effort to be fiscally conservative and analyze alternatives, staff prepared several
scenarios to model what the required General Fund contributions would be if the assumed
development fees did not materialize as anticipated or receipt of these fees was delayed.
The following scenarios were modelled:
Baseline Scenario – All development fees received
Scenario 1 – 50% of development fees received as anticipated
Scenario 2 – No development fees received
Under the baseline scenario, adequate funds are on hand for all FFP projects, and the
minimum reserve balance remains above the $8.6 minimum level outlined in the City’s
Reserve Policy as illustrated in the chart below.
Under Scenario 1, the existing General Fund contribution strategy is adequate until Fiscal
Year 2035-36, at which time fund balance turns slightly negative for a period of three
fiscal years as illustrated in the following chart.
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Facilities Financial Plan (FFP) And Harbor & Beaches Master Plan
February 9, 2022
Page 4
Staff has calculated that to maintain the reserve balance at $8.6 million or above in all
years with only 50% of the development fees received as in Scenario 1, the General Fund
contribution would need to be indexed to 3.31% of General Fund revenues, resulting in
contributions increasing above the current $8.6 million in Fiscal Year 2024-25 rather than
Fiscal Year 2028-29 in the baseline scenario. The required Fiscal Year 2022-23
contribution would be the same as the amount required in the baseline scenario.
Under Scenario 2, the existing General Fund contribution strategy is adequate until Fiscal
Year 2033-34, at which time fund balance turns significantly negative for a period of ten
fiscal years as illustrated in the chart below.
17
Facilities Financial Plan (FFP) And Harbor & Beaches Master Plan
February 9, 2022
Page 5
Staff has calculated that to maintain the reserve balance at $8.6 million or above in all
years with no development fees received as in Scenario 2, the General Fund contribution
would need to be indexed to 3.97% of General Fund revenues, resulting in contributions
increasing above the current $8.6 million in Fiscal Year 2022-23 rather than Fiscal Year
2028-29 in the baseline scenario. The required Fiscal Year 2022-23 contribution would
be $9.8 million, an increase of $1.2 million versus the amount required in the baseline
scenario.
Although the timing of development agreement-related contributions can be uncertain and
development projects generating these fees may be modified or cancelled, ultimately the
City is likely to receive sizable revenues from development agreements in the years
ahead that will be deposited into the FFP Fund. However, in an effort to be fiscally
conservative and to evaluate alternatives, staff has prepared this analysis for the
Committee’s consideration and feedback.
Harbor & Beaches Master Plan
The HBMP is funded from two sources – a portion of Tidelands revenues and an annual
transfer from the General Fund. With the implementation of permit and rent increases
authorized by the City Council in 2010, staff was directed to deposit incremental rent
increases from certain harbor revenue sources to a new Tidelands Capital Fund. The intent
was to set aside the incremental increases from these adjustments to finance critical in-
Harbor capital improvements, like sea wall repair, dredging, and piers. Historically, the
Tidelands Operating Fund has not generated sufficient revenue to cover the full cost of
operations, in large part because of the public safety costs (lifeguards, emergency medical
response, and police services) associated with the ocean beaches and other Tidelands
property. Similarly, the incremental rents dedicated to the Tidelands Capital fund are not
sufficient to fund the capital improvement projects contemplated in the HBMP. Due to the
ongoing gap between Tidelands capital revenues and expenditures, the City’s General
Fund has transferred a variable amount, most recently $4.5 million, to the Tidelands Capital
Fund annually to provide sufficient funding for the HBMP projects to be completed.
In the past year, staff in the Finance Department have worked with the Public Works
Department to update the HBMP and ensure that all necessary projects are included. The
detailed project list can be found in Attachment B and annual expenditures are summarized
in the following chart.
18
Facilities Financial Plan (FFP) And Harbor & Beaches Master Plan
February 9, 2022
Page 6
Several projects have been added, most notably full replacement of the City’s two ocean
piers in 2027 and 2032. Anticipated external contributions have also been updated,
primarily to reflect the current estimate of grant receipts for future dredging projects. With
an updated project list and updated project costs, staff worked toward developing an
appropriate inflation-indexed General Fund contribution amount that will provide greater
prospective certainty regarding future funding amounts while ensuring that adequate funds
are on hand to support the HBMP projects. The contributions as proposed begin at $4.5
million in the current fiscal year and will increase by 2.5% annually thereafter through Fiscal
Year 2032-33 as shown below.
The inflationary adjustment to the $4.5 million contribution in the current fiscal year will
require an additional General Fund contribution of $112,500 to the HBMP in the upcoming
fiscal year. Due to the elimination of debt service in 2030 and growth in the Tidelands
Capital Fund revenues, the model currently reflects a reduction to the required ongoing
19
Facilities Financial Plan (FFP) And Harbor & Beaches Master Plan
February 9, 2022
Page 7
contribution amount in Fiscal Year 2033-34. However, this could change as the content of
the HBMP and the availability of grant funds possibly changes over time. Based on current
information, the $4.5 million contribution, indexed for inflation at 2.5% per year, is
anticipated to be sufficient to fund all Tidelands capital projects through Fiscal Year 2032-
33 and projected fund balances remain healthy and positive in the future as shown in the
chart below.
Facilities Maintenance Management Plan (FMMP)
It should also be noted that the City has a separate funding program known as the FMMP,
which sets aside funds for maintenance efforts related to City facilities. In recent years, the
General Fund has typically allocated $1.0 to $1.5 million toward this program. In an effort
to better fund maintenance efforts and ensure that City facilities are maintained in top
condition, staff will be recommending that the contribution be increased to $2.5 million in
Fiscal Year 2022-23 and increased thereafter by an annual inflation rate of 2.5% until such
time as the Public Works Department determines that a change is appropriate due to a
material increase in the number of City facilities being maintained or other factors.
Prepared and Submitted by:
/s/ Scott Catlett
____________________________
Scott Catlett
Finance Director/Treasurer
Attachments:
A. Facilities Financial Plan Baseline Scenario
B. Harbor & Beaches Master Plan
20
ATTACHMENT A
FACILITIES FINANCIAL PLAN BASELINE SCENARIO
21
3
1 2
3 4
5 6
7 8
CITYOFNEWPORTBEACHFACILITIESFINANCIALPLANNINGDASHBOARD
CashContributions
GF contributions equal to 3% GF Rev but not < than $8.6M (highest of debt service) | 0% of Development Fees received
GF contributions equal to 3.31% of GF Rev but not < than $8.6M (highest debt service) through 2037, then 3% GF Rev | 50% of Development Fees received
0.00%1.00%
2.00%
3.00%
4.00%5.00%
6.00%
7.00%
8.00%
9.00%10.00%202220242026202820302032203420362038204020422044GFContributiontoFFP
asaPercentofGFRevenue
GFContribution%Budget DebtServiceͲas%ofRevenues
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
202220242026202820302032203420362038204020422044GFContributiontoFFPCompared
toDebtService
GFContributiontoFFP DebtService
Ͳ
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045FFPReserveBalance
Ͳ
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
202220242026202820302032203420362038204020422044ProjectFunding
CashFundedConstruction DebtFundedConstruction
Ͳ
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
202220242026202820302032203420362038204020422044ProjectExpenditures
Ͳ
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
202220242026202820302032203420362038204020422044DebtServiceCapacity
MaxDebtServiceͲ8%ofRevenues DebtService
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%202220242026202820302032203420362038204020422044DebtServiceas%ofGFRevenues
DebtServiceͲas%ofRevenues
Ͳ
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
2022 2023 2024 2025
CashContributions
AnnualGFContributions
PeriodicGForOneͲtimeTransfers*
PrivateContributions
InterestEarnings
*OneͲtimeTransferforFY2022includes$10.5millionfromyearͲendsurplus andoneͲtimetransferforFY2023includes$10.1millionofARPA.
GF contributions equal to 3% GF Rev but not < than $8.6M (highest debt service) | 100% of Development Fees received
GF contributions equal to 3% of GF Rev but not < than $8.6M (highest debt service) | 50% of Development Fees received
GF contributions equal to 3.97% GF Rev but not < than $8.6M (highest of debt service) through 2037, then 3% of GF Rev | 0% of Development Fees received
1 of 3 22
ProjectPlanningWorksheet LastUpdated 02/02/2022
12 3 4 56 7 8 9 1011 12 13 14 15 16 17
ActiveProjects CurrentAgeFrom:
Ref
New/Repl
acement Function Project
YrBuilt/
Refurb
OGyr
Built ReplSqFtEst$/SqFt2021
Useful
Life
Yearsto
Start ProjectEstimateFYDesignYear
FYConstStart
Year
FVCostEst@2.5%
GrowthPrivateContribtionsNetProposedCost
1 N RecFacility SunsetViewParkw/PedBridge TBD TBD NA 100 1 11,100,0002019 2022 11,377,5002,349,6009,027,900
2 N Fire NewportJr.GuardBuilding(includes450kforsiteprep) TBD TBD 5,40087550 1 5,350,0002021 2022 5,483,7501,750,0003,733,750
3 N Library LibraryLectureHall TBD TBD 9,5141,34560 1 12,812,0002021 2022 12,812,0006,406,0006,406,000
4 N RecFacility NewportCoastPickleballCourt TBD TBD N/A 40 1 1,000,0002021 2022 1,025,000Ͳ1,025,000
5RGenGov 15thStreetBeachRestroom 1961 1961 1,03572560 60 3 750,0002022 2024 807,668807,668
6 MunicpalOperations CorporationYard(FuelingandTransferStation)TBD TBD NA 2 6,980,0002022 2023 7,333,3637,333,363
7 R Fire FS1ͲPeninsula 1962 1962 6,00080059 60 4 4,800,0002022 2025 5,298,3025,298,302
8 R Library LibraryͲBalboa(Constructw/FSͲ1)1962 1962 3,00075059 60 4 1,950,0002022 2025 2,152,4352,152,435
9 R Police LandPurchaseforNewStation(4acres)174,000230**12 2023 2033 Ͳ Ͳ
10 R RecFacility BonitaCreekͲArtificialTurfReplacement 2015 2015 157,355106 10 4 1,573,5502025 2025 1,736,9051,736,905
11 R Police PoliceStation 1973 1973 60,00080048 60 12 48,000,0002030 2033 64,554,66464,554,664
12 R RecFacility NewportTheatreArtsCenter 1973 1973 7,94775048 60 12 5,960,2502030 2033 8,015,8744,007,9374,007,937
13 R Fire FS6ͲMariners(livingarearebuild)2009 1957 3,00080012 60 13 2,400,0002031 2034 3,308,4273,308,427
14 R RecFacility LawnBowlingFacility(SanJoaquinHillsPark)1974 1974 2,75057547 60 13 1,581,2502031 2034 2,179,7712,179,771
15 R Fire FS3ͲSantaBarbara 1971 1971 13,00080050 60 14 10,400,0002032 2035 14,694,92814,694,928
16 R Fire LifeguardHQReplacement(majorrehab)1988 1966 3,00080033 50 17 2,400,0002035 2038 3,651,8843,651,884
17 R RecFacility CarrollBeekCenter 1980 1980 1,50075041 60 19 1,125,0002037 2040 1,798,4811,798,481
18 R RecFacility CommunityYouthCenter(CYC)ͲGrantHowald 1988 1988 5,65875033 60 27 4,243,5002045 2048 8,265,4898,265,489
19 R RecFacility BonitaCreekCommunityCtr.1988 1988 2,87675033 60 27 2,157,0002045 2048 4,201,4054,201,405
20 R Fire FS4ͲBalboaIsland1994 1994 4,40080027 60 33 3,520,0002051 2054 7,951,1557,951,155
21 R RecFacility CliffDriveCommunityRoom(MajorRehab)2022 1960 761750 Ͳ1 30 31 570,7502051 2052 1,227,1161,227,116
22 R Fire FS8ͲNpt.Coast 1995 1995 7,00080026 60 34 5,600,0002052 2055 12,965,80412,965,804
23 R Library LibraryͲCentral 1997 1997 65,00075024 60 36 48,750,0002054 2057 118,586,097118,586,097
24 R Library LibraryͲMariners 2006 2006 15,30575015 60 45 11,478,7502063 2066 34,871,33234,871,332
