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HomeMy WebLinkAboutFinance Committee - April 14, 2022CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Community Room Thursday, April 14, 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 Michael Gomez, Deputy Finance Director 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. 1 April 14, 2022 Page 2 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 MARCH 10, 2022A. Recommended Action: Approve and file. DRAFT MINUTES 03102022 V.CURRENT BUSINESS PROPOSED FISCAL YEAR 2022-23 BUDGET OVERVIEWA. Summary: Staff will provide the Committee with an overview of the expenditure budget for Fiscal Year 2022-23 that will be presented to the City Council in May. Recommended Action: Receive and file. OPEB ACTUARIAL VALUATION REPORT UPDATEB. Summary: Staff will provide the Committee with an overview of the latest actuarial valuation report prepared by the City's actuary. Recommended Action: Receive and file. 2 April 14, 2022 Page 3 Finance Committee Meeting BUDGET AMENDMENTS FOR QUARTER ENDING MARCH 31, 2022C. Summary: Staff will report on the budget amendments from the prior quarter. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A WORK PLAN REVIEWD. 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 3 Finance Committee Meeting Minutes March 10, 2022 Page 1 of 10 CITY OF NEWPORT BEACH FINANCE COMMITTEE MARCH 10, 2022 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 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 John Reed, Committee Member Nancy Scarbrough, and Committee Member Joe Stapleton ABSENT: None STAFF PRESENT: City Manager Grace K. Leung, Finance Director/Treasurer Scott Catlett, Deputy Finance Director Michael Gomez, Budget Manager Shelby Burguan, Senior Budget Analyst Amber Haston, Administrative Specialist to the Finance Director Marlene Burns, Public Works Administrative Manager Chris Miller, Public Works Finance/Administrative Manager Theresa Schweitzer, Recreation & Senior Services Management Analyst Matt Chong, Deputy Recreation & Senior Services Director Sean Levin, Recreation & Senior Services Director Laura Detweiler, Harbormaster Paul Blank, Fire Marshal Kevin Bass, Fire Administrative Manager Mary Locey, Management Assistant Lili Melero, Library Services Director Tim Hetherton, Acting Library Services Manager Melissa Hartson MEMBERS OF THE PUBLIC: Charles Klobe and Jim Mosher III. PUBLIC COMMENTS Jim Mosher noted his comments at the previous meeting regarding the contract for the City’s Tyler Munis Enterprise Resource Planning (ERP) Program may have caused some confusion for the Finance Committee. He reported staff had since advised him that the original five-year contract for the implementation of the ERP software expired two years ago, but a recurring maintenance clause was included in the contract. IV. CONSENT CALENDAR MINUTES OF FEBRUARY 9, 2022 Recommended Action: Approve and file. Chair O’Neill clarified his comments from the minutes and advised the recommendation to replace the two piers came from discussions with the City Council. 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 Reed. The motion carried 7 ayes – 0 noes 4 Finance Committee Meeting Minutes March 10, 2022 Page 2 of 10 V. CURRENT BUSINESS A. FISCAL YEAR 2021-22 FEE STUDY UPDATE Summary: Staff will present the Master Fee Schedule to the Finance Committee prior to presenting it to the City Council. Recommended Action: Review and discuss the proposed fee updates discussed in this report and provide any recommendations for consideration by the City Manager and City Council. Finance Director/Treasurer Catlett provided a brief overview of the annual Fee Study Update and provided background on types of fees and fines. He explained the authority behind setting cost-recovery-based user fees is established in City Council Policy F-4 – Revenue Measures and the Fiscal Sustainability Plan. He noted Newport Beach Municipal Code Section 3.36.030 mandates 100% cost recovery except for subsidized services as identified in the code. Finance Director/Treasurer Catlett reported cost recovery-based user fees cannot exceed the cost of providing the service and detailed how those costs are determined. He provided a brief overview of the Cost of Service Analysis process and calculations used to determine cost. Senior Budget Analyst Amber Haston provided an overview of Recreation and Senior Services fees and reported they were last updated in 2016. She reported the department is recommending increasing the cost recovery for five programs including Youth Camps (3%), Youth After School Programs (2%), Preschool Camps & Programs (2%), Aquatics Programs (3%), and Oasis Fitness Memberships (5%). She noted the increase in fees will help align with the increased costs in delivering those programs since they were last studied five years ago. Committee Member Collopy inquired if the benefactors of each activity have been charged the escalation costs. Finance Director/Treasurer Catlett explained the fees are the same as 2016 and the fee increase is to catch up to where an incremental adjustment would have set the fees. He clarified the fees are not Consumer Price Index (CPI) adjusted and the proposed increases are to maintain the level of cost recovery. Mayor Pro Tem Blom inquired if the rates have remained the same since 2016 on these programs. Senior Budget Analyst Haston confirmed the rates have remained the same. Finance Director/Treasurer Catlett reported some fees adjust annually based on CPI, but CPI adjustments are not applied to these fees. He clarified that because the cost of the program has increased over the past five years while the fees have remained the same, the now proposed cost recovery is increasing to return to approximately the level in place five years ago. Senior Budget Analyst Haston reported Adult Sports fees have been administratively reorganized to simplify the presentation of fees, correctly capture all fees related to current operations, and simplify the information that end-users are viewing. She reported Natural Resources Program fees are being modified to align with current operations and eliminate fees for services that are no longer provided. She reported the Fee Study is recommending modifying Municipal Code Section 3.36.030 to add a 0% cost recovery for applicants who successfully appeal Special Event Permits. Committee Member Scarbrough asked for clarification of an Isopod. Senior Budget Analyst Haston believes it to be related to tide pools. Senior Budget Analyst Haston reported the proposed changes to the Fee Schedule will result in a net positive revenue impact of $81,000. 