HomeMy WebLinkAboutApproved Minutes - January 13, 2022Finance Committee Meeting Minutes January 13, 2022
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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 Scarborough, 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 and 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 401(k). 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 forwarded 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 these are candid appraisals of 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 Moss 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 Scarborough 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 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 Scarborough 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 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 Scarborough 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 26 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.