25 R Fire FS7ͲSAH 2007 2007 11,20780014 60 46 8,965,6002064 2067 27,917,54127,917,541
26 R RecFacility NewportCoastCtr 2007 2007 16,86575014 60 46 12,648,7502064 2067 39,386,32139,386,321
27 R RecFacility Girls&BoysClub(EastBluffPark)ͲMajorRehab 2019 11,8007502 50 48 1,500,0002066 2069 4,907,2344,907,234Ͳ
28 R RecFacility OASISSr.Ctr 2010 2010 43,23275011 60 49 32,424,0002067 2070 108,726,647108,726,647
29 R GenGov CivicCenter 2013 2013 123,0007508 60 52 92,250,0002070 2073 333,125,114333,125,114
30 R GenGov CouncilChambers 2013 2013 5,6007508 60 52 4,200,0002070 2073 15,166,67215,166,672
31 R GenGov CivicCenterParkingStructure(450Stalls)2013 2013 45022,0008 60 52 9,900,0002070 2073 35,750,01235,750,012
32 R RecFacility MarinaPark2015 2015 24,3907506 60 54 18,292,5002072 2075 69,400,37169,400,371
33 R Fire FS6ͲMariners(apparatusbayonly)2018 1957 1,4368663 60 57 1,243,5762075 2078 5,080,8075,080,807
34 R FireandLibrary FS5andCDMLibrary 2019 2019 10,3137602 60 58 7,837,8802076 2079 32,823,34232,823,342
35 R Fire FS2ͲFireStationNo2 2022 1952 11,600800 Ͳ1 60 61 9,280,0002080 2082 41,850,80041,850,800
Total 1,029,013,439
PotentialProjects
N RecFacility ArroyoParkSyntheticTurfField TBD TBD 128,0001010 2 1,300,0002022 2023 1,365,8131,300,000
N RecFacility PoolComplex(aquaticcenter)($5.5M)withPark($2.5M)8,000,0008,000,000
Harbor BalboaYachtBasinBuildings 1950 1950 18,08060071 60 4 10,848,0002022 2025 11,974,16211,974,162
Police AnimalShelterTBD 1955 2,32060 TBD
MunicpalOperations CorporationYard TBD
MunicpalOperations UtilitiesYard TBD
RecFacility BackBayScienceCenter 750TBD
RecFacility CDMConcessions/LGHQ 800TBD
RecFacility WestNewportCommunityCenter 750TBD
RecFacility DoryFisherman'sFleetMarket 500TBD
GenGov AllPublicRestroomBldgs TBD
Total 21,274,162
TOTALREPLACEMENT 1,029,710,1228,915,1711,020,794,951
TOTALNEW 32,064,06310,505,60029,492,650
TOTALPROJECTCOST 1,061,774,18519,420,7711,050,287,601
2 of 3 23
3456789101112
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
AFFORDABILITYASSUMPTIONs
GeneralFundRevenues 238,523,831.00245,679,546253,049,932260,641,430268,460,673276,514,493284,809,928293,354,226302,154,853311,219,498
GFRevenueGrowthAssumption 3.00%3.00%3.00%3.00%3.00%3.00%3.00%3.00%3.00%3.00%
FFPContributions@3%ofGFRevenues 7,155,7157,370,3867,591,4987,819,2438,053,8208,295,4358,544,2988,800,6279,064,6469,336,585
GFAnnualContribution%ofRevenue 3.56%3.50%3.40%3.30%3.20%3.11%3.02%3.00%3.00%3.00%
DebtServiceas%ofGFRevenues 3.68%3.50%3.39%3.28%3.18%3.09%2.99%2.90%2.81%2.72%
SUMARYFFPFUNDSOURCESANDUSES
BeginningFFPBalance 28,092,59745,087,48148,885,51645,262,57442,335,03839,469,10537,096,48537,908,83838,949,42577,517,076
Sources
AnnualGFContributions 8,500,0008,600,5288,600,5288,600,5288,600,5288,600,5288,600,5288,800,6279,064,6469,336,585
PeriodicGForOneͲtimeTransfersIn*10,500,00010,141,272
PrivateContributions 8,454,3705,611,472Ͳ510,4022,000,000ͲͲͲ22,295,000Ͳ
ParkInLieu 2,666,875104,500ͲͲͲͲͲͲ14,540,245Ͳ
InterestEarnings 140,463225,437488,855452,626423,350789,382741,930758,1771,168,4832,325,512
DebtFunding ͲͲͲͲͲͲͲͲͲͲ
TotalSources:30,261,70824,683,2099,089,3839,563,55511,023,8789,389,9109,342,4579,558,80447,068,37311,662,097
Uses
DebtService (8,772,325)(8,600,528)(8,587,208)(8,550,433)(8,542,924)(8,535,855)(8,519,104)(8,507,217)(8,489,722)(8,466,500)
OtherFiscalCharges (11,000)(11,000)(11,000)(11,000)(11,000)(11,000)(11,000)(11,000)(11,000)(11,000)
ProjectUses (4,483,499)(12,273,647)(4,114,116)(3,929,658)(5,335,887)(3,215,675)ͲͲͲͲ
TotalUses:(13,266,824)(20,885,174)(12,712,325)(12,491,091)(13,889,811)(11,762,530)(8,530,104)(8,518,217)(8,500,722)(8,477,500)
ProjectedFFPBalance45,087,48148,885,51645,262,57442,335,03839,469,10537,096,48537,908,83838,949,42577,517,07680,701,673
ProjectedFFPBalancereservedforparkinlieu 1,666,8751,207,6251,207,6251,108,282561,895214,194214,194214,19414,754,43914,754,439
SourcesandUsesProforma
3 of 3 24
ATTACHMENT B
HARBOR & BEACHES MASTER PLAN
25
HARBOR & BEACHES MASTER PLAN DASHBOARDTRUEUpdated: 02/01/2022123456$0$10,000,000$20,000,000$30,000,000$40,000,000$50,000,000$60,000,000$70,000,000$80,000,000202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045Harbor and Beaches Master Plan Funding Balance$0$5,000,000$10,000,000$15,000,000$20,000,000$25,000,000$30,000,000$35,000,000$40,000,000202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045Project ExpendituresCity ExpGrant Covered Exp0.00%5.00%10.00%15.00%20.00%25.00%30.00%35.00%40.00%202220242026202820302032203420362038204020422044Debt Service as % of Dedicated RevenuesDebt Service ‐ as % of Revenues$0$5,000,000$10,000,000$15,000,000$20,000,000$25,000,000$30,000,0002022202420262028203020322034203620382040204220442046All Estimated Revenue SourcesGrantsPeriodic GF or One‐time TransfersGeneral Fund ContributionsInterest EarningsTidelands Capital Fund RevenuesBulkhead, $146.0, 64%Dredging, $21.4, 9%Gate Valves, $3.0, 1%Other, $4.2, 2%Piers, $26.8, 12%Sand, $16.9, 8%Slips, $8.8, 4%Water Quality, $0.3, 0%Expenditures by Type (millions)With external contributions (grants) as indicated on project listIncrement Revenue, $198 , 45%General Fund Contributions, $205 , 46%Periodic General Fund Contributions or One‐Time Transfers, $2 , 0%Grants, $38 , 9%Revenues by Type (millions)1 of 426
Last Updated: 02/01/20222022Ref # Project Category Units Measurement Total Units Today's Unit Cost Current Age: Useful Life Project Estimate FY Design Start YearFY Const Start YearFV Cost Est @2.5% GrowthExternal Contributions Net Proposed CostUTILITIES19 Tide Gate Valves (Balboa Island): Replace (34 total)Gate ValvesEA15 $50,000**25$750,000 2022 2025$807,668$807,66832 Tide Gate Valves (Peninsula): ReplaceGate ValvesEA39 $50,000**25$1,950,000 2022 2026$2,152,435$2,152,435SUBTOTAL$2,700,000$2,960,103$0$2,960,103BULKHEAD/STRUCTURES8Bulkhead (American Legion): RepairBulkheadLF1 $1,700,0006540$1,700,000 2019 2021$1,742,500$1,742,50039 Lower Castaways: Bulkhead OnlyBulkheadLF265 $3,800**80$1,007,000 2024 2026$1,111,540$1,111,54041 Balboa Island, N, S, E & GC: Boardwalk & Perimeter Drainage System only (Little Island not include ~42k SF)OtherSF92,000 $25**80$2,300,000 2024 2026$2,538,770$2,538,77045 Balboa Island, N, S, E & GC: Replace Seawall SBFBulkheadLF4,386 $3,8009281$16,667,666 2026 2031$20,815,631$20,815,63146 Balboa Island, N, S, E & GC: Replace Seawall GC and EBFBulkheadLF4,386 $3,8009280$16,667,666 2026 2031$20,815,631$20,815,63147Balboa Island, N, S, E & GC: Replace Seawall NBFBulkheadLF4,386 $3,8009282$16,667,666 2026 2037$24,139,751$24,139,75161 Bulkhead (American Legion): ReplaceBulkheadLF336 $3,8006580$1,276,800 2051 2070$4,177,038$4,177,03865 Bulkhead (West Newport): ReplaceBulkheadLF1,722 $3,800**80$6,543,600 2038 2041$10,460,927$10,460,92766 Bulkhead (Corona Del Mar): ReplaceBulkheadLF175 $3,800**80$665,000 2042 2045$1,173,466$1,173,46667 Bulkhead (Promontory Bay): ReplaceBulkheadLF1,158 $3,8005780$4,400,400 2042 2045$7,764,993$7,764,99369 Bulkhead (Rhine Wharf): ReplaceBulkheadLF343 $3,8006280$1,303,400 2046 2049$2,538,763$2,538,76371 Bulkhead (Street Ends ‐ Peninsula): ReplaceBulkheadLF2,217 $3,800**80$8,424,600 2053 2056$19,505,663$19,505,66327 Bulkhead (Balboa Yacht Basin): ReplaceBulkheadLF1,370 $3,8003780$5,206,000 2063 2065$15,053,254$15,053,25437 Bulkhead (Marina Park): ReplaceBulkheadLF857 $3,800780$3,256,600 2093 2095$19,751,796$19,751,796SUBTOTAL$86,086,399$151,589,722$0 $151,589,722PUBLIC PIERS ‐ REPAIR / REPLACE11 Public Pier (15th St): Float onlyPiersEA1 $50,000**20$50,000 2021 2022$51,250$51,25012 Public Pier (19th St): Gangway & FloatPiersEA1 $75,000**20$75,000 2021 2022$76,875$76,87513 Public Pier (Coral Ave): Gangway & FloatPiersEA1 $75,0003720$75,000 2021 2022$76,875$76,87514 Public Pier (Fernando St): Gangway & FloatPiersEA1 $75,000**20$75,000 2021 2022$76,875$76,87515 Public Pier (M St): Gangway & FloatPiersEA1 $100,000**20$100,000 2021 2022$102,500$102,50016 Public Pier (Opal Ave): Gangway & FloatPiersEA1 $75,000**20$75,000 2021 2022$76,875$76,87517 Public Pier (Park Ave): Gangway & FloatPiersEA1 $75,000**20$75,000 2021 2022$76,875$76,87518 Public Pier (Washington St): Gangway & FloatPiersEA1 $75,000**20$75,000 2021 2022$76,875$76,87521 Balboa Yacht Basin Major Dock MaintenanceSlipsEA1 150,000 3740$150,000 2021 2022$153,750$153,75028 Ocean Piers Maintenance (Balboa and Newport)PiersEA1 500,000 **0$500,000 2021 2022$512,500$512,50029 Public Pier (29th St): Gangway & FloatPiersEA1 $100,000**20$100,000 2021 2022$102,500$102,50030 Public Pier (Emerald Ave): Gangway & FloatPiersEA1 $75,0003620$75,000 2021 2022$76,875$76,87531 Public Pier (Sapphire Ave): Gangway & FloatPiersEA1 $75,000**20$75,000 2021 2022$76,875$76,87542Balboa Yacht Basin Marina (Slips): ReplaceSlipsSlips172 $35,0003740$6,020,000 2022 2024$6,324,763$6,324,76352 Public Pier (15th St): Pier & GangwayPiersEA1 $115,000**20$115,000 2031 2034$154,662$154,66253 Public Pier (Coral Ave): Pier onlyPiersEA1 $75,0003720$75,000 2031 2034$100,867$100,86754 Public Pier (Emerald Ave): Pier onlyPiersEA1 $75,0003620$75,000 2031 2034$100,867$100,86755 Public Pier (Fernando St): Pier onlyPiersEA1 $75,000**20$75,000 2031 2034$100,867$100,86756 Public Pier (M St): Pier onlyPiersEA1 $100,0003720$100,000 2031 2034$134,489$134,48957 Public Pier (Opal Ave): Pier onlyPiersEA1 $115,000**20$115,000 2031 2034$154,662$154,66258 Public Pier (Park Ave): Pier onlyPiersEA1 $115,000**20$115,000 2031 2034$154,662$154,66259 Public Pier (Sapphire Ave): Pier onlyPiersEA1 $115,000**20$115,000 2031 2034$154,662$154,66260 Public Pier (Washington St): Pier onlyPiersEA1 $75,000**20$75,000 2031 2034$100,867$100,86762 Public Pier (Rhine Channel): Float onlyPiersEA1 $175,0001530$175,000 2034 2037$253,452$253,45264 Public Pier (Grand Canal, Balboa Ave): Pier PlatformPiersEA1 $15,000520$15,000 2037 2038$22,268$22,26868 Public Pier (Rhine Channel): Gangway onlyPiersEA1 $60,000**40$60,000 2044 2047$111,237$111,23770 Marina Park Slips: ReplaceSlipsEA23 $40,000740$920,000 2052 2055$2,078,143$2,078,14372 Public Pier (Balboa Marina West): Float onlyPiersEA1 $200,000140$200,000 2059 2062$537,013$537,01373 Public Pier (Balboa Marina West): GangwayPiersEA1 $50,000140$50,000 2059 2062$134,253$134,25326 Public Pier (Central Ave): Gangway and FloatPiersEA1 $250,000540$250,000 2055 2057$593,301$593,30110 Ocean Pier: NewportPiersEA1 $20,000,0008285$20,000,0002025 2027$22,628,164$22,628,16423 Ocean Pier: BalboaPiersEA1 $15,000,0008285$15,000,0002030 2032$19,201,268$19,201,268SUBTOTAL$45,050,000$54,577,966$0 $54,577,966DREDGING2Grand Canal Dredging and Beach MaintenanceDredgingCY1 $1,500,000**20$1,500,000 2037 2039$2,282,427$2,282,4279Dredging: Lower Bay (Channels ‐ Ongoing Maintenance)DredgingCY1,200,000 $19**30$22,800,000 2019 2022$23,370,000 $10,000,000 $13,370,000HARBOR & BEACHES MASTER PLAN PROJECTS2 of 427
Ref # Project Category Units Measurement Total Units Today's Unit Cost Current Age: Useful Life Project Estimate FY Design Start YearFY Const Start YearFV Cost Est @2.5% GrowthExternal Contributions Net Proposed Cost25 Dredging: Newport Island Area (Channels) ‐ TBDDredgingCY20,000 $150 **50$3,000,000 2028 2030$3,655,209$3,655,20943 Dredging (Balboa Yacht Basin):DredgingCY25,600 $70 3740$1,792,000 2022 2024$1,882,720$1,882,72048 Dredging: Upper Bay Catch BasinsDredgingCY500,000 $30 1321$15,000,000 2027 2030$18,276,043 $18,276,043$049 Dredging: Upper Bay ChannelsDredgingCY250,000 $30 1321$7,500,000 2027 2030$9,138,022 $9,138,022$0SUBTOTAL$51,592,000$58,604,421 $37,414,065 $21,190,356FERRY & WHARF REPAIR / REPLACE35 Ferry Landing ‐ Agate AvenueBulkheadEA1 $0 9260$0 2023 2025$0$036 Ferry Landing ‐ Palm StreetBulkheadEA1 $0 9260$0 2023 2025$0$0SUBTOTAL$0$0$0$0WATER QUALITY20 Water Quality: TMDL Compliance:Water QualityLS1 $200,000 ** Ongoing$200,000 2022 2028$231,939$231,93933 Vessel Sewage Pumpouts ReplacementsWater QualityEA5 $21,255 **7$106,275 2027 2028$123,246 $102,031$21,215SUBTOTAL$306,275$355,185 $102,031$253,154BEACH NOURISHMENT ‐ HARBOR & OCEAN22 Central Peninsula Sand Nourishment (Ocean Beach)SandCY1,000,000 $15 120$15,000,000 2022 2025$16,153,359$16,153,35944 Surfside/Sunset Beach Sand Nourishment Stage 14SandLS1 $300,000 57$300,000 2027 2029$356,606$356,60651 Public Bay Beaches: Sand Nourishment (25k yards)OtherCY25,000 $50 625$1,250,000 2028 2031$1,561,079$1,561,079SUBTOTAL$16,550,000$18,071,044$0 $18,071,044MISCELLANEOUS4 Navigation Markers: Convert Federal Stationary Markers to Floats OtherLS1 $60,000 **0$60,000 2030 2030$73,104$74,932($1,828)SUBTOTAL$60,000$73,104$74,932($1,828)GRAND TOTAL$202,344,674$286,231,545 $37,591,028 $248,640,517POTENTIAL PROJECTSOnshore Mooring EnhancementsMoorings$0$0$0Multiple Vessel Mooring System (MVMS) ‐ City OwnedMooringsEA6 $45,000 **20$270,000 2023 2023$270,000$270,000Mooring Field Realignment Moorings EA 800 $200 0 0 $160,000 2022 2025 $172,303 $172,303TOTAL$45,200 $430,000 $442,303 $0 $442,303** denotes “unknown”.3 of 428