5 Finance Committee Meeting Minutes March 10, 2022 Page 3 of 10 Senior Budget Analyst Haston provided a brief overview of proposed fee changes in Library Services and noted the fees were last studied in 2016. She advised the Library Cancellation Charge will be reduced from $66 to $56. Committee Member Collopy inquired if an individual appeals a Special Event Permit, and it is approved then there are no added costs. Senior Budget Analyst Haston confirmed that is correct. Committee Member Collopy inquired if an individual proposed to have an event and it is declined, it is inferred that the City made a mistake. Recreation & Senior Services Director Laura Detweiler explained the Special Event application process allows individuals to appeal Level 3 events, which are large-scale events, to the City Council. Senior Budget Analyst Haston continued the presentation. She reported the Fee Study proposal to reduce the Library Cancellation Charge is based on the cost to provide the service. She reported an increase in the Passport Photo fee from $10 to $15 and updated cost recovery in the Municipal Code. She advised the department is proposing three new fees, which include two new fees for Per Page Copies from Central Printers and a new Test Proctoring fee. Lastly, she advised the proposed changes will result in a net positive revenue impact of $84,000 to the General Fund. Chair O’Neill reported the City is subsidizing passport photos at a fairly high amount in that it costs $25 to process the photos but the proposed fee would only recover $15 for them. He advised the City is processing approximately 558 passport photos per year which equates to the City subsidizing $5,700 of staff time for the service totaling 93 staff hours. He advised the fees mandated by the government to provide passport services also do not cover the City’s costs. He noted only $35 is recovered for this service which equates to $24,000 in staff time and resources. Chair O’Neill noted $30,000 of subsidized staff time is a large number given the passport process can be handled by other entities in the City. He inquired if the City should continue being involved in the passport process. He believes the City should review its passport service offering. Committee Member Scarbrough inquired if eliminating passport services would mean the City is providing less than other adjacent cities. Chair O’Neill confirmed that would be the case. Finance Director/Treasurer Catlett reported that while some neighboring cities do offer the service, Irvine, Costa Mesa, and Laguna Beach do not. Committee Member Collopy noted the $30,000 in question is not fully loaded and inquired if a position can be eliminated if the City does not continue to provide the service. Chair O’Neill does not believe a position can be eliminated for this service. City Manager Grace Leung clarified there is no dedicated staff for this service, and it is provided as part of existing staff duties and noted it is not exclusively for Newport Beach residents. Chair O’Neill advised he would like to bring the item back to the Finance Committee for further review. City Manager Leung advised the recovery cost for the passport photos can be increased to 100%. Chair O’Neill recommended the recovery cost for passport photos be set at 100%. Senior Budget Analyst Haston provided a brief overview of proposed fee changes for Fire Prevention and reported the fees were last studied in 2020. She advised the Fee Study recommends increasing cost recovery for all Fire Prevention services to 100% cost recovery levels in alignment with other agencies. She reported and provided details on two key methodology changes for certain State-mandated inspections and for Operations Permits to use 1/3 of the hourly rate for the full Engine Company. Finance Director/Treasurer Catlett 6 Finance Committee Meeting Minutes March 10, 2022 Page 4 of 10 explained staff determined there was too much cost going into the fee given that the Engine Company remains in service to respond to emergencies while performing inspections. Committee Member Collopy inquired if the Engine Company was doing Fire Marshal work and if the Fire Chief still occupied the dual role of Fire Chief and Fire Marshal. Chair O’Neill reported a full-time Fire Marshal was hired three years ago. Committee Member Collopy inquired why Engine Companies are conducting inspections when it is the Fire Marshal’s job. Fire Marshal Kevin Bass explained there is more fire prevention work than the number of Fire Inspectors available can perform, and so certain inspections are conducted by Engine Companies. He noted it serves two purposes, which include the fire prevention work and familiarizing the Engine Company with their assigned area. He advised this model allows the Fire Prevention staff to focus on more complex locations such as hotels, high-rises, and schools. Chair O’Neill inquired if the Fire Prevention staff are sworn personnel. Fire Marshall Bass clarified the staff are civilian employees and cost less than sending out sworn personnel. Chair O’Neill noted it would cost less if civilian personnel were deployed, but this policy allows for the use of those Engine Companies who may be responding to calls and creates a hybrid model when determining the fees. Fire Marshall Bass advised most agencies in Orange County are going to this model for inspections. He explained the Engine Companies do not have the continuity to complete longer, complex projects due to the fact the Engine Company works in shifts. Committee Member Scarbrough inquired about the type of inspections Engine Companies would conduct. Fire Marshall Bass explained it would be exit routes, fire extinguishers, fire sprinkler systems, and more complex systems depending on the location. Vice Mayor Blom advised he has experienced both sides of this. He recalled an experience years ago where Costa Mesa Fire Prevention conducted the inspections but when an incident occurred, the responding Engine Company did not know where anything was located and caused damage to the building. He noted it is different now that they have been able to get to know the Engine Companies, which results in them getting to better understand know the layout of the business. He expressed support for the fee recommendation. Committee Member Scarbrough advised the fire plan check fee changes based on occupancy. She noted I Occupancy facilities plan check fees were less than those of regular facilities even though they have more complex systems. She inquired if those fees should be reviewed in the future. Fire Marshall Bass advised the majority of I Occupancy inspections in the city are conducted by a State agency. He noted those that are inspected by City staff do not take as long and are reflected in the current rate studies. He advised a Fee Study will be conducted again in two years to assess those fees. Senior Budget Analyst Haston continued the presentation and reported the proposed changes results in a net positive revenue impact of $84,000 to the General Fund. She reported other fee updates include increasing Notary Services to $15 to align with the fee increase authorized by Government Code. She advised three new fees are proposed based on actual costs and will utilize the fully burdened hourly rate of personnel, to includes Users Services Not otherwise Identified, Appeals where the Applicant is unsuccessful (50% Cost Recovery), and Appeals where the Applicant is Successful (0% Cost Recovery). 7 Finance Committee Meeting Minutes March 10, 2022 Page 5 of 10 Committee Member Reed inquired when a Fee Study will be conducted on the User Services that have not been identified. Finance Director/Treasurer Catlett explained this would cover a situation that would typically not reoccur. He advised departments would follow a process notifying the Finance Department who would then review if a Fee Study is warranted. Senior Budget Analyst Haston reported the Fee Study proposes modifying the Municipal Code to authorize the City Manager or Finance Director to waive user fees up to $5,000 per occurrence, which is to be used in limited circumstances. Senior Budget Analyst Haston provided a brief overview of updates for Non-Studied Departments. She advised these include Marine Activities Permit (MAP) Renewal for Service Providers, which is a new fee to differentiate between the 2 business types due to the difference in processing times. She reported staff is working with the Community Development Department (CDD) to study two new fees relating to the first and subsequent requests for building permit extensions beyond the initial 3-year time limit. Lastly, she advised that no changes are proposed for the fee for the RGP Dredging Permit and noted staff recommends deferring any changes until Public Works fees are studied in Fiscal Year 2023-24. Senior Budget Analyst Haston reported the proposed fee updates will result in approximately $180,000 of additional revenue next fiscal year and noted it does not account for the impact of any fees where volume statistics are unavailable. She provided an overview of the fiscal impact of fee subsidies. Finance Director/Treasurer Catlett explained Recreation and Senior Services proposed annual subsidy is a large number due to the general benefit of those activities and it is commonplace for cities to subsidies those activities. Finance Director/Treasurer Catlett reported staff will be evaluating the format of the executive summaries provided to the Finance Committee and will bring back options to the Finance Committee for review next year. He advised a Request for Proposals (RFP) for a new user fee consultant will be advertised in spring 2022. He reported the Fee Study will go before City Council on April 12, 2022, for First Reading, April 26, 2022, for Second Reading, and if approved the fees will be effective on July 1, 2022. Committee Member Collopy and Chair O’Neill complimented Senior Budget Analyst Haston for her good work on the presentation. Chair O’Neill opened public comments. Charles Klobe inquired about how 2,500 hours of productive work time for each employee for the Cost of Service Analysis was identified. Jim Mosher reminded the Finance Committee that it was initially the City Clerk’s office who requested the ability to provide passport services in 2001 when other service locations were not as widespread as today. He noted the Library accepted the responsibilities when the City Clerk no longer wanted to offer the service and should not be blamed for providing the highly subsidized service. He advised the idea is that when an appeal is successful the opponent does not have to pay a fee is not a long-standing policy in the City and arose about six years ago from a former Councilmember. He recommends if it is now a new policy, it should state from the beginning that a successful appeal is 0% cost recovery and would save lines in the chart. He recommended improving the communication of the new User Services not otherwise identified fee and noted the definition should be further clarified and cited examples of why it is not clear. He expressed support for the City Manager being able to waive fees but believes the definition of hardship needs to be clarified. He advised he could not locate either the Hearing Officer Appeal fee or the Building Permit Extension fee in the proposed Fee Schedule. He reported the proposed fees for color copies at the Library are already set at $0.75 which have been set for the last year. Chair O’Neill closed public comments. 8 Finance Committee Meeting Minutes March 10, 2022 Page 6 of 10 Chair O’Neill encouraged staff to modify the hardship language as noted by Mr. Mosher. Finance Director/Treasurer Catlett clarified the 2,500 hours of productivity accounts for multiple staff members in the example presented rather than a single person. Chair O’Neill agreed with Mr. Mosher’s point of moving towards a more standard zero-fee policy if the appeal is successful. MOTION: Chair O’Neill moved to recommend approval of the Master Fee Schedule to the City Council with the recommendation that the passport photo fee is increased from $15.00 to $25.00, seconded by Committee Member Stapleton. The motion carried 7 ayes – 0 noes. B. OVERVIEW OF REVENUE PROJECTIONS Summary: 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 Fiscal Year 2022-23 budget preparation process. Recommended Action: Receive and file. Finance Director/Treasurer Catlett provided a brief overview of the Fiscal Year 2022-23 Revenue Projections and noted the City is looking at a projected $265 million General Fund Revenue budget for Fiscal Year 2022-23, which is $15 million larger than the current year. He explained from a revenue perspective the City has fully recovered from the effects of the pandemic and is in a much better place than anticipated. Finance Director/Treasurer Catlett reported the City receives 17.2% of the 1% Property Tax. He advised the City receives the third-highest share of the 1% behind Santa Ana and Laguna Beach. He explained assessed value has a significant impact on revenue and noted the City’s assessed valuation for Fiscal Year 2021-22 was $67 billion. Committee Member Reed inquired about other cities' percentages. Finance Director/Treasurer Catlett reported Laguna Beach was the largest at 22% and Santa Ana was second at 19%. Committee Member Collopy inquired how the percentage is calculated. Finance Director/Treasurer Catlett explained it is a complicated and convoluted calculation based on the impact of Proposition 13 on property taxes in place at the time of its passage. Committee Member Collopy inquired how Irvine’s assessed valuation was calculated at $95 billion. Finance Director/Treasurer Catlett reported Irvine has the Spectrum and other sizable commercial areas and is a much larger city in land area than Newport Beach. Finance Director/Treasurer Catlett reported the median home price grew 16% in 2021 and noted 85% of the City’s Property Tax comes from homes. He advised staff worked with the City’s Property Tax consultant HdL to develop the secured Property Tax Revenue Projection and is projecting a 6.5% growth factor for the secured Property Tax. He noted this will be the City’s best year since Fiscal Year 2018-19. Chair O’Neill noted for perspective Laguna Beach adopted a General Fund Budget of $121 million. He advised the City will have a problem attracting young families into the City in the future with the average home price being $3 million. Finance Director/Treasurer Catlett reported Sales Tax is the City’s second-largest revenue source and noted it receives 1% of the 7.75% Sales Tax. He advised most of the tax revenue comes from auto sales, restaurants and hotels, and general consumer goods. He presented the top 25 Sales Tax producers in the City. 9 Finance Committee Meeting Minutes March 10, 2022 Page 7 of 10 Committee Member Scarbrough inquired why Sales Tax growth from Building and Construction is so small. Finance Director/Treasurer Catlett explained those are businesses such as lumber yards and hardware stores, of which Newport Beach has very few. Finance Director/Treasurer Catlett provided a brief overview of the Sales Tax Revenue Projection methodology. He advised HdL looks at new and closed retailers and misallocated revenues from the State. He explained HdL works with Beacon Economics to develop a statewide revenue forecast by industry category. He noted preliminary Sales and Use Tax Revenue projections do not match the budget because some of the Sales Tax is shared with Newport Lexus under a tax sharing agreement. Chair O’Neill inquired if Lexus is the only business with which the City has an active Sales Tax sharing agreement. Finance Director/Treasurer Catlett confirmed Lexus is the only business with an active agreement. Committee Member Collopy inquired about the duration of the Sales Tax sharing agreement. Finance Director/Treasurer Catlett believes it will conclude in a few years but will confirm for the Finance Committee. Public Works Finance/Administrative Manager Theresa Schweitzer noted she also believes it concludes in the next few years. Committee Member Collopy inquired about the $400,000 Administration