HARBOR & BEACHES MASTER PLAN SOURCES AND USES PROFORMA202220232024202520262027202820292030AFFORDABILITY ASSUMPTIONSTidelands Capital Fund Revenues3,736,094 3,792,136 3,849,018 3,906,753 3,965,354 4,024,835 4,085,207 4,146,485 4,208,682 Growth Assumption1.50%1.50%1.50%1.50%1.50%1.50%1.50%1.50%1.50%Debt Service as % of Revenues33.46%32.96%32.48%32.00%31.52%31.06%22.68%12.06%11.88%Harbor Capital Balance as % of Debt Service2130.44%2026.84%2562.39%2748.63%2393.44%2111.47%2189.80%4267.67% 6011.94%HARBOR CAPITAL SOURCESBUDGETEDBeginning Harbor Capital Balance33,004,996 26,630,505 25,335,544 32,029,898 34,357,937 29,917,942 26,393,429 20,292,025 21,338,362 SourcesIncrement Revenue Projections 3,435,8423,493,958 3,589,187 3,619,926 3,633,415 3,703,455 3,803,650 3,913,058 4,000,531 Interest Earnings300,253 298,178 259,830286,827 331,939321,379281,557233,427 208,152 General Fund Contributions4,500,000 4,612,500 4,727,813 4,846,008 4,967,158 5,091,337 5,218,620 5,349,086 5,482,813 Periodic GF or One‐time TransfersGrants1,000,000 5,500,000 3,500,000 ‐ ‐ ‐ 10,203 56,1172,784,611 Total Sources (does not include grants):8,236,094 8,404,636 8,576,830 8,752,761 8,932,512 9,116,171 9,303,827 9,495,571 9,691,495 UsesDebt Service(1,250,000) (1,250,000) (1,250,000) (1,250,000) (1,250,000) (1,250,000) (926,659) (500,000) (500,000) Other Fiscal Charges‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Project Uses(13,360,585) (8,449,597) (632,476) (5,174,722) (12,122,506) (11,390,685) (14,478,572) (7,949,234) (470,158) Transfers Out‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Less: Cash Proj FundingTotal Uses:(14,610,585)(9,699,597) (1,882,476) (6,424,722) (13,372,506) (12,640,685) (15,405,231) (8,449,234) (970,158) Projected Harbor Capital Balance 26,630,505 25,335,544 32,029,898 34,357,937 29,917,942 26,393,429 20,292,025 21,338,362 30,059,699 4 of 429
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Facilities Financial Plan (FFP) and
Harbor & Beaches Master Plan (HBMP)
Finance
Committee
February 9, 2022
City of Newport Beach –Finance Department 2
Background
Staff prepares updates to the FFP and HBMP annually in close consultation
with the Public Works Department
The Harbor Commission reviewed the HBMP at their meeting on January 12th
The CIP and FFP were preliminarily discussed by the City Council at the
Planning Session held on January 29th
In addition to the Committee’s annual review of these plans, this year staff is
also seeking the Finance Committee’s feedback regarding the appropriate
level of General Fund contributions to these plans
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2
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City of Newport Beach –Finance Department 3
Facilities Financial Plan
Outlined in City Council Policy F-28 – Facilities Financial Planning Program
Funding for:
Renovation or replacement of City facilities that have reached the end of their
useful life
Addition of new City facilities
Public Works provided an overview of included projects and updated
funding from ARPA and donations during the previous item
This item is primarily focused on evaluating the adequacy of the funding
allocations from the General Fund to the FFP
Current policy requires a contribution to the FFP of $8.5 million until such
time as 3% of General Fund revenues exceeds this amount
City of Newport Beach –Finance Department 4
FFP Debt Service Contributions
Debt service for debt-financed FFP projects is funded from the FFP Fund
These payments currently amount to just over $8.6 million per year
$7.7 million for the Civic Center Certificates of Participation
$0.9 million for the Fire Station No. 2 Certificates of Participation
Principal payments just began on the Fire Station No. 2 COPs
Given that debt service now exceeds the $8.5 million contribution, staff
recommends that the minimum annual transfer be increased to match the
annual debt service amount
Staff also recommends that the transfer from the General Fund to the FFP
Fund be split into two components – one for debt service and one for cash
contributions to fund balance – to increase transparency
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4
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City of Newport Beach –Finance Department 5
FFP Reliance on Development Agreement Fees
Under current policy, the FFP is prepared with all development fees and
park fees projected to be generated from future known projects included as
a revenue source
These revenues are an important source of funds for the FFP
Due to the sizable nature of some of the contributions, timing differences could
create challenges in maintaining the fiscal health of the FFP Fund
In an effort to ensure adequate funds are on hand, the City’s Reserve Policy
sets a minimum fund balance goal for the FFP Fund equal to the maximum
annual debt service (currently $8.6 million)
Under current policy, the FFP is projected to be adequately funded and to
maintain a minimum reserve balance above $8.6 million in each year
City of Newport Beach –Finance Department 6
Development Fee Scenario Analysis
In an effort the be fiscally conservative, staff prepared two alternative
scenarios to model what the required General Fund contributions would be if
the assumed development fees did not materialize as anticipated or the
receipt of these fees was delayed
•Baseline scenario all development fees received
•Scenario 1 50% of development fees received as anticipated
•Scenario 2 no development fees received
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6
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City of Newport Beach –Finance Department 7
Development Fee Scenario Analysis
The baseline scenario is adequately funded at $8.6 million per year until FY 2028-
29, at which time the contributions would index to 3.00% of General Fund revenues
With 50% of fees received, contributions are adequate at $8.6 million per year until
FY 2024-25, at which time they would index to 3.31% of General Fund revenues
With no fees received, the annual contributions would need to be indexed to 3.97%
of General Fund revenues and increase to $9.8 million next fiscal year
Baseline Scenario 50% of Fees Received No fees received
City of Newport Beach –Finance Department 8
FFP Considerations for the Finance Committee
Increasing the minimum contribution to match debt service, resulting in a
minimum contribution of $8.6 million per year
Evaluating the appropriate level of General Fund contribution
No. Scenario
FY 2022‐23
Contribution
Revenue
Index Amount
1 Baseline Scenario $8.6 million 3.00%
2 Scenario 1 –50% of Development Fees Received $8.6 million 3.31%
3 Scenario 2 –No Development Fees Received $9.8 million 3.97%
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City of Newport Beach –Finance Department 9
Harbor & Beaches Master Plan
Funded from Tidelands capital revenues and an
annual General Fund transfer currently set at $4.5
million
Staff has comprehensively updated the project list
Ocean pier replacement projects now included
in 2027 and 2032
Current best information on anticipated grant
receipts
Staff has also evaluated the adequacy of the
current contribution amount
Goal was to make future contributions more regular
in amount and growing over time, comparable to
the structure of the FFP transfers
City of Newport Beach –Finance Department 10
HBMP Funding Adequacy
The current $4.5 million annual transfer from the General Fund was
evaluated for long-term adequacy
Staff believes the $4.5 million transfer is adequate if indexed to grow at
2.5% per year beginning next fiscal year
The FY 2022-23 contribution would be $4.6 million
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City of Newport Beach –Finance Department 11
Facilities Maintenance Management Plan
The FMMP funds maintenance efforts related to City facilities
Annual contributions have varied, but typically have been between $1.0 and
$1.5 million in recent years
Staff are recommending that the transfer increase to $2.5 million in FY
2022-23 and be maintained at that level plus an annual adjustment for
inflation of 2.5%
Funding would be evaluated by Public Works annually to ensure that a
higher contribution is not required as the City’s facilities continue to age or
new facilities are constructed
City of Newport Beach –Finance Department 12
Recommendations
That the Finance Committee:
1.Provide feedback and recommendations regarding the presented
options for assumed long-term funding for the FFP
2.Concur with staff’s recommended funding level for the HBMP
3.Provide any other related recommendations for consideration by the
City Manager and City Council
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12
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02/09/2022
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City of Newport Beach –Finance Department 13
Questions?
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CITY OF NEWPORT BEACH
FINANCE COMMITTEE
STAFF REPORT
Agenda Item No. 5C
February 9, 2022
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Scott Catlett, Finance Director/ Treasurer
949-644-3123, scatlett@newportbeachca.gov
SUBJECT: SECOND QUARTER BUDGET UPDATE
SUMMARY:
The Finance Department prepares quarterly financial reports to review in detail the status
of revenues and expenditures for the City’s General Fund and to identify any concerning
budgetary trends in other City funds. This report contains information on revenues,
expenditures, and estimated fund balance for the second quarter of Fiscal Year 2021-22.
This second financial report of Fiscal Year 2021-22 provides an analysis of the financial
activity of the City from the months of July through December 2021. Based on information
available at the end of the second quarter, staff has made positive adjustments to year-
end projected revenues and preliminary expenditure savings have been identified that
should result in a healthy year-end budget surplus. Year-to-date expenditure budget
adjustments are fully offset by the additional projected revenues.
RECOMMENDED ACTION:
Review and discuss this report and provide any recommendations for consideration by
the City Manager and City Council.
DISCUSSION:
Economic Overview
Key economic indicators such as unemployment, taxable sales, and assessed property
values continue to improve, which is indicative of the recent robust improvement to the
economy. While recent trends in inflation have caused concern in the broader economy
and financial markets, the City is well-positioned to weather any short-term increase in
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Second Quarter Budget Update
February 9, 2022
Page 2
inflation thanks to the related increase in many of the City’s revenues such as sales tax
and transient occupancy tax as prices increase and having long-term labor contracts in
place with most of the City’s employee associations.
The economy is expected to continue to grow through the remainder of the fiscal year.
However, it is likely that the hardest hit industries will continue to see the strongest
recovery as a return to normal consumer behavior spurs further growth in sales
associated with restaurants, hotels, and general consumer goods purchased in brick-and-
mortar establishments.
General Fund Revenues
Overall General Fund revenue growth has outpaced projections generated by the City’s
consultants and staff that were incorporated into the adopted Fiscal Year 2021-22 budget.