Cost. Finance Director/Treasurer Catlett explained this is the State fee to administer the Sales Tax. He reported the County similarly takes a portion of the City’s Property Tax allocation as an administrative fee. He reported anticipated Sales Tax Revenue growth for Fiscal Year 2022-23 is 5.3%. Committee Member Collopy inquired if it would be worth discussing what Sales Tax for the Fashion Island Hotel would be. Finance Director/Treasurer Catlett advised the main item for Fashion Island Hotel would be Transient Occupancy Tax (TOT) which will be discussed later in the presentation. He advised the City did lose some Sales Tax from automotive dealers that have left the area but noted they were very low volume. Finance Director/Treasurer Catlett provided a brief overview of TOT Revenue and reported the City charges a 10% TOT tax rate and noted how it compares to other cities in California. He advised the 10% TOT is charged on both hotel and Short-Term Rentals (STRs) stays. He provided a brief overview of the TOT Revenue Projection methodology and advised staff has been working with Visit Newport Beach to determine future trends. He reported Visit Newport Beach publishes a weekly Economic Recovery Dashboard that tracks a variety of data including occupancy and room rates. He noted they also track John Wayne Airport traffic and noted traffic is hovering around pre-pandemic levels. He advised the projections do not account for any impact from the VEA Newport Beach reopening and assume the Pendry Newport Beach (former Fashion Island Hotel) will not open until Fiscal Year 2023-24. Finance Director/Treasurer Catlett reported anticipated TOT Revenue growth is 4.6% after taking into account a $1 million reduction in the prior year's projection for timing concerns. He advised hotel-related revenues are projected to exceed pre-pandemic levels and STR-related revenues are growing well beyond the already-reached record high level of revenue. Finance Director/Treasurer Catlett reported other General Fund revenues include Service Fees and Charges, Property Income, and Other Taxes. He advised Business Licenses are captured under Other Taxes. He reported the anticipated growth from Services Fees and Permit Revenues is due to the implementation of the recycling fee increase and recreation class revenues returning to pre-pandemic levels. Finance Director/Treasurer Catlett reported Property Income Revenue includes leased property income generated from non-Tidelands property leases and parking income generated from non-Tidelands parking lots and meters. He advised the projection was developed 10 Finance Committee Meeting Minutes March 10, 2022 Page 8 of 10 internally with subject matter experts in the departments responsible for each of the programs. He advised growth came from parking revenue increases and higher percentage-based property rents. He noted parking revenues have been projected conservatively for next year. Finance Director/Treasurer Catlett reported Other Taxes Revenues include Business License Tax Revenue, Property Transfer Tax Revenue, and Franchise Fees and the projection was developed by Finance staff. He reported the decline is due to the conservative revenue forecast for Property Transfer Tax. Finance Director/Treasurer Catlett reported the Tidelands Fund is a special revenue fund used to account for revenues related to the Tidelands areas under the City’s jurisdiction. He advised the Tidelands Operating Fund is supported by the General Fund and noted the General Fund will transfer $4.6 million to the Capital Fund in Fiscal Year 2022-23 to support capital needs. He provided a brief overview of Tidelands Fund revenue sources and advised 96% of revenues are generated from leases and 4% of revenues are generated by investment income. He advised staff predicts a modest increase in revenue in the next year. Committee Member Collopy inquired if these projections will be baked into the City Council budget presentation in the next month few months. Finance Director/Treasurer Catlett confirmed they will be included. Finance Director/Treasurer Catlett reported 98% of the Water Utility Revenue is generated by service fees and charges from customers. He advised the current rate plan ends January 1, 2024. He noted these are demand-based fees and noted it is hard to determine actual revenues. He anticipates a 9.2% increase in Water Utility Revenues next year. Finance Director/Treasurer Catlett reported 98% of the Wastewater Utility Revenue is generated by service fees and charges from customers. He reported the rate plan ended January 1, 2022, and a rate study will be funded as part of the ongoing Fiscal Year 2022-23 budget process to complete a new rate plan. He anticipates a 9.7% increase in Wastewater Utility Revenues next year. Committee Member Collopy noted it is impossible to meter wastewater at the residential level. He inquired if the rates charged for water subsidize the additional cost year after year for wastewater due to the age of the infrastructure. Finance Director/Treasurer Catlett explained the funding is in separate Enterprise Funds and revenues are not shared between the two. He clarified there is a wastewater rate charged as part of a resident’s utility bill. City Manager Leung advised the rate will be reviewed as part of the rate study in the future. Chair O’Neill expressed concern that rates will not keep pace with inflation. He would like to see a projection of infrastructure costs for water and expressed concern that the City will not be property funded in its Enterprise Funds and does not want to pass a large deficit in the City’s Utility Funds to future City Councils. Committee Member Scarbrough inquired how funding is acquired for infrastructure repairs should a natural disaster occur. Finance Director/Treasurer Catlett advised there are reserves available in each of the Enterprise funds and if it was a significant disaster, the City would be eligible for Federal Emergency Management Agency (FEMA) funding. He explained the City would pay for repairs out of its reserves and then request reimbursement from FEMA. Committee Member Scarbrough inquired how the City determines enough funding is available in the reserves to cover a disaster. Committee Member Collopy advised a General Fund Reserve Analysis was conducted two years ago to determine appropriate levels. Committee Member Stapleton inquired about the number of units for rent both hotel and STRs that contribute to the City’s TOT. Finance Director/Treasurer Catlett noted he does not have those numbers with him but reported STR permits are capped at 1,550 although he believes 11 Finance Committee Meeting Minutes March 10, 2022 Page 9 of 10 there were more operating before the cap was imposed. He believes there are under 1,500 permitted STRs actively reporting revenue at least in the last quarter. He advised timeshares are not subject to the STR ordinance. Chair O’Neil opened public comments. Mr. Klobe noted while residential property owners are benefiting from the increase in property value it does make it challenging for residents’ younger children to live in the City. He suggested the City Council recommend some focus on senior housing, low-income housing, or home purchase subsidies to help develop some affordable housing. Mr. Mosher reported the City is leasing the public road to Fletcher Jones at no cost. He advised when Fletcher Jones was offered millions of dollars in incentives to develop the property the thought that it would be recouped from the Sales Tax the facility generated. He noted the City believes it got a good deal out of those negotiations but does not feel the City needs to continue to subsidize auto dealers. He noted the Water Utility Revenues, and the Wastewater Utility Revenues cannot be comingled because they come from different payers. He reported Property Taxes vary because in 1978 properties were taxed by different agencies. He encouraged residents to look at their property tax bill and review the tax rate area which defines how the 1% is divided up. He advised the tax rate can be looked up at the Orange County Auditor-Controller’s website under Property Tax Accounting and then select Annual Tax Increment factor by tax rate area. Chair O’Neill closed public comments. The item was received and filed. C. INTERNAL AUDIT PROGRAM UPDATE Summary: Bi-monthly progress update on the internal audit program. Recommended Action: Receive and file. Finance Director/Treasurer Catlett reported Deputy Finance Director Michael Gomez assumed this project from former Deputy Finance Director Steve Montano before his departure. He advised the five-year contracts for the new panel of firms that will conduct the program will be brought before the City Council in the next several months. He reported the program is in the implementation phase of the last five audits and beginning in May a regular update will be provided on a bi-monthly basis that will highlight progress. Committee Member Collopy suggested changing the program name since the audit is conducted by outside firms. Finance Director/Treasurer Catlett explained from an industry terminology standpoint it is an outsourced internal audit program, so it is permissible for the City to have its internal auditor be a paid contractor. Chair O’Neill called for public comments and hearing none, closed public comments. The item was received and filed. 12 Finance Committee Meeting Minutes March 10, 2022 Page 10 of 10 D. 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 meeting on April 14, 2022, will include an overview of the proposed expenditure budget, to be followed by a joint meeting with the City Council and a vote to recommend a budget to the City Council on May 26. City Manager Leung confirmed the joint study session will be held on May 24 and requested all Finance Committee members be present for both sessions. Chair O’Neill called for public comments and hearing none, closed public comments. The item was received and filed. VI. ADJOURNMENT The Finance Committee adjourned at 4:39 p.m. to the next regular meeting of the Finance Committee. The agenda for the Regular Meeting was posted on March 4, 2022, at 9:40 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 13 04/14/2022 1 FY 2022-23 Proposed Budget Finance Committee Meeting April 14, 2022 City of Newport Beach – Finance Department 2 Principles Guiding Development of the Budget Budget Emphasizes: • Providing high quality municipal services that residents expect • Providing a safe and secure neighborhood • Keeping Newport Beach looking great • Maintaining a prosperous, fiscally sustainable, and economically viable city Additional Focus: • Continued emphasis on elimination of the City’s long-term liabilities • Ensuring proper funding of long-term infrastructure maintenance and replacement • Addressing key City Council priorities identified at the January 29, 2022, City Council Planning Session 1 2 04/14/2022 2 City of Newport Beach – Finance Department 3 Budget Development Timeline Source and Use Projections Personnel Budget Development Departmental CIP Preparation Departmental Budget Preparation City Manager Review Finance Committee Review City Council Review Budget Adoption Budget Implementation Oct        Nov Dec       Jan             Feb           Mar          Apr         May        Jun       Jul        Aug         Sep City of Newport Beach – Finance Department 4 Opportunities for Public Review of the Budget Date Meeting Type Meeting Purpose Thursday, January 13, 2022 Finance Committee Meeting Long-Range Financial Forecast (LRFF) update Saturday, January 29, 2022 Special City Council Meeting City Council Planning Session Tuesday, March 8, 2022 City Council Study Session Early Look at the Capital Improvement Program Thursday, March 10, 2022 Finance Committee Meeting Overview of FY 2022-23 Revenue Projections Thursday, April 14, 2022 Finance Committee Meeting Proposed FY 2022-23 Expenditure Budget Review Tuesday, May 24, 2022 Joint City Council / Finance Committee Study Session FY 2022-23 Operating Budget Review Tuesday, May 24, 2022 City Council Study Session FY 2022-23 Capital Improvement Budget Review Thursday, May 26, 2022 Finance Committee Meeting Finalize Recommendations to City Council Tuesday, June 7, 2022 City Council Public Hearing Adoption of FY 2022-23 Budget 3 4 04/14/2022 3 FY 2021-22 Budget Status 5City of Newport Beach – Finance Department City of Newport Beach – Finance Department 6 Recap of Second Quarter Budget Update Adopted Revenue Budget $ 234.1 million First Quarter Projection $ 237.9 million Second Quarter Projection $ 250.0 million • $15.9 million of projected 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 SecondQuarterMillions Property Tax Sales Tax TOT Other 5 6 04/14/2022 4 City of Newport Beach – Finance Department 7 Recap of Second Quarter Budget Update Adopted Expenditure 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 City of Newport Beach – Finance Department 8 Recap of Second Quarter Budget Update • $31.0 million appropriated at FY 2020-21 year-end per City Council Policy F-5 • $5.0 million additional pension UAL payment included in projected operating expenditures • Increase in transfers out reflects $26.0 million allocated to FFP and CIP projects • $15.2 million projected FY 2021-22 budget surplus • Additional positive revenue adjustments and expenditure savings are anticipated FY 2021-22 FY 2021-22 Adopted Projected BEGINNING UNRESTRICTED FUND BALANCE 31,036,884$ 31,036,884$ SOURCES: Operating Revenues 234,126,964 250,029,010 Less: Restricted Revenues (1,128,513) (1,128,513) Prior Year Resources Carried Forward - 3,072,666 Release of Restricted Funds 1,220,000 1,220,000 Transfers In from Other Funds 11,977,157 11,977,157 TOTAL SOURCES 246,195,608 265,170,320 USES: Operating Expenditures 225,963,632 233,943,843 Transfers Out 20,200,000 47,030,300 Resources Carried Forward to FY 2021-22 - - Addition to 25% Contingency Reserve - - TOTAL USES 246,163,632 280,974,143 ENDING UNRESTRICTED FUND BALANCE 31,068,860$ 15,233,061$ CHANGE IN FUND BALANCE 31,976$ (15,803,823)$ Category 7 8 04/14/2022 5 All Funds Budget Overview 9City of Newport Beach – Finance Department City of Newport Beach – Finance Department 10 Summary of All Funds - Expenditures • 12.5% growth in operating budget, primarily due to: • Tidelands Fund presentation format change • Increase in proposed CalPERS UAL payment to $40 million • Higher internal service fund charges based on recent project to review rates • Adjustment to Police Department and Fire Department overtime budgets • Significant additional capital spending from FY 2020-21 surplus and ARPA FY 19 Adopted FY 20 Adopted FY 21 Adopted FY 22 Adopted FY 23 Proposed % Variance Operating Budget 291,709,382    304,005,215    307,759,024    309,114,306    347,850,329    12.5% CIP New Appropriations 46,807,906      45,686,890      31,377,224      35,506,078      70,958,858      99.8% Total Budget 338,517,288    349,692,105    339,136,248    344,620,384    418,809,187    21.5% 9 10 04/14/2022 6 City of Newport Beach – Finance Department 11 Summary of All Funds – Expenditures (Restated) • The table below presents the historical budget trend with prior years’ Tidelands