Growth in sales tax and transient occupancy tax has been the most pronounced, but
growth in many other areas has contributed to a significant projected increase in General
Fund revenues of $15.9 million versus the adopted budget. Of note, sales tax in the
categories hardest hit by the pandemic (brick-and-mortar businesses and restaurants &
hotels) has now surpassed the record high levels seen just prior to the pandemic’s onset,
and transient occupancy tax is now projected to exceed the pre-pandemic high by year-
end.
The following table summarizes the changes to projected General Fund revenues versus
the adopted budget for Fiscal Year 2021-22. Details follow highlighting the reasons for
the material variances.
Fiscal Year 2021-22 Projected General Fund Revenues
A B C = B-A D = C/A
Revenues by Category PY Actual
Adopted
Budget
Projected
Actual Variance % Variance
Property Taxes 119,157,540$ 122,229,980$ 123,449,496$ 1,219,516$ 1.0%
Sales Tax 38,956,275 40,275,670 43,062,546 2,786,876 6.9%
Transient Occupancy Tax 16,886,197 19,027,493 25,573,145 6,545,652 34.4%
Other Taxes 12,849,340 10,815,117 12,095,117 1,280,000 11.8%
Service Fees & Charges 18,264,952 19,046,329 20,010,449 964,120 5.1%
Parking Revenue 7,074,853 5,681,942 5,989,448 307,506 5.4%
Licenses and Permits 5,133,399 5,106,646 5,106,646 - -
Property Income 5,115,255 5,044,403 5,922,927 878,524 17.4%
Fines & Penalties 4,012,568 3,292,102 3,379,886 87,784 2.7%
Intergovernmental 5,175,738 1,760,934 3,318,998 1,558,064 88.5%
Investment Earnings 1,598,624 1,112,200 1,112,200 - -
Misc Revenues 1,359,034 734,148 1,008,151 274,003 37.3%
Total Revenues 235,583,776$ 234,126,964$ 250,029,010$ 15,902,046$ 6.7%
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Second Quarter Budget Update
February 9, 2022
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Property Tax - Property taxes are the City’s single largest General Fund revenue and
represent approximately 50% of all General Fund revenues. As these revenues are
primarily dependent on the assessed valuation established in January of 2021, there is
typically very little variance seen from the original budget as the year progresses. The
growth rate for Fiscal Year 2021-22 was smaller than what has been seen in recent years,
primarily due to the lower 1.036% CPI factor. For Fiscal Year 2020-21, secured property
tax payments came in strong, $1.2 million over budget, which is an indication of timely
property tax payments and higher valuations. Based on the higher prior year revenues
and the most recent data shared by the City’s property tax consultant, staff has increased
the property tax revenue estimate for Fiscal Year 2021-22 by $1.2 million to $123.4
million.
Projections for Fiscal Year 2022-23 property tax revenues from the City’s property tax
consultant reflect a 6.5% increase in assessed values in the year ahead. This strong
growth is a result of the CPI factor returning to the maximum 2.0% allowed and adding
$1.2 billion to the assessed valuation, as well as continued strong property sales activity
and price appreciation adding $2.8 billion to the assessed valuation. The City’s total
assessed valuation for Fiscal Year 2022-23 is now projected to grow from $64.8 billion to
$69.0 billion.
Sales Tax - The second largest funding source for the General Fund is sales tax revenue,
making up more than 15% of General Fund revenues. The City’s sales tax base is largely
generated from three industry categories – autos and transportation, general consumer
goods, and restaurants/hotels. Most of these industries are also heavily impacted by
tourism.
Because sales tax revenues are remitted to the City by the State several months after
they are paid by consumers, information on which to report is less complete at the
midpoint of the fiscal year than for other revenue sources. However, based on the strong
growth seen in recent quarters and the latest projections from the City’s sales tax
consultants, staff has increased the sales tax revenue estimate for Fiscal Year 2021-22
by $2.8 million to $43.1 million, an increase of 6.9%.
This increase results from two primary drivers. First, while auto sales have slowed due
to inventory shortages, price increases have more than offset this decline and have
resulted in strong growth in this category of sales tax revenues of 8.3% on a quarter over
prior year quarter basis in the July to September quarter. Second, revenue from brick-
and-mortar retail establishments and restaurants & hotels have now surpassed the pre-
pandemic high as consumer behavior has largely returned to normal. These revenues
grew at rates of 44.1% and 46.7%, respectively, versus the same prior year quarter. Also
factoring into the strong growth is revenue from fuel and service stations, with 49.8%
growth versus the same prior year quarter due to higher fuel prices and higher demand.
Overall revenue was up 15.8% versus the same prior year quarter, leading to a year-end
projection of 10.5% growth for the full fiscal year versus the prior fiscal year.
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Second Quarter Budget Update
February 9, 2022
Page 4
The outlook for sales tax revenues remains positive despite supply chain, pricing, and
labor concerns, and the City expects to see continued growth in the years ahead. Early
projections anticipate 5.3% growth for next fiscal year as the effects of the pandemic
recede and trends return to more normal behavior.
Transient Occupancy Tax – The City has seen a steady rebound and comeback for
TOT revenues as the effects of the pandemic receded. Initially, the TOT budget for the
current fiscal year was developed in anticipation of full recovery of TOT revenues not
occurring until the end of Fiscal Year 2022-23. However, staff’s revised projection based
on revenues received in the first half of the fiscal year now contemplates an increase in
the budgeted revenues of $6.5 million to $25.6 million, an increase of 34.4%.
Two factors are causing this significant increase in the projection. First, revenue from
short-term lodging businesses, which grew throughout the pandemic, is at a record high
level. Second, many hotel properties are reporting record high TOT receipts and have
been doing so for multiple consecutive months. While occupancy levels have not
returned to pre-pandemic levels, they are slowly increasing. This lag in occupancy levels
has been largely offset by higher daily room rates, resulting in hotel TOT revenues that
are projected to approach the pre-pandemic high this fiscal year. When taken together,
the strong growth in residential TOT makes up for the slightly lower hotel TOT projection
and the two in total are now projected to result in a record year for TOT revenues for the
City. The year-end projected revenues would exceed the prior year by 51.4% and the
Fiscal Year 2018-19 record by $876,000.
Data provided by Visit Newport Beach illustrates these very positive trends:
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Second Quarter Budget Update
February 9, 2022
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Notably, there does not appear to be a significant impact on occupancy or room rates due
to the recent Omicron Variant surge in COVID-19 cases. This report was prepared based
on actual TOT revenue received through November due to the timing of receipt of TOT
revenues, which does not yet reflect any impact from the surge. While staff will evaluate
the actual revenue data once received and adjust accordingly, the data provided by VNB
does not suggest that a material impact on TOT revenues is likely.
While the Marriot remains under renovation, it is expected to reopen as VEA Newport
Beach before the end of the fiscal year with expanded meeting space, higher room rates,
and a full complement of rooms available that have not been usable during the renovation
process this past year. Staff has conservatively not included an impact in the TOT
revenue projection from the changes to the hotel, which should result in a positive
variance beyond the current projection once the hotel is fully open. The Fashion Island
Hotel remains closed, but is expected to reopen, hopefully in the fiscal year ahead,
following a sale and renovation. Similarly, because the timing is uncertain, staff has not
included any revenue from the Fashion Island Hotel in the projection. These reopening’s,
combined with the expected return of more business travelers, are anticipated to have
additional positive impact on the City’s TOT revenues.
The outlook for TOT revenues continues to exceed expectations, and the reopening of
the Marriott and Fashion Island hotels with significant renovations and higher room rates
presents further opportunity for growth. Early projections anticipate 8.7% growth in the
fiscal year ahead as the effects of the pandemic recede and trends return to more normal
behavior.
All Other Revenue – This category includes all other revenue sources other than the top
three (property tax, sales tax, and TOT). All Other Revenue is made up of the following:
Other Taxes – real property transfer taxes, business license taxes, marine charter
taxes, and franchise fees.
Service Fees and Charges – plan check fees, recreation classes, emergency
medical services fees, and numerous other cost-of-service fees.
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Second Quarter Budget Update
February 9, 2022
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Parking Revenue – all General Fund related metered parking fees that are
assessed throughout the various parking zones of the City.
Licenses and Permits – fees charged to process building related permits, street
closure permits, dog licenses, and police tow franchise fees.
Property Income – City owned and managed income producing properties, long-
term ground leases to concessions, restaurants, hotels and other businesses and
organizations, and rental of City facilities to the public.
Fines and Penalties – parking citation fines collected by the City, administrative
citation fines, fines remitted to the City from the County for vehicle code violations,
and false alarm penalties.
Intergovernmental Revenues – federal, state, and local grant revenues, which
includes, but is not limited to, the City’s portion of the ½ cent sales tax revenue
paid to the County for public safety, state mandate reimbursements,
reimbursement for strike teams sent to assist with fires, and revenue sharing with
the County of Orange under the Waste Disposal Agreement (WDA).
Investment Earnings – revenue generated from the investment of City funds.
Miscellaneous Revenues – restricted revenue, damage to City property, bad debt,
donations and contributions, non-operating revenues such as proceeds from the
sale of materials and equipment, and other miscellaneous revenues.
Growth in other revenues as a whole is projected to be $5.4 million above the adopted
budget or 10.2%. Primary drivers of this growth include:
Service fees and charges revenues are projected to exceed the adopted budget
by $1.0 million primarily due to increased revenue received from recreation fee-
based classes and the Junior Lifeguard program as discussed in more detail in the
prior quarter’s financial report.
Property income revenues are projected to exceed the adopted budget by $0.9
million, primarily due to increased percentage-based rent revenues from the Lido
House Hotel lease due to the hotel’s increased revenues.
Intergovernmental revenues are projected to exceed the adopted budget by $1.6
million, primarily due to adjustments related to mutual aid reimbursements and SB-
2 Permanent Local Housing Allocation grant funds, as discussed in the prior
quarter’s financial report in more detail.
Property transfer tax revenues are projected to exceed the adopted budget by $1.3
million due to the strong sales activity discussed earlier in this report.
General Fund Expenditures
The Fiscal Year 2021-22 General Fund revised expenditure budget totals $238.3 million.
The year-to-date spending trends in the current fiscal year are generally consistent with
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Second Quarter Budget Update
February 9, 2022
Page 7
prior years and do not indicate any cause for concern. Existing appropriations are on
target to fund all current operational expenditures and staff are currently projecting sizable
year-end budget savings comparable to what has been generated in prior fiscal years.
The table below summarizes the year-to-date changes to the adopted expenditure budget
for Fiscal Year 2021-22, as well as projected expenditure savings by budget category.
Details follow highlighting the reasons for the material variances. As the fiscal year is
only 50% complete, budget savings as currently projected will be revised upward or
downward as the year progresses based on new information. Based on trends seen in
prior years, additional budget savings are anticipated to materialize as the fiscal year
progresses.
Fiscal Year 2021-22 Projected General Fund Expenditures
Significant expenditure budget variances are as follows:
The revised salary and benefits budget totals $158.9 million, an increase of $7.2
million. The increase is primarily due to the appropriation of $5.0 million from Fiscal
Year 2020-21 year-end budget surplus as an additional discretionary payment to
CalPERS to further reduce the City’s unfunded pension liability. The remaining
$2.2 million relates to recently approved contracts with the majority of the City’s
employee associations. The City does not budget for unknown labor costs, which
requires mid-year appropriations for negotiated salary and benefit increases in the
year in which new labor contracts are negotiated. While the budget for the current
year did include a $2.0 million vacancy factor, additional salary and benefit savings
beyond the vacancy factor of $2.4 million are currently projected.
Increases to the contract services budget relate to a variety of routine mid-year
adjustments previously approved by the City Council, including $0.6 million added
to the contract instructors’ budget for Recreation and Senior Services that is fully
offset by higher revenues, $0.4 million for the Be Well OC program, $0.3 million
for the Medical IGT Program that is fully offset by higher revenues, and
appropriations offsetting several donations. Based on staff’s most recent budget
A B C = A-B D = C/A
Expenditures by Category
Adopted
Budget
Revised
Budget
Projected
Actual
Savings
(Overage)% Variance
Salary & Benefits 151,713,101$ 158,896,146$ 156,492,417$ 2,403,728$ -1.5%
Contract Services 24,702,901 27,232,515 25,077,927 2,154,588 -7.9%
Grant Operating 600,000 926,490 926,490 - -
Utilities 3,011,315 3,248,516 3,806,096 (557,580) 17.2%
Supplies & Materials 3,739,730 4,397,470 4,305,408 92,061 -2.1%
Maintenance & Repair 12,640,923 13,497,005 13,464,754 32,251 -0.2%
Travel & Training 814,868 833,079 576,126 256,953 -30.8%
General Expenses 2,130,552 2,304,168 2,304,168 - -
Internal Svc Charge 25,078,890 25,093,732 25,093,732 - -
Risk Management 750,915 750,915 750,915 - -
Capital Expenditures 780,438 1,145,810 1,145,810 - -
Total Expenditures 225,963,632$ 238,325,844$ 233,943,843$ 4,382,001$ -1.8%
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Second Quarter Budget Update
February 9, 2022
Page 8
meetings with City Departments, contract services savings of $2.2 million are
currently projected.
Staff have identified an issue with the City’s recent budgeting for utilities. A portion
of this issue was addressed with a budget amendment approved by the City
Council in the first quarter. However, additional overages are now apparent. Staff
is evaluating this issue and will be making adjustments in the Fiscal Year 2022-23
budget to address it. As budget savings in other expenditure categories are
anticipated to fully offset the projected $0.6 million overage, staff is not
recommending a further adjustment to the utilities budget at this time.
As the year is only 50% complete, savings projections are subject to revision as the year
progresses.
Staff will also be including a budget amendment with this report when it is provided to the
City Council to obtain authorization for a transfer of expenditure appropriations from the
General Fund to the Information Technology Internal Service Fund in the amount of
$31,764, which cannot be approved administratively due to the movement between two
funds. This is a routine request consolidating funding related to a previously approved
new phone system for the City’s lifeguard towers.
On October 26, 2021, the City Council approved $31.0 million of recommended
appropriations from prior year unrestricted General Fund resources as follows:
1. CalPERS Unfunded Liability – $5.0 million to bring the City’s annual unfunded
liability contribution to CalPERS up from $35 million to $40 million, consistent with
recent years and the recommendation of the Finance Committee.
2. Facilities and Infrastructure Replacement Liabilities – $10.5 million toward
additional contributions to long-term infrastructure liabilities within the Facilities
Financial Plan and Harbor and Beaches CIP. Funds were set aside, with specific
allocations being recommended as part of the upcoming Fiscal Year 2022-23
budget process.
3. CIP and Neighborhood Enhancements – $15.5 million toward the Fiscal Year
2022-23 capital improvement program, to include neighborhood enhancement
projects. Funds were set aside with specific allocations being recommended as
part of the upcoming Fiscal Year 2022-23 budget process.
Other than the previously discussed appropriation toward the City’s CalPERS unfunded
liability, the remainder of these appropriations are reflected in the budget as transfers out
of the General Fund.
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Second Quarter Budget Update
February 9, 2022
Page 9
General Fund Sources, Uses, and Projected Surplus
As a result of the strong revenue growth seen year-to-date and projected continued strong
revenue growth through the end of the fiscal year, a budget surplus is anticipated based
on the additional revenues alone. Projected expenditure savings, which based on prior
year trends will likely exceed what is currently projected, will add to that surplus. While
this is all good news, the year is only 50% complete and staff remain cautious. Staff will
continue to revise these projections as the year progresses, with an update to be provided
to the Finance Committee and City Council following the conclusion of the third quarter
of the fiscal year.
The table below illustrates the prior year sources and uses of funds as compared to the
adopted budget, the revised budget, and the projected year-end results:
Fiscal Year 2021-22 Projected General Sources, Uses, and Budget Surplus
As can be seen in the table above, even with the sizable appropriations earlier this year
that allocated three prior years’ budget surpluses, current projections now reflect a $15.2
million budget surplus for the current fiscal year. As discussed earlier in this report, it is
quite possible that additional budget savings will be identified in the second half of the
year that may increase the surplus. However, it should again be noted that the City’s
financial situation can change based on economic forces outside of our control. Prudence
is therefore dictated until the year is complete and the actual budget surplus is calculated.
Other Funds
Staff have evaluated the fiscal condition of the City’s other major operating funds
(Tidelands, Water, and Wastewater). An analysis of the budget performance for these
funds through the second quarter of this fiscal year indicates that no budget adjustments
are necessary and variances between budgeted and actual amounts are within reason.
Conclusion
As a result of conservative budgeting and sound financial policies, the City remains well
positioned to continue delivering a high level of service to the community while targeting
A B C=B-A D=C/A
FY 2020-21 FY 2021-22 FY 2021-22 FY 2021-22 Variance % Variance
Actual Adopted Revised Projected
BEGINNING UNRESTRICTED FUND BALANCE 24,081,225$ 31,036,884$ 31,036,884$ 31,036,884$ -$ 0.0%
SOURCES:
Operating Revenues 235,583,776 234,126,964 250,029,010 250,029,010 15,902,046 6.8%
Less: Restricted Revenues (958,152) (1,128,513) (1,128,513) (1,128,513) - 0.0%
Prior Year Resources Carried Forward 2,075,632 - 3,072,666 3,072,666 3,072,666 ---
Release of Restricted Funds 2,392,197 1,220,000 1,220,000 1,220,000 - 0.0%
Transfers In from Other Funds 21,804,961 11,977,157 11,977,157 11,977,157 - 0.0%
TOTAL SOURCES 260,898,414 246,195,608 265,170,320 265,170,320 18,974,712 7.7%
USES:
Operating Expenditures 220,705,249 225,963,632 238,325,844 233,943,843 7,980,211 3.5%
Transfers Out 27,467,575 20,200,000 47,030,300 47,030,300 26,830,300 132.8%
Resources Carried Forward to FY 2021-22 3,072,666 - - - - ---
Addition to 25% Contingency Reserve 2,697,265 - - - - ---
TOTAL USES 253,942,755 246,163,632 285,356,144 280,974,143 34,810,511 14.1%
ENDING UNRESTRICTED FUND BALANCE 31,036,884$ 31,068,860$ 10,851,060$ 15,233,061$ (15,835,799)$ -51.0%
CHANGE IN FUND BALANCE 6,955,659$ 31,976$ (20,185,824)$ (15,803,823)$ (15,835,799)$
Category
45
Second Quarter Budget Update
February 9, 2022
Page 10
surplus resources to key priorities at year-end as has been the case for a number of
consecutive years. Staff recommends that the Finance Committee review and discuss
this report and provide any recommendations for City Manager and City Council
consideration prior to the February 22, 2022, City Council meeting, at which time this
report will be presented.
Prepared and Submitted by:
/s/ Scott Catlett
____________________________
Scott Catlett
Finance Director / Treasurer
46
02/09/2022
1
2021‐22
Second Quarter Financial Report
Finance
Committee
February 9, 2022
City of Newport Beach –Finance Department 2
Projected General Fund Revenues
Adopted Budget $ 234.1 million
First Quarter Projection $ 237.9 million
Second Quarter Projection $ 250.0 million
•$15.9 million of pr0jected positive variance
•Primary variances from adopted budget
•Property Tax + $1.2 million
•Sales Tax + $2.8 million
•Transient Occupancy Tax + $6.5 million
•Property Transfer Tax + $1.3 million
$‐
$50
$100
$150
$200
$250
$300
Adopted First Quarter Second QuarterMillions
Property Tax Sales Tax TOT Other
1
2
47
02/09/2022
2
City of Newport Beach –Finance Department 3
Property Tax
•Represents approximately 50% of
General Fund revenues
•On track to exceed the adopted
budget based on strong assessed
value growth reflected in the final
tax roll
•Staff does not anticipate further
revisions to the projection for
secured property tax
•6.5% growth projected for FY
2022‐23, including the full 2.0%
allowable CPI factor
$97
$102
$108
$113
$119
$123
$90
$95
$100
$105
$110
$115
$120
$125
$130
2016‐17
Actual
2017‐18
Actual
2018‐19
Actual
2019‐20
Actual
2020‐21
Actual
2021‐22
ProjectedMillions+4.8%
+6.7%
+4.6%
+5.2%
+3.6%
City of Newport Beach –Finance Department 4
Sales Tax
•FY 2020‐21 was a record year for sales tax
revenues
•Growth expected to continue
•Cautious growth projections have turned
optimistic as multiple quarters of significant
growth have now been recorded
•Auto sales remain strong, with inventory
declines offset by price increases
•Restaurant and hotel receipts have now
exceeded pre‐pandemic levels
•Brick and mortar retail establishment receipts
are back as well
$34 $35
$39
$36
$39
$43
$30
$34
$38
$42
$46
2016‐17
Actual
2017‐18
Actual
2018‐19
Actual
2019‐20
Actual
2020‐21
Actual
2021‐22
ProjectedMillions+4.0%
+9.9%‐5.9%+7.5%
+10.5%
3
4
48
02/09/2022
3
City of Newport Beach –Finance Department 5
Transient Occupancy Tax
•Revenue is now projected to exceed pre‐
pandemic levels this fiscal year
•Hotel TOT revenues are projected to
exceed pre‐pandemic levels next fiscal year
and residential TOT revenues are at a
record high level and growing
•Cautious growth projections have turned
optimistic as multiple hotel properties are
reporting record TOT collections with room
rates consistently higher than in prior years
•Projections do not account for any impact
from the Marriott Hotel renovation and do
not assume a reopening of the Fashion
Island Hotel
$22 $23
$25
$21
$17
$26
$14
$18
$22
$26
$30
2016‐17
Actual
2017‐18
Actual
2018‐19
Actual
2019‐20
Actual
2020‐21
Actual
2021‐22
ProjectedMillions+2.4%
+8.2%
‐15.6%
‐19.0%
+51.4%
City of Newport Beach –Finance Department 6
Historical General Fund Revenues
$235
$241
$251
$219
$200 $204
$217
$230 $230 $236
$250
$190
$200
$210
$220
$230
$240
$250
$260
2016‐17
Actual
2017‐18
Actual
2018‐19
Actual
2019‐20
Actual
2020‐21
Actual
2021‐22
ProjectedMillions
Pre‐COVID Projection Initial Post‐COVID Projection Actual and Current Projection
5
6
49
02/09/2022
4
City of Newport Beach –Finance Department 7
Other General Fund Revenues
•Other revenues are projected to exceed the adopted budget by $5.4 million
or 10.2%
•Service fees and charges + $1.0 million primarily due to increased
revenues from recreation classes
•Property income + $0.9 million primarily due to increased percentage‐
based rent revenues
•Intergovernmental revenues + $1.6 million from mutual aid
reimbursements and SB‐2 Permanent Local Housing Allocation funds
•Property transfer tax + $1.3 million
City of Newport Beach –Finance Department 8
Projected General Fund Expenditures
Adopted Budget $ 226.0 million
Revised Budget $ 238.3 million
Second Quarter Projection $ 233.9 million
•$5.0 million additional payment to CalPERS included in revised budget
•$3.1 million of budget carryovers
•Budget amendments for various purposes, most notably
•Implementation of new labor agreements
•Engineering costs for Balboa Island undergrounding district
•Budget savings of $4.4 million projected, which will likely increase
7
8
50
02/09/2022
5
City of Newport Beach –Finance Department 9
General Fund Sources and Uses
•Increase in transfers out
reflects the use of prior year
surplus for FFP and CIP
transfers
•Current projection of $15.2
million surplus
•Budget savings will likely
increase later in the year
•Staff remain cautious and
continue to evaluate trends
and new information
ABC=B‐A
FY 2020-21 FY 2021-22 FY 2021-22 FY 2021-22 Variance
Actual Adopted Revised Projected
BEGINNING UNRESTRICTED FUND BALANCE 24,081,225$ 31,036,884$ 31,036,884$ 31,036,884$ -$
SOURCES:
Operating Revenues 235,583,776 234,126,964 250,029,010 250,029,010 15,902,046
Less: Restricted Revenues (958,152) (1,128,513) (1,128,513) (1,128,513) -
Prior Year Resources Carried Forward 2,075,632 - 3,072,666 3,072,666 3,072,666
Release of Restricted Funds 2,392,197 1,220,000 1,220,000 1,220,000 -
Transfers In from Other Funds 21,804,961 11,977,157 11,977,157 11,977,157 -
TOTAL SOURCES 260,898,414 246,195,608 265,170,320 265,170,320 18,974,712
USES:Operating Expenditures 220,705,249 225,963,632 238,325,844 233,943,843 7,980,211 Transfers Out 27,467,575 20,200,000 47,030,300 47,030,300 26,830,300
Resources Carried Forward to FY 2021-22 3,072,666 - - - -
Addition to 25% Contingency Reserve 2,697,265 - - - -
TOTAL USES 253,942,755 246,163,632 285,356,144 280,974,143 34,810,511
ENDING UNRESTRICTED FUND BALANCE 31,036,884$ 31,068,860$ 10,851,060$ 15,233,061$ (15,835,799)$
CHANGE IN FUND BALANCE 6,955,659$ 31,976$ (20,185,824)$ (15,803,823)$ (15,835,799)$
Category
City of Newport Beach –Finance Department 10
Recommended Action
Staff recommends that the Finance Committee:
•Review and discuss this report
•Provide any recommendations for consideration by the
City Manager and the City Council
9
10
51
02/09/2022
6
City of Newport Beach –Finance Department 11
Questions?
11
52
CITY OF NEWPORT BEACH
FINANCE COMMITTEE
STAFF REPORT
Agenda Item No. 5D
February 9, 2022
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Scott Catlett, Finance Director/Treasurer
949-644-3123, scatlett@newportbeachca.gov
SUBJECT: INTERNAL SERVICE FUNDS UPDATE
SUMMARY:
The City uses internal service funds to allocate the cost of one department providing
goods and services to other departments, as well as to collect funds to cover the future
cost of certain expenses such as vehicle replacements. Over the last six months, City
staff have comprehensively reviewed the internal service funds to consider whether their
structure, current and projected balances, and rates and rate methodology are still
appropriate and fully reflective of the current and anticipated future needs of the
applicable programs. This report summarizes the purpose of each fund and the related
improvements that are underway as part of the budget development for Fiscal Year 2022-
23. It is not currently anticipated that there will be a significant increase in the total ISF
contribution from the General Fund recommended as part of the charges to departmental
operating budgets for Fiscal Year 2022-23. However, certain rates are anticipated to
increase materially on an individual basis as further discussed in this report.
RECOMMENDED ACTION:
Review and discuss the changes to internal service fund rates discussed in this report
and provide any recommendations for consideration by the City Manager and City
Council.