Fund expenditures restated to the current presentation format • Reduces operating budget growth from 12.5% to the real growth of 6.6% • Subsequent all funds tables and charts reflect this restated presentation format for clarity FY 19 Adopted FY 20 Adopted FY 21 Adopted FY 22 Adopted FY 23 Proposed % Variance Operating Budget 307,558,578    319,962,314    324,888,178    326,415,030    347,850,329    6.6% CIP New Appropriations 46,807,906      45,686,890      31,377,224      35,506,078      70,958,858      99.8% Total Budget 354,366,484    365,649,204    356,265,402    361,921,108    418,809,187    15.7% $280.7 $289.0 $306.2 $314.5 $325.9 $326.4 $347.9 $250 $270 $290 $310 $330 $350 $370 2016-17 Actual 2017-18 Actual 2018-19 Actual 2019-20 Actual 2020-21 Actual 2021-22 Adopted 2022-23 ProposedMillions City of Newport Beach – Finance Department 12 All Funds Operating Expenditures Trend + 6.6% + 0.1%+ 3.6% + 2.7% + 5.9% + 3.0% 11 12 04/14/2022 7 City of Newport Beach – Finance Department 13 Expenditures by Fund General Fund 70.2% Tidelands 6.0% Water 8.2% Wastewater 1.4% Other 14.2% City of Newport Beach – Finance Department 14 Major Fund Operating Expenditures • General Fund growth of 8.1% to be discussed in more detail • Wastewater Fund growth of 23.4% (15.6% versus FY 2020-21) • Improved insurance ISF allocation methodology • Updated administrative charge calculation FY 19 Adopted FY 20 Adopted FY 21 Adopted FY 22 Adopted FY 23 Proposed % Variance General Fund 208,745,822    219,111,935    219,859,038    225,963,632    244,186,089    8.1% Tidelands 19,148,353      18,502,088      20,084,234      20,436,962      20,978,717      2.7% Water 24,669,005      26,584,151      27,969,925      27,933,241      28,404,922      1.7% Wastewater 3,824,713         3,966,734         4,284,105         3,956,840         4,884,150         23.4% Other 51,170,686      51,797,406      52,690,876      48,124,354      49,396,451      2.6% Total Operating Budget 307,558,579    319,962,315    324,888,178    326,415,030    347,850,329    6.6% 13 14 04/14/2022 8 City of Newport Beach – Finance Department 15 Enterprise Fund Inflation Impacts • Chair O’Neill inquired at the March Finance Committee meeting whether there would be material rate pressures on the City’s Water and Wastewater Utilities as a result of current high inflation • The Finance Director, Utilities Director, and City Engineer met to discuss this issue and can offer the following thoughts • The City’s 2019 Water Rate Study assumed inflation between 2% and 7% for various costs • The City’s 2016 Sewer Rate Study assumed inflation between 1% and 3% • While these inflation assumptions do provide some cushion against inflationary pressures on cost, they are insufficient to counter prolonger higher levels of inflation • The final year of the wastewater rate plan has occurred this year with a 2% rate increase, and a rate study is proposed as a program enhancement for FY 2022-23 that will factor in current inflation trends. City of Newport Beach – Finance Department 16 Enterprise Fund Inflation Impacts • Capital & maintenance projects and materials • Higher inflation in construction bids and materials costs will lead to project postponements • Higher inflation will reduce capacity to construct projects – i.e., $10 million now buys $9 million of planned projects • Higher inflation leads to longer project durations • Inflation vs. pricing volatility – Industry experts are recommending upward project budget adjustments to account for pricing volatility • Cost estimates and project budgets established more than one year ago are now considered outdated Source: APWA So Cal 15 16 04/14/2022 9 City of Newport Beach – Finance Department 17 Enterprise Fund Inflation Impacts • Staff believes that brief higher inflation is manageable in the short-term, especially if it stabilizes • However, sustained higher inflation, sustained supply chain delays, and/or a prolonged drought will lead to future rate implications • Absent a response through upward rate adjustments, inflation will lead to: • Future reductions in capital spending • Reduced reserves, and possibly , reserves falling below established target levels • More dramatic rate increases in future years • Also of note: • It is difficult to evaluate inflationary impacts when you can’t get a product or service you need • Some agencies include annual water supply inflation costs as a pass thru into their rates • Regular and frequent rates studies are a common best practice City of Newport Beach – Finance Department 18 CIP Investment in Infrastructure and Facilities • Fluctuations in capital spending are routine • Appropriation of prior year surplus funds and ARPA resources has facilitated significant additional capital investment FY 19 Adopted FY 20 Adopted FY 21 Adopted FY 22 Adopted FY 23 Proposed % Variance CIP New Appropriations 46,807,906      45,686,890      31,377,224      35,506,078       70,958,858        99.8% CIP Estimated Rebudgets 30,757,550      47,562,633      55,774,942      39,441,387       32,503,321         ‐17.6% Total Budget 77,565,456$    93,249,523$    87,152,166$    74,947,465$    103,462,179$   38.0% 17 18 04/14/2022 10 General Fund Budget Overview 19City of Newport Beach – Finance Department City of Newport Beach – Finance Department 20 General Fund Revenue (in millions) 49.6% 17.6% 10.5% 4.6% 10.5% 4.6%2.7% Property Taxes Sales Tax Transient Occupancy Tax Other Taxes Charges for Services Property Income All Other Sources 19 20 04/14/2022 11 City of Newport Beach – Finance Department 21 Historical General Fund Revenues $234.7 $241.1 $251.3 $259.6 $204.4 $216.5 $228.5 $219.1 $199.6 $228.5 $235.9 $250.1 $265.0 $190 $200 $210 $220 $230 $240 $250 $260 $270 2016-17 Actual 2017-18 Actual 2018-19 Actual 2019-20 Actual 2020-21 Actual 2021-22 Projected 2022-23 ProjectedMillions Pre-Covid Projection Initial Post-Covid Projection Actual and Current Projection City of Newport Beach – Finance Department 22 Revenue Updates Since March Finance Committee • While the total General Fund revenue in the chart appears to be the same, since the Finance Committee reviewed the revenue projections for FY 2022-23 in March, two important changes have been made • HdL has provided an updated, higher sales tax estimate for both FY 2021-22 and FY 2022-23 that has now been incorporated into the revenue projection as an increase of $1.2 million • Staff has relocated all previously restricted revenues out of the General Fund, which has resulted in a reduction in General Fund revenue of approximately $1 million and the elimination of the two restricted revenue-related line items found in the Sources and Uses table that were used to restrict and release these revenues 21 22 04/14/2022 12 City of Newport Beach – Finance Department 23 General Fund Expenditures (in millions) 59.7% 29.1% 0.4% 10.8%Salaries & Benefits $163.4M Maintenance & Operations $79.6M Capital Outlay $1.2M Transfers $29.6M $190.1 $202.8 $208.7 $219.1 $219.9 $226.0 $244.2 $180 $190 $200 $210 $220 $230 $240 $250 2016-17 Adopted 2017-18 Adopted 2018-19 Adopted 2019-20 Adopted 2020-21 Adopted 2021-22 Adopted 2022-23 ProposedMillions City of Newport Beach – Finance Department 24 General Fund Operating Expenditures Trend + 8.1% + 2.8%+ 0.4% + 5.0% + 3.0% + 6.7% 23 24 04/14/2022 13 City of Newport Beach – Finance Department 25 Efforts to Enhance Budgeting Accuracy • Over the last year, staff has comprehensively evaluated opportunities to improve the accuracy of the City’s budgeting • Changes to Tidelands Fund subsidy recognition • Comprehensive evaluation of internal service fund charges and allocation methodologies • Comprehensive review of capital transfers (FFP, HBMP, and FMMP) • Comprehensive review of the City’s cost allocation plan • Evaluation of the adequacy of the overtime and utilities budgets • Identification of accounts that need periodic inflationary adjustments • Reduction in the use of surplus vehicles City of Newport Beach – Finance Department 26 Significant Reasons for Budget Growth of 8.1% Cost % Change Increase to $40 Million UAL Payment $ 4,813,000 2.1% Police and Fire Overtime Adjustment $ 2,958,000 1.3% Increased Internal Service Charges $ 2,904,000 1.3% Program Enhancements $ 2,187,000 1.0% Removal of Vacancy Factor $ 2,000,000 0.9% Be Well OC Contract Continuation (program enhancement)$ 1,000,000 0.4% Utilities Budget Adjustments (electricity and water)$ 826,000 0.4% Other Miscellaneous Adjustments (COLAs, Contract CPIs, etc.)