DISCUSSION:
Utilization of internal service funds (ISFs) is a best practice in government agencies,
which when properly funded result in fewer unanticipated budget demands and more
regular allocated costs to the contributing funds. Absent their use, resources must be
appropriated on an as-needed basis as expenses arise, which can result in irregular
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Internal Service Funds Update
February 9, 2022
Page 2
funding requirements. Contributions to the City’s ISFs are funded from the operating
budget of each City department. Departments are charged a rate equal to their
proportionate share of the total “revenue” required to fund each program at its target
funding level. The City has established internal service funds in five major categories:
Insurance (Risk Management), Compensated Absences, Other Post-Employment
Benefits (Retiree Medical Insurance), Equipment, and Information Technology. Detailed
discussions of each of these categories and the adequacy of current rates follow.
Insurance
The City currently has three sub-funds comprising the Insurance Reserve Internal
Service Fund (ISF): General Liability ISF, Workers’ Compensation ISF, and Uninsured
Claims ISF. The costs associated with each program are typically claims administration,
legal defense, insurance premiums, self-insured retention, and the establishment of
appropriate loss reserves. The City employs an actuary to estimate the liabilities
associated with both the general liability and workers’ compensation programs, while the
Uninsured Clams ISF is utilized to recover costs for any non-tort litigation or claims not
covered by insurance and to pay premiums on the City’s property, crime, and other
insurance policies not related to the General Liability and Workers’ Compensation
programs.
General Liability and Workers’ Compensation ISFs – The full expected value of the
long-term claims liabilities is booked within these ISFs, and funds are collected and held
therein to offset the future payments associated with the liabilities. The ISFs are
considered fully funded when the cash balances are at least equal to the amount of the
long-term liabilities. As actuarial estimates are subject to some uncertainty, the City has
established a target funding level in excess of the expected liability in order to cover
contingencies. It is the City’s policy to fund general liability and workers’ compensation
obligations at an amount sufficient to establish an 80% confidence level, as opposed to
the 75% confidence level often seen in government agencies. However, over time this
strategy can result in excess funds being collected and the cash balances in the ISFs
exceeding the liability. Projections at the time the Fiscal Year 2021-22 budget was
developed indicated a likely excess of $10.7 million versus liabilities of $25.3 million. To
avoid continued over collection, the Fiscal Year 2021-22 budget included reduced
internal service charges and instead utilized existing fund balance for a portion of the
annual funding requirement, thereby drawing down on this sizable fund balance by a
projected $2.6 million. It is anticipated that the same approach will be utilized in Fiscal
Year 2022-23 in order to prudently not charge the departmental operating budgets a
higher rate when the target funding level has been exceeded. Rates and fund balances
are now evaluated annually by the Finance Department, and rates will be increased at
such time as the excess funds on hand have been reduced to an appropriate level.
Uninsured Claims ISF – The Uninsured Claims ISF was established several years ago
in an effort to remove certain costs from the other insurance ISFs that did not have a
direct relationship to those programs, including property, crime, and other insurance
premiums and reserves for tort claims and litigation expenses not covered by insurance.
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Internal Service Funds Update
February 9, 2022
Page 3
In further review of the Uninsured Claims ISF and in discussions with the staff managing
the programs contained therein, it is more appropriate to account for these programs in
two funds. This change will create a fourth sub-fund by splitting the existing Uninsured
Claims ISF into two – one to account for the non-tort litigation and related claim
settlements and the other to account for the insurance policies with independent third
parties for other loss risks. As the claims for non-tort matters are relatively low in dollar
amount, it is not anticipated that the City will use an actuary to estimate the expected
liability and funding level. In addition, in an effort to consolidate outside counsel
expenditures into a single cost center, the outside counsel cost center within the City
Attorney’s Office budget is being relocated to this ISF and consolidated with the outside
counsel budget therein as part of the Fiscal Year 2022-23 budget. The City Attorney and
Human Resources Director have been involved in evaluating these changes and support
their implementation as part of the Fiscal Year 2022-23 budget.
Rate Setting Methodology Changes – In accordance with industry best practices, the
forthcoming Fiscal Year 2022-23 budget will also reflect improvements to the rate setting
methodology for all four of the insurance ISF funds. Previously the rates were set by the
Finance Department based on historical claims, which can result in significant rate
volatility. Industry best practices recommend a mix of allocation factors, including
historical claims as well as other variables such as number and type of employees and
number of vehicles that better reflect the likelihood of future claims in addition to the
actual claims history. These improvements will result in less variability in the internal
charges to individual departments due to claims variances. Additionally, the Uninsured
Claims ISF historically has utilized the allocation methodology for the General Liability
ISF, which does not correlate well to the types of losses accounted for therein. The most
material cost is for property insurance, and those premiums will now be allocated based
on the schedule of values for the City’s facilities.
Compensated Absences
The Compensated Absences ISF is used as a budget smoothing technique for cash
payments to employees for flex leave, vacation leave, and sick leave upon separation
from the City or pursuant to the established memoranda of understanding with the City’s
employee groups. Each department makes contributions to this ISF at a rate equal to
3.5% of salaries. The maximum reserve balance is currently set at fifty percent of the
projected liability. Staff believe that the current rate methodology is sound and the
funding levels appropriate. No changes are recommended to this ISF at this time.
Other Post-Employment Benefits (OPEB)
The City currently has two funds comprising the Retiree Insurance ISF: Operating ISF
and Conversion ISF. These funds have been used to account for the cost of providing
post-employment health care benefits and setting aside funds to offset the long-term
OPEB liability. However, as the City has now established an external OPEB trust with
CalPERS, both of these funds will be closed and not reflected in the Fiscal Year 2022-
23 budget and financial statements. Remaining activity related to retiree medical
benefits will be handled via the City’s payroll fund consistent with other benefits on a go
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Internal Service Funds Update
February 9, 2022
Page 4
forward basis. At the March 10, 2022, Finance Committee meeting, an update will be
provided to the Committee covering all aspects of this program and its funding status.
Equipment
The City currently has multiple funds comprising the Equipment ISF: Equipment
Maintenance ISF, Equipment Replacement – All Other ISF, Equipment Replacement –
Police ISF, Equipment Replacement – Fire ISF, Parking Equipment ISF, and Recreation
Equipment ISF. The main purpose of the Equipment ISF is to accumulate funds for the
maintenance and regular replacement of vehicles and other major pieces of equipment.
This ISF receives operating funding from each department by way of charges
determined by equipment usage and a replacement charge based on an annual
assessment of the equipment’s age, condition, and anticipated future replacement date
and cost.
Equipment Replacement – All Other ISF – This fund accounts for the replacement of
the City’s vehicle fleet excluding the Police Department. This fund’s rates were
significantly increased in Fiscal Year 2021-22 and modified to incorporate an inflation
factor in the rate methodology. These changes were designed to ensure that adequate
funding is collected for timely vehicle replacements and included significant
improvements to the rate setting methodology. For Fiscal Year 2022-23, it is anticipated
that the proposed rates will be similar to the prior year, with a General Fund impact of
approximately $3 million.
Equipment Replacement – Police ISF – This fund accounts for the replacement of the
City’s Police Department vehicles and equipment that is mounted to the vehicles. In
addition, and starting with Fiscal Year 2022-23, the Police Department is recommending
expanding the use of this ISF to begin accumulating funds towards the replacement of
additional equipment, such as in-car computers, in-car video systems, gas masks, and
patrol rifles, which have previously been purchased using one-time funding. To account
for this, it is anticipated that the premium charged to the departmental operating budget
in the General Fund will increase by approximately $73,000 per year. In addition, the
City Council was advised during the recent planning session of the need to fund the
replacement of the Department’s tasers and the implementation of body-worn cameras.
Staff is also recommending the inclusion of the tasers and body-worn cameras within
this ISF at an annual cost of approximately $305,000 on an ongoing basis. In addition,
to ensure that adequate funding is collected for timely vehicle replacements, staff is
recommending increasing the rates for Fiscal Year 2022-23 to reflect current costs and
incorporate a prospective inflation factor into the rate methodology, which will result in
an additional increase of approximately $110,000 per year. The total required increase
to the General Fund contribution to this ISF is anticipated to be $488,000 in Fiscal Year
2022-23, for a total contribution of approximately $1.18 million per year. However, in
reviewing the existing sizable cash balance on hand in this ISF, and in order to prevent
excess funds being collected, staff intends to reduce the Fiscal Year 2022-23 internal
service charge to the Police Department budget and instead draw down $200,000 of
fund balance for a portion of the annual funding requirement, resulting in a reduced net
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Internal Service Funds Update
February 9, 2022
Page 5
increase of $288,000 to the General Fund contribution. The rates and fund balance will
be evaluated annually by the Finance Department and Police Department, and rates will
be increased at such time as the excess funds on hand have been reduced to an
appropriate level.
Equipment Maintenance ISF – This fund accounts for the maintenance of the City’s
vehicle fleet, excluding vehicles assigned to the Police Department. This ISF centralizes
and allocates maintenance costs, but no funds are accumulated for this purpose and the
maintenance costs are funded on a pay-as-you-go basis, with the rates only anticipated
to cover the current year equipment maintenance budget, including labor, parts, and
vehicle repairs. It is anticipated that the premium for Fiscal Year 2022-23 will be
comparable to that of the prior year, with a General Fund impact of approximately $1.6
million. No changes are recommended to this ISF at this time.
Recreation Equipment ISF – This fund accounts for replacement of recreation
equipment and includes an infrastructure component to cover court resurfacing for
various sports. While historically, the premiums and expenditures from this ISF would
fluctuate each year, the rates have been steady in recent years, with an anticipated
General Fund impact of approximately $196,000 in Fiscal Year 2022-23. At the recent
City Council planning session, staff discussed conducting a consultant study to inventory
the full complement of recreation equipment and lesser facilities throughout the City.
This project will be recommended for inclusion in the Fiscal Year 2022-23 capital
improvement program. Once the study is complete, the adequacy of the funding
contributed to this ISF will be evaluated to determine whether additional funding is
required based on the consultant’s inventory.
Fire Equipment ISF – This fund accounts for the replacement of the City’s Fire
Department operational equipment, such as vests, gurneys, ropes, air compressors,
chainsaws, and extrication tools. The Department’s vehicles are funded through the
Equipment Replacement – All Other ISF. No rate methodology changes or material rate
increases are contemplated for this ISF in Fiscal Year 2022-23, with the General Fund
impact anticipated to be comparable to Fiscal Year 2021-22 at approximately $409,000.
Parking Equipment ISF – This fund accounts for the replacement of the City’s parking
equipment, including meters, pay stations, and signage. No rate methodology changes
or material rate increases are contemplated for this ISF in Fiscal Year 2022-23, with the
General Fund impact anticipated to be comparable to Fiscal Year 2021-22 at
approximately $400,000.
Information Technology (IT)
The City has two major IT ISFs, IT Operating ISF and IT Strategic ISF, to account for the
cost of maintaining and replacing the City’s computers, printers, copiers, and
telecommunication equipment, as well as the purchase of new and replacement software
systems. It is anticipated that there may be an increase to the charges to the
departmental operating budgets to coincide with personnel salary and benefit increases
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for the IT Operating ISF resulting in a net increase in the General Fund contribution. For
the IT Strategic ISF, it’s anticipated that the rates for Fiscal Year 2022-23 will be
comparable to those in the prior year, with a General Fund impact of approximately $1.8
million. Staff is not recommending any changes to the rate setting methodology for these
funds at this time.
Concluding Thoughts
With the recent evaluation of the City’s ISFs, the City’s already robust financial planning
practices in this area have been further enhanced and refined to ensure that the City’s
ISFs remain on sound financial footing in the years ahead. City staff will continue
finalizing the Fiscal Year 2022-23 rates for each of the ISFs as part of the budget
development process. The Finance Committee will review the finalized fiscal impact of
the improvements identified in this report at the April 14, 2022, Finance Committee
meeting as part of the Proposed Fiscal Year 2022-23 Budget Overview.
Prepared and Submitted by:
/s/ Amber Haston
_____________________________
Amber Haston
Senior Budget Analyst
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Internal Service Funds Update
Finance
Committee
February 9, 2022
City of Newport Beach –Finance Department 2
Background
•Utilization of Internal Service Funds (ISFs) is a best practice in government
agencies
•Proper funding results in fewer unanticipated budget demands and more
regular allocated costs to the contributing funds
•Avoids the need for larger, irregular appropriations on an as‐needed basis as
expenses arise
•Contributions are funded from operating budget contributions from the
related City Department(s)
1
2
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2
City of Newport Beach –Finance Department 3
Background
•The City has established ISFs in five categories
•Insurance (risk management)
•Compensated absences
•Other post‐employment benefits (OPEB)
•Equipment
•Information technology
City of Newport Beach –Finance Department 4
Insurance ISFs
•The City has established three insurance ISFs
•General Liability
•Workers’ Compensation
•Uninsured Claims (to be split into two funds next fiscal year)
•Last fiscal year, staff evaluated the funding levels of these funds and determined that
they were overfunded by over 40% ($10.7 million)
•Rates were reduced to gradually draw down the excess fund balance
•This year, the rate setting methodologies are being revised to reduce volatility and bring
the methodology in line with industry best practices
•Rates and fund balances are now evaluated annually
3
4
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3
City of Newport Beach –Finance Department 5
Compensated Absences ISF
•Funded from regular transfers to ensure that adequate funds are set aside
for payments to employees for flex leave, vacation leave, and/or sick leave
upon separation or per the cash‐out provisions of MOUs
•Contributions equal to 3.5% of payroll
•Reserve balance set at 50% of the projected liability
•The current rate methodology and funding levels are appropriate
•No changes are recommended at this time
City of Newport Beach –Finance Department 6
OPEB ISFs
•The City currently has two OPEB‐related ISFs
•Operating ISF
•Conversion ISF
•These funds are used to account for the cost of providing the OPEB benefit as well as
setting aside funds to offset the liability
•With the implementation of the City’s OPEB trust with CalPERS, these funds are no
longer necessary
•Remaining activity associated with the retiree medical benefits can be handled via
the City’s payroll fund consistent with other benefits
•The Finance Committee will receive a detailed OPEB update at the March meeting
5
6
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4
City of Newport Beach –Finance Department 7
Equipment ISFs
•The City currently has five equipment replacement ISFs
•Police (vehicles and equipment)
•Fire (equipment only)
•All Other (all other vehicles (including Fire) and equipment)
•Recreation
•Parking
•The City also has an equipment maintenance ISF that funds the in‐house
fleet maintenance function and related costs on a pay‐as‐you‐go basis
City of Newport Beach –Finance Department 8
Equipment ISFs
•In consultation with the Police Department, the Finance Department is
recommending several key changes to the Police Equipment ISF for
implementation in FY 2022‐23
•$288,000 increase to the overall allocation
•$73,000 for smaller equipment not historically included (comparable to
current Fire methodology)
•$305,000 for body‐worn cameras
•$110,000 for tasers
•Offset by a $200,000 drawdown on excess fund balance
7
8
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5
City of Newport Beach –Finance Department 9
Equipment ISFs
•The Equipment Maintenance –All Other rates were increased substantially
last year and no increases to the rates are recommended at this time,
though the rate methodology has been further refined this year
•The Recreation ISF is adequately funded at this time, but an ongoing study
to inventory the full complement of recreation equipment and lesser
facilities may result in a need to increase this contribution in FY 2023‐24
•The Fire and Parking ISFs are adequately funded, and no changes are
recommended to their rate methodologies
City of Newport Beach –Finance Department 10
Information Technology ISFs
•The City currently has two IT ISFs
•IT Operating
•IT Strategic
•Rates are set by the IT Division staff based on operating costs and an
analysis of long‐term hardware and software needs
•No increased costs or rate methodology changes are anticipated other than
minor cost increases related to routine increases in personnel and contract
costs
9
10
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City of Newport Beach –Finance Department 11
Summary of Proposed Changes
•The changes that will be implemented in FY 2022‐23 further strengthen the City’s
financial management practices related to the ISFs
•Minimal cost increases on a citywide basis will be required, though improved allocation
methodologies may result in a shifting of costs between funds
No. Scenario
Rate
Methodology
Change
Citywide Cost
Impact
1 Insurance ISFs Yes No
2 Compensated Absences No No
3 OPEB (to be eliminated) No No
4 Equipment Yes $288,000 *
5 Information Technology No No
* $488,000 following multi‐year drawdown of excess fund balance
City of Newport Beach –Finance Department 12
Recommended Action
Staff recommends that the Finance Committee:
•Review and discuss this report
•Provide any recommendations for consideration by the
City Manager and the City Council
11
12
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7
City of Newport Beach –Finance Department 13
Questions?
13
65
CITY OF NEWPORT BEACH
FINANCE COMMITTEE
STAFF REPORT
Agenda Item No. 5E
February 9, 2022
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Scott Catlett, Finance Director/Treasurer
949-644-3123, scatlett@newportbeachca.gov
SUBJECT: INTERNAL AUDIT PROGRAM REPORTS (PART 2)
SUMMARY:
In the spirit of continuous improvement and with support and direction from the City
Manager’s Office, the Finance Department was charged with developing an ongoing
comprehensive internal audit program. Audit firm Moss Adams previously prepared a
recommended internal audit program for Fiscal Year 2020-21 that focused on addressing
priorities identified as part of the City’s risk assessment and internal controls review. On
January 13, 2022, the Committee reviewed reports covering three of the five internal
control areas recommended for Fiscal Year 2020-21. This report summarizes the
recommended improvement opportunities for the remaining two of the five internal control
areas of focus recommended for Fiscal Year 2020-21.
RECOMMENDED ACTION:
Review and discuss the reports and provide recommendations for City Manager
consideration.
DISCUSSION:
Background
While the City has managed a great many financial statement and compliance audits over
the years, the City has not historically had a robust internal audit program. The current
program was initiated in 2020 with an enterprise risk assessment and initial evaluation of
internal control risks. These processes served as the primary building blocks to inform
and develop a workplan to further assess and test internal controls, conduct performance
audits, and provide management consulting services when appropriate. From this
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February 9, 2022
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workplan, an internal audit program was developed for Fiscal Year 2020-21, and the
remaining components of the workplan that were not undertaken during Fiscal Year 2020-
21 will be reviewed in future fiscal years.
Current Progress
Of the workplan components identified by Moss Adams, the Fiscal Year 2020-21 Internal
Audit Program included five focus areas, three of which were reviewed by the Finance
Committee at the January 13, 2022, meeting. These three key control areas covered
procurement operations, inventory management, and an inventory of the City’s fiscal
policies and procedures (P&Ps). The assessments of the remaining two focus areas
covering cash handling and information technology systems access were completed in
January 2022. The final summary reports for these remaining two completed assessment
areas are attached to this staff report and were reviewed in detail by City staff. Detailed
observations were provided to City staff in separate internal management reports for each
assessment area with specific recommendations regarding opportunities for improvement
in accordance with best practices. An overview of each document is provided below.
Information Technology Operational Review and Internal Controls Testing
City staff retained Moss Adams to complete a review and assessment over systems
access for the City’s information technology (IT) systems, with objectives including:
Determine whether consistent and well-controlled procedures are in place to
properly restrict and control systems access across the City’s systems.
Test internal controls related to setting up systems access for new employees,
removing access for terminated employees, and processing changes to user roles
and related access levels.
Compare the City’s internal controls and processes related to systems access to
best practices and identify opportunities for improvement, if applicable.
As part of this assessment, Moss Adams conducted interviews, completed testing,
reviewed sample documentation including existing policies, procedures, and workflows,
analyzed the results of these efforts, and prepared a final report summarizing the analysis
and recommendations. As outlined in the final summary report, the recommendations are
as follows:
Review, update, and finalize the policies and procedures related to systems
access, to ensure all significant functions are addressed.
Train City employees and enforce compliance to ensure that all systems access
changes are consistently documented and approved, and that access is monitored
and reviewed regularly.
Define the specific requirements for how role and permission changes must be
requested, approved, documented, and processed, and enforce compliance with
those requirements.
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Internal Audit Program Reports (Part 2)
February 9, 2022
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Formally document the process for handling terminated employee and contractor
systems access removal to define related roles and responsibilities,
documentation requirements, and controls to ensure removals of access are
processed on or before the employee’s or contractor’s departure.
While such areas were identified as findings, Moss Adams also noted areas where the
City has commendable processes in place, such as the systems in place for new hire
systems access and holding regular meetings between the IT Division and Finance
Department to review and discuss systems access changes. City staff concurs with the
findings and recommendations from Moss Adams as outlined in Attachment A and has
created a corresponding work plan for implementation of the recommendations.
Implementation is anticipated to be complete within six months.
Cash Handling Internal Controls Testing
City staff retained Moss Adams to complete a review and assessment of the internal
controls over cash handling practices, with objectives including:
Determine whether consistent and well-controlled procedures are in place across
City cash collection sites to ensure that cash is collected, secured, deposited, and
accounted for properly.
Evaluate the cash handling process to identify opportunities for streamlining across
sites, increasing the overall efficiency and effectiveness of the process, and
implementing best practices.
Test samples of cash transactions/activity for compliance with policies and for
adequate internal controls, including segregation of duties.
As part of this assessment, Moss Adams conducted interviews, reviewed documentation,
completed internal control sample testing, analyzed the results of these efforts, and
prepared a final report summarizing the analysis and recommendations. As outlined in
the final summary report, the audit yielded several recommendations for improvement
opportunities as follows:
Establish citywide requirements for training for all cash handlers, centralize the
tracking of training completion within the Revenue Division, and establish regular
communication between the individual sites and the Revenue Division.
Consider performing a PCI assessment to evaluate compliance and related
security risks.
Develop minimum citywide policies that are applicable to all sites and require that
each site develop supporting procedures that demonstrate how their site will
ensure minimum standards of controls are met.
To ensure cash and related revenue balances reported are accurate and to reduce
the risk of misappropriation of cash, develop a citywide policy that identifies the
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February 9, 2022
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frequency at which cash at each cash collection site must be transferred to the
Revenue Division for deposit.
The Revenue Division should work with the Central Library to establish more
effective controls and provide education on key controls over performing daily
reconciliations. Documentation requirements to support cash transfers to the
Revenue Division should be established, and a rotating audit process should be
implemented.
City staff concurs with the findings and recommendations from Moss Adams as outlined
in Attachment B and has created a corresponding work plan for implementation of the
recommendations. Implementation is anticipated to be complete within six months.
Concurrent with the implementation of the identified improvement opportunities for these
two internal control areas of focus, City staff will continue undertaking audit work for
additional focus areas with the direction received on the selection of topics for Fiscal Year
2021-22 at the January 13, 2022, Finance Committee meeting.
Prepared and Submitted by:
/s/ Amber Haston
_____________________________
Amber Haston
Senior Budget Analyst
Attachments:
A. Information Technology Systems Access Final Summary Report
B. Cash Handling Final Summary Report
69
ATTACHMENT A
INFORMATION TECHNOLOGY SYSTEMS ACCESS FINAL SUMMARY REPORT
70
FINAL REPORT
City of Newport Beach
INFORMATION TECHNOLOGY SYSTEMS ACCESS INTERNAL AUDIT
January 11, 2022
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 302-6500
71
Information Technology Systems Access Internal Audit Report | 1
FOR INTERNAL USE OF THE CITY OF NEWPORT BEACH
EXECUTIVE SUMMARY
Moss Adams LLP (Moss Adams) was contracted by the City of Newport Beach (the City) to evaluate
the internal controls over systems access to information technology (IT) systems. We utilized a
combination of interviews, document review, and internal control sample testing to determine whether
adequate controls were established, and functioning effectively, to control systems access across the
City.
Our internal audit focused on systems access, which is managed by the City’s Division of Information
Technology Services (the IT Division), and included the following primary objectives:
Determine whether consistent and well-controlled procedures are in place to properly restrict and
control systems access across the City’s systems
Test internal controls related to setting up systems access for new employees, removing access
for terminated employees, and processing changes to user roles and related access levels
Compare the City’s internal controls and processes related to systems access to best practices
and identify opportunities for improvement, if applicable
This engagement was performed in accordance with Standards for Consulting Services established
by the American Institute of Certified Public Accountants. Accordingly, we provide no opinion,
attestation, or other form of assurance with respect to our work or the information upon which our
work is based. This engagement was also performed with guidance issued by the Institute of Internal
Auditor’s (IIA) International Professional Practices Framework (IPPF). This report was developed
based on information gained from our interviews and analysis of sample documentation. The
procedures we performed do not constitute an examination in accordance with generally accepted
auditing standards or attestation standards.
FINDINGS AND RECOMMENDATIONS
1.
Finding
The City does not have documented and finalized policies and procedures
related to all systems access functions, and informal processes are not
consistently followed.
Recommendation
Review, update and finalize the P&Ps related to systems access, to ensure
all significant functions are addressed, train City employees, and enforce
compliance to ensure that all systems access changes are consistently
documented and approved, and that access is monitored and reviewed
regularly.
2.
Finding Changes needed in user roles and permissions defined in Tyler-Munis are not
consistently requested, approved, and documented.
Recommendation
The City should define the specific requirements, and enforce compliance
with those requirements, for how role and permission changes must be
requested, approved, documented, and processed.
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Information Technology Systems Access Internal Audit Report | 2
FOR INTERNAL USE OF THE CITY OF NEWPORT BEACH
FINDINGS AND RECOMMENDATIONS
3.
Finding
Systems access is not always removed timely upon a contractor’s
termination, a defined process for documenting contractor access timelines
and cancellation dates is not in place, and proof of systems access
cancellation is not always maintained.
Recommendation
The process for handling terminated contractor systems access removal
should be formally documented to define related roles and responsibilities,
documentation requirements, and controls to ensure removals of access are
processed on or before the contractor’s departure.
Based on the insights gathered during interviews, document review, and testing completed, it is
evident that the City has many commendable attributes in this area, including the following examples:
New Hire System Access: Although there are not formally documented systems access policies
and procedure in place, a process is established for communicating new hires to the IT Division
and documenting systems access requests and related approvals. In our analysis of the systems
access documentation related to 20 new employees hired between July 1, 2021 through
September 9, 2021, all were properly supported with an approved Personnel Action Form, which
documents IT access requests, and Help Desk Ticket.
Review of Access to IT Systems: The City’s IT Applications team meets quarterly to review
systems access changes, discuss access that was not disabled timely, and ensure role and
permission changes are properly supported and approved. These regular meetings and reviews
show that the City understands the importance of controlling systems access, monitoring access
permissions on a continuous basis, and assessing root causes of delays that occur to implement
improvements.