$ 1,534,000 0.7% Total $ 18,222,000 8.1% • The growth in the General Fund operating budget is primarily being driven by the proposed increased UAL payment, increased transfers to ISFs, removal of the vacancy factor, and budget accuracy-related adjustments 25 26 04/14/2022 14 City of Newport Beach – Finance Department 27 General Fund Expenditures by Department • City Clerk – Election costs • City Attorney – Outside counsel budget relocation • City Manager – Homeless services • Police – Overtime adjustment • Fire – Overtime adjustment • Public Works – equipment purchases and water • Utilities – Insurance charges and electricity • Miscellaneous – property insurance allocation • Vacancy factor elimination  2018‐19  Adopted   2019‐20  Adopted   2020‐21  Adopted   2021‐22  Adopted   2022‐23  Proposed % Variance City Council 834,796          881,199          848,125          841,003          909,554          8.2% City Clerk 1,131,339      1,065,439      1,206,539      1,080,305      1,256,209      16.3% City Attorney 2,593,143      2,623,784      2,708,230      2,725,458      2,350,264       ‐13.8% City Manager 3,022,380      3,344,155      3,543,321      4,571,940      5,992,008      31.1% Human Resources 3,142,478      3,293,238      3,423,267      3,448,725      3,437,449       ‐0.3% Finance 9,157,560      9,461,368      9,573,969      9,667,618      9,982,311      3.3% Police 62,627,537    66,040,641    67,002,345    67,401,926    71,566,966    6.2% Fire 50,514,086    53,193,484    54,790,911    55,861,885    60,153,871    7.7% Community Development 12,834,324    12,952,728    12,525,476    12,772,405    13,775,980    7.9% Library 9,021,784      9,265,651      9,559,849      9,655,108      9,387,194       ‐2.8% Recreation and Senior Services 13,624,221    13,853,165    13,325,836    13,360,496    13,569,635    1.6% Public Works 35,774,140    38,255,532    37,274,177    41,305,237    44,359,521    7.4% Utilities 4,336,136      4,759,656      5,033,549      5,144,631      5,649,416      9.8% Miscellaneous Non‐Operating 131,896          121,896          1,043,444      126,896          1,795,710      1315.1% Vacancy Factor ‐                    ‐                   (2,000,000)     (2,000,000)      ‐                    ‐100.0% SubTotal 208,745,820  219,111,935  219,859,038  225,963,632  244,186,089  8.1% Transfers Out 24,909,000    31,900,252    6,000,000      20,200,000    29,647,341    46.8% Total 233,654,820  251,012,187  225,859,038  246,163,632  273,833,430  11.2% City of Newport Beach – Finance Department 28 General Fund Transfers • General Fund CIP transfer reduced by $700,000 for one-time transfer in prior year of Oceanfront Encroachment Reserve funds and includes $530,000 in the current year for a program enhancement • Increases to FFP, HBMP, and FMMP per recent Finance Committee discussion • Addition of Tidelands subsidy transfer per recent Finance Committee discussion • $379,452 transfer to Fire Equipment Fund for a program enhancement 2018‐19  Adopted 2019‐20  Adopted 2020‐21  Adopted 2021‐22  Adopted 2022‐23  Proposed % Variance General Fund CIP         5,525,000          5,220,000          5,000,000       5,700,000          5,530,000 ‐3.0% Facilities Financing Plan (FFP)        8,500,000       10,020,333                         ‐         8,500,000          8,600,000 1.2% Harbor & Beaches Master Plan         4,000,000          5,500,000                         ‐         4,500,000          4,600,000 2.2% Facilities Maintenance Plan (FMP)        1,000,000          2,500,000          1,000,000       1,500,000          2,500,000 66.7% Tidelands Operating Fund                        ‐                           ‐                           ‐                         ‐            8,037,889  ‐  800MHz Radio Fund            534,000             500,000                         ‐                         ‐                           ‐     ‐  Other One‐Time Transfers         5,350,000          8,159,919                         ‐                         ‐               379,452  ‐  Total      24,909,000       31,900,252          6,000,000    20,200,000       29,647,341 46.8% 27 28 04/14/2022 15 City of Newport Beach – Finance Department 29 General Fund Internal Service Fund Charges • Vehicle replacement charges are increasing based on adjustments to the rate setting process over the past two fiscal years • Insurance charges are increasing due to increasing excess insurance premiums and the elimination of the fund balance drawdown included in last fiscal year’s budget • The variance of $288,000 from the total change below and the ISF line item on the earlier slide listing reasons for the 8.1% budget growth is due to a proposed program enhancement that will result in an increased transfer to the Police Equipment Fund FY 19 Adopted FY 20 Adopted FY 21 Adopted FY 22 Adopted FY 23 Proposed % Variance Information Technology           5,321,409            6,628,828            6,639,228            6,595,085            6,888,238 4.4% Vehicle Replacement           2,429,440            2,429,440            2,714,673            3,327,141            3,922,740 17.9% Equipment Replacement           2,391,536            2,610,653            2,672,067            2,779,552            2,822,871 1.6% Insurance           8,629,028            9,953,334            9,440,982            7,866,768          10,777,438 37.0% OPEB           3,502,724            3,528,356            4,510,345            4,510,345            3,778,920 ‐16.2% Compensated Absences           2,304,782            2,403,134            2,440,698            2,481,372            2,561,722 3.2% Total  $    24,578,919  $    27,553,745  $    28,417,993  $    27,560,262  $    30,751,928 11.6% General Fund Reserves and Surplus 30City of Newport Beach – Finance Department 29 30 04/14/2022 16 FY 2021-22 FY 2022-23 Projected Proposed Variance BEGINNING UNRESTRICTED FUND BALANCE 31,036,884 11,794,742 (19,242,142) SOURCES: Operating Revenues 250,029,010 265,030,502 15,001,492 Less: Restricted Revenues (1,128,513) - 1,128,513 Prior Year Resources Carried Forward 3,072,666 - (3,072,666) Release of Restricted Funds 1,220,000 - (1,220,000) Transfers In from Other Funds 11,977,157 18,550,724 6,573,567 TOTAL SOURCES 265,170,320 283,581,226 18,410,906 - USES:- Operating Expenditures 233,943,843 244,186,089 10,242,245 Transfers Out 47,030,300 29,647,341 (17,382,959) Resources Carried Forward to FY 2021-22 - - - Addition to 25% Contingency Reserve 3,438,319 - (3,438,319) TOTAL USES 284,412,462 273,833,430 (10,579,033) - ENDING UNRESTRICTED FUND BALANCE 11,794,742 21,542,539 9,747,797 CHANGE IN FUND BALANCE (19,242,142) 9,747,797 (9,747,797) City of Newport Beach – Finance Department 31 General Fund Sources and Uses • The