73
ATTACHMENT B
CASH HANDLING FINAL SUMMARY REPORT
74
This report is intended for the internal use of the City of Newport Beach, and may not be provided to, used,
or relied upon by any third parties.
Proprietary & Confidential
FINAL REPORT
City of Newport Beach
CASH HANDLING INTERNAL AUDIT
January 24, 2022
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 302-6500
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Cash Handling Internal Audit Report | 1
FOR INTERNAL USE OF THE CITY OF NEWPORT BEACH ONLY
EXECUTIVE SUMMARY
Moss Adams LLP (Moss Adams) was contracted by the City of Newport Beach (the City) to evaluate
the internal controls over cash handling practices, including testing controls and comparing best
practices to current practices. We utilized a combination of interviews, document review, and internal
control sample testing to determine whether adequate controls were established and appeared to be
functioning effectively.
Our internal audit focused on the following primary objectives:
Determine whether consistent and well-controlled procedures are in place across City cash
collection sites to ensure that cash is collected, secured, deposited, and accounted for.
Evaluate the cash handling process to identify opportunities for streamlining across sites,
increasing the overall efficiency and effectiveness of the process, and implementing best
practices.
Test samples of cash transactions/activity for compliance with policies and for adequate internal
controls, including segregation of duties.
This engagement was performed in accordance with Standards for Consulting Services established
by the American Institute of Certified Public Accountants. Accordingly, we provide no opinion,
attestation, or other form of assurance with respect to our work or the information upon which our
work is based. This engagement was also performed with guidance issued by the Institute of Internal
Auditor’s (IIA) International Professional Practices Framework (IPPF). This report was developed
based on information gained from our interviews and analysis of sample documentation. The
procedures we performed do not constitute an examination in accordance with generally accepted
auditing standards or attestation standards.
FINDINGS AND RECOMMENDATIONS
1.
Finding
There are a significant number of employees who handle cash, and training
requirements for these employees are not applied consistently or tracked in a
centralized manner, resulting in employees not receiving adequate training on
both cash handling and credit card security.
Recommendation
Establish City-wide requirements for training for all cash handlers, centralize
the tracking of training completion within the Revenue Division, and establish
regular communication between the individual sites and the Revenue Division.
Consider performing a PCI assessment to evaluate compliance and related
security risks.
2.
Finding
The City does not have documented policies in place for consistent controls
around cash handling at all sites, resulting in, inconsistent practices, levels of
understanding, and adequacy of internal controls.
Recommendation
Although specific cash handling processes will vary by site, the City should
develop minimum City-wide policies that are applicable to all sites and require
that each site develop supporting procedures that demonstrate how their site
will ensure minimum standards of controls are met.
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Cash Handling Internal Audit Report | 2
FOR INTERNAL USE OF THE CITY OF NEWPORT BEACH ONLY
FINDINGS AND RECOMMENDATIONS
3.
Finding The frequency in which locations make deposits to the Revenue Division
fluctuates, and there is not a requirement in place related to deposit frequency.
Recommendation
To ensure cash and related revenue balances reported are accurate, and to
reduce the risk of misappropriate of cash, develop a City-wide requirement that
identifies the frequency in which cash at each respective cash collection site
must be deposited to the Revenue Division.
4.
Finding
The Central Library lacks an effective daily reconciliation process to ensure that
all payments collected are supported by an issued receipt, payments were
entered into the cash register upon receipt, and all payments were
appropriately reported into the Symphony Workflow system.
Recommendation
The Revenue Division should work with the Central Library to establish more
effective controls and provide education on key controls over performing daily
reconciliations. Documentation requirements to support deposits made to the
Revenue Division should be established, and a rotating audit process should be
implemented.
Based on the insights gathered during interviews, document review, and testing completed, it is
evident that the City has commendable attributes in this area, including the following example:
Daily Balancing Packets: In our analysis of the accuracy of the Daily Balancing Packets
submitted by the Revenue Division to the Accounting Division from June 30 through
July 15, 2021, and July 31 through August 15, 2021, all were properly supported with a Tyler
Munis or Community Plus Report and agreed with the general ledger.
Revenue Division Support: Throughout the internal audit, it was clear that the Revenue Division
wants to better understand the processes, controls, and needs at the individual cash handling
sites in order to identify ways to better support the sites through technical assistance, training,
and guidance. Given the decentralized nature of cash collections across the City, having a
centralized resource to promote communication and provide monitoring and support will be key to
establishing solid internal controls and processes at the individual site level.
Revenue Division Record Keeping: Although the level of supporting documentation submitted
by individual sites varies significantly, the Revenue Division consistently maintained the support
submitted and the daily balancing packets described above.
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1
FY 2020‐21
Internal Audit Program Reports
Finance
Committee
February 9, 2022
City of Newport Beach –Finance Department 2
Background
The City’s internal audit program was initiated in 2020
Goal to continuously review various areas of City operations with both
financial and operational reviews
Five topics were identified for review in FY 2020-21
No. Topic Progress Task Resource
1 Procurement Operational Review and Internal Controls Testing Complete MGO
2 Cash Handling Internal Controls Testing Complete Moss Adams
3 Information Technology Operational Review and Internal Controls Testing Complete Moss Adams
4 Fiscal Policy Inventory and Implementation Plan Complete Moss Adams
5 Inventory Management Internal Controls Testing Complete City Manager’s Office
1
2
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2
City of Newport Beach –Finance Department 3
IT Controls Review: Goals and Methodology
The IT Controls operational review was completed by Moss Adams
Objectives included:
Determining whether consistent procedures are in place to restrict and control system access
Testing internal controls related to setting up system access for new employees, removing
access for terminated employees, and processing changes to user roles and related access levels
Comparing the City’s internal controls and processes related to system access to best practices
and identifying opportunities for improvement
Moss Adams reviewed existing policies, procedures, and workflows and
conducted interviews with staff throughout the City
City of Newport Beach –Finance Department 4
IT Controls Review: Results
Key findings of the Moss Adams review included identifying a need to:
Review, update, and finalize the policies and procedures related to systems access
Train City employees and enforce compliance to ensure that all systems access changes are
consistently documented and approved, and that access is monitored and reviewed regularly
Define the specific requirements for how role and permission changes must be requested, approved, documented, and processed, and enforce compliance with those requirements
Formally document the process for handling terminated employee and contractor systems
access removal to define roles and responsibilities, documentation requirements, and controls to
ensure removals of access are processed on or before departure
Staff concur with the Moss Adams findings and recommendations and will
create a work plan for implementation
3
4
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3
City of Newport Beach –Finance Department 5
Cash Handling Controls: Goals and Methodology
The cash handling operational review was completed by Moss Adams
Objectives included:
Determining whether consistent and well-controlled procedures and in place across City cash collection sites
Evaluating the cash handling process to identify opportunities for streamlining across sites
Testing samples of cash transactions/activity for compliance with policies and for adequate
internal controls, including segregation of duties
Moss Adams reviewed existing policies and procedures, conducted sample
testing, and conducted interviews with staff throughout the City
City of Newport Beach –Finance Department 6
Cash Handling Controls: Results
Key findings of the Moss Adams review included identifying a need to:
Establish citywide requirements for training all cash handlers, centralize the tracking of training completion within the Revenue Division, and establish regular communication between the
individual sites and the Revenue Division
Consider performing a PCI assessment to evaluate compliance and related security risks
Develop minimum citywide policies that are applicable to all sites and require that each site develop supporting procedures
Develop a citywide policy identifying the frequency at which cash at each cash collection site
must be transferred to the Revenue Division for deposit
Establish more effective controls and education on key controls over performing daily cash
reconciliations, and implement rotating cash audits, at the Central Library
Staff concur with the Moss Adams findings and recommendations and will
create a work plan for implementation
5
6
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4
City of Newport Beach –Finance Department 7
Recommendation and Next Steps
Two reports have been presented to the Finance Committee today
These reports conclude the FY 2020-21 internal audit program
The Committee may wish to provide feedback to the City Manager regarding
these reports
At the January meeting, the Finance Committee provided direction to staff
regarding the FY 2021-22 internal audit program topics
City of Newport Beach –Finance Department 8
Questions?
7
8
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2/3/22
Scheduled Date Agenda Title Report Type Agenda Description
Wednesday, February 9, 2022 Capital Improvement Program (CIP) Update Presentation Staff from Public Works will provide an update on what is planned for inclusion in the FY 2022-23 CIP.
Facilities Financial Plan (FFP) and Harbor & Beaches Master Plan Presentation Staff will provide an update on the current status of FFP and Harbor & Beaches Master Plan funding.
Second Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected FY
2021-22 budget performance.
Internal Service Funds Update Presentation Staff will provide the Committee with an update on the health of the City's insurance, vehicle, equipment, and other internal service funds.
Internal Audit Program Reports (Part 2)Presentation Presentation of reports, findings, and recommendations from the FY 2020-21 audit program.
Thursday, March 10, 2022 Fee Study Update Presentation Staff will present the Master Fee Schedule to the Finance Committee prior to presenting it to the City Council.
OPEB Actuarial Valuation Report Update Presentation Staff will provide the Committee with an overview of the latest actuarial valuation report prepared by the City's actuary.
Overview of Revenue Projections Presentation
Staff will provide the Committee with an overview of the assumptions utilized to
prepare revenue projections for the City's major funds as part of the FY 2022-23
budget preparation process.
Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program.
Thursday, April 14, 2022 Proposed FY 2022-23 Budget Overview Presentation Staff will provide the Committee with an overview of the expenditure budget for
FY 2022-23 that will be presented to the City Council in May.
Budget Amendments for Quarter Ending March 31, 2022 Receive and File Staff will report on the budget amendments from the prior quarter.
Newport Beach Finance Committee Work Plan
April 2022
February 2022
March 2022
I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2022\WORK PLAN 2021-22 - 1-31-2022 182
2/3/22
Scheduled Date Agenda Title Report Type Agenda Description
Newport Beach Finance Committee Work Plan
Thursday, May 12, 2022 Third Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected Fiscal Year 2021-22 budget performance.
Follow-Up Discussion of Proposed FY 2022-23 Budget Discussion
Staff will provide the Committee with a copy of the Fiscal Year 2022-23
proposed budget document. Should the Committee wish to continue April's discussion of the Fiscal Year 2022-23 budget, this is also an opportunity to do so.
Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program.
Thursday, May 26, 2022 Financial Statement Auditor's Communication with the Finance Committee acting as the City's Audit Committee Presentation
The City's external auditors, Davis Farr LLP, will provide an overview presentation regarding the audit process and request feedback from the Committee regarding any information that may assist them in their audit of the City's financial statements.
Committee Recommendation to Council for the FY 2022-23 Budget Discussion
Discussion of the Study Session earlier in the week and formulation of any
recommendations to be presented to the City Council at the budget public hearing in June.
Committee Recess
July 2022
June 2022
May 2022
Committee Recess
August 2022
Committee Recess
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2/3/22
Scheduled Date Agenda Title Report Type Agenda Description
Newport Beach Finance Committee Work Plan
Thursday, September 15, 2022 Annual Review of Investment Performance Presentation
The City's investment advisor, Chandler Asset Management, will report on the
performance of the City's investment portfolio for the fiscal year ending June 30, 2022.
Annual Review of Investment Policy Presentation
Staff will provide a presentation regarding any changes proposed to the City's
Investment Policy by staff or the City's investment advisor prior to the
Investment Policy being approved by the City Council.
Overview of Police Department Budget Presentation Staff will provide the Committee with a presentation covering the budget for the
Police Department.
New Item Recommended Changes to Purchasing Policies Presentation Staff will provide on overview of recommended changes to the City's purchasing policies for the Committee's consideration, in follow-up to the Internal Audit Program report presented to the Committee in January.
Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program.
Budget Amendments for Quarter Ending June 30, 2022 Receive and File Staff will report on the budget amendments from the prior quarter.
Thursday, October 20, 2022 Year-End Budget Results Presentation Staff will provide a presentation regarding the year-end budget results for FY
2021-22.
Revenue Audit Program Update Presentation Staff will provide an update on audits conducted by the Revenue Division to verify transient occupancy tax (hotels, agents and residential owners), charter boat company, waste hauler, etc. revenue collections.
Budget Amendments for Quarter Ending September 30, 2022 Receive and File Staff will report on the budget amendments from the prior quarter.
Thursday, November 10, 2022 CalPERS Update Presentation Staff will provide the Committee with an overview of the data from the latest actuarial reports from CalPERS as well as their impact on prior projections of the paydown of the City's unfunded pension liability.
First Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected FY
2022-23 budget performance.
Long Range Financial Forecast (LRFF) Update Presentation Staff will brief the Committee regarding the results of the updated LRFF analysis.
Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program.
September 2022
November 2022
December 2022
Committee Recess
October 2022
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Scheduled Date Agenda Title Report Type Agenda Description
Newport Beach Finance Committee Work Plan
Thursday, January 12, 2023 Financial Statement Audit Results and Related Communication Presentation The City’s external auditors will meet with the Finance Committee to discuss the results of their audit for the fiscal year ending June 30, 2022.
Internal Audit Program Reports Presentation Presentation of reports, findings, and recommendations from the FY 2021-22
audit program.
Internal Audit Program Work Plan Review Presentation Selection of audit topics for the FY 2022-23 audit program.
Budget Amendments for Quarter Ending December 31, 2022 Receive and File Staff will report on the budget amendments from the prior quarter.
January 2023
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