current year projected surplus of $15.8 million will need to be partially allocated to maintain the contingency reserve at 25% • $11.8 million is projected to remain • Elimination of restricted revenues • The significant reduction in transfers out is the result of the expenditure of the prior year surplus during FY 2021-22 • The FY 2022-23 budget as currently proposed includes a structural surplus of $9.7 million City of Newport Beach – Finance Department 32 Remaining Structural General Fund Surplus • The budget as proposed reflects a $9.7 million structural surplus after increasing the discretionary allocation to the City’s pension UAL from $35.0 million to $40.0 million • This amount is in addition to the projected FY 2021-22 surplus of $11.8 million • Several smaller employee bargaining groups have yet to conclude negotiations, which once concluded will reduce this number by a total amount estimated to be well under $1.0 million • The structure surplus could be utilized to address additional City Council priorities in a manner comparable to the direction under City Council Policy F-5 • Investment in infrastructure or neighborhood capital improvements • Example: $8.6 million to fully fund the remaining components of the Balboa Island drainage project • Addressing long-term obligations • $5.7 million to eliminate the City’s remaining OPEB unfunded liability • An additional increase to the City’s pension UAL payment for FY 2022-23 31 32 04/14/2022 17 Program Enhancements and Staffing Changes 33City of Newport Beach – Finance Department City of Newport Beach – Finance Department 34 Key General Fund Program Enhancements • Police Department body worn camera program, taser replacement program, and enhanced internal service fund allocation • Subscription-based program costs rather than a lump sum • Net General Fund impact of a $288,000 increase to the annual ISF transfer • $105,000 for one additional Community Services Officer position • $1,000,000 additional General Fund commitment to homeless services • Ongoing funding for the Be Well OC program 33 34 04/14/2022 18 City of Newport Beach – Finance Department 35 Key General Fund Program Enhancements • Capital purchases • $530,000 to fully fund the Fire Department station alerting system project • $379,000 to fund installation of the vehicle ventilation system in the remaining fire stations • $251,000 for the purchase of a sidewalk sweeper and a Bobcat track loader to enhance the Public Works Department’s sand management capabilities and improve response times • Other material miscellaneous enhancements include • $298,000 of one-time funds for Community Development Department professional services in support of contract plan check, planning studies, and other temporary workload demands • $189,000 to reduce the use of surplus vehicles for full-time staff • $100,000 for a wastewater rate study • $50,000 to increase the budget for the purchase of library materials • $24,800 for enhanced lifesaving equipment for the Harbor Department’s patrol boats City of Newport Beach – Finance Department 36 Changes in Full-Time Staffing 2009-2020 832 805 792 763 752 736 728 730 724 726 726 728 728 730 741 650 675 700 725 750 775 800 825 850 2009 2011 2013 2015 2017 2019 2021 2023 Fiscal Year • Full-time staffing levels in the City have been relatively flat for a period of eight years • There were 736 full-time positions in FY 2013-14 and 730 full-time positions in the current fiscal year • The City had 832 full-time positions in FY 2008-09 prior to cuts made in response to the Great Recession • During that 15-year period, targeted part-time positions have been added to address Council priorities and areas with workload demands 35 36 04/14/2022 19 City of Newport Beach – Finance Department 37 Changes in Total Staffing 2009-2020 • Total staffing levels, including part-time employees, in the City remain 7.4% below the 15-year peak in 2009 • Part-time employees become eligible for CalPERS membership when they work more than 1,000 hours in a fiscal year and remain so for the duration of their employment • These employees do not receive the full benefit package offered to full-time employees, yet some work close to full- time hours • The primary difference is the level of contribution to medical insurance coverage 967 946 925 886 878 848 853 867 855 867 877 886 888 895 902 500 600 700 800 900 1000 2009 2011 2013 2015 2017 2019 2021 2023 City of Newport Beach – Finance Department 38 Proposed Realignment of Part-Time to Full-Time Staff • In an effort to address recruitment and retention challenges associated with certain part-time positions that are eligible for CalPERS membership, staff propose a limited program to convert part-time positions to full-time positions • Since all but one of these positions are already participating in CalPERS, the material fiscal impact is limited to providing the full cafeteria plan contribution afforded to full-time staff Department Position FTE Change Additional Cost Community Development Limited Term Planning Technician None $ 29,700 Community Development Department Assistant None $ 22,200 Community Development Building Inspector (Combination) (0.50) ($ 24,500) City Manager Management Analyst 0.20 $ 42,100 Finance Buyer None $ 16,900 Finance / Recreation Senior Fiscal Clerk (Combination) 1 None $ 28,300 Recreation Office Assistant 0.10 $ 33,700 Total (0.20) $ 148,400 1 These positions are not currently in CalPERS. 37 38 04/14/2022 20 City of Newport Beach – Finance Department 39 Proposed Additional Staffing • Other staffing requests have been limited in the proposed budget to the most critical needs • Contract Conversions • As was the case last year, staff continue to monitor whether in-house staff are more cost effective than contract staff • One Public Works Inspector position is proposed at a cost of $129,000 that is fully offset by reduced contract expenditures of $170,000 • After a successful first phase of implementation in the current fiscal year, adding 2.02 part-time FTEs in Public Works to further increase the pool of Maintenance Aide hours that are being utilized in lieu of contract staff to improve the City’s standards relative to portering and maintenance services • Recreation and Senior Services requests the addition of a part-time 0.45 FTE Facilities Maintenance Worker position to bring certain specialized maintenance work in-house City of Newport Beach – Finance Department 40 Proposed Additional Staffing • New positions • Staff continues to make every effort to be efficient with existing resources and avoid adding new full-time staff unless absolutely necessary • Staff is proposing the addition of one Community Services Officer in the Police Department to manage the body worn camera program • Staff is proposing the addition of one Associate Civil Engineer in the Public Works Department to help facilitate the timely delivery of the City’s increasing recurring level of capital improvement projects • Staff is proposing an increase of part-time Associate Civil Engineer hours in Public Works of 0.60 FTE to address the same workload demands • One additional FTE was added mid-year in FY 2021-22 for the Management Fellowship program • Reclassifications • Various reclassifications and salary adjustments have been included in the budget to address departmental reorganizations and salary studies • The fiscal impact associated with these changes is minimal 39 40 04/14/2022 21 City of Newport Beach – Finance Department 41 Five-Year Staffing Detail F/TP/T F/TP/T F/TP/T F/TP/T F/TP/T F/TP/T General Fund City Clerk 5.00 1.00 5.00 1.00 5.00 1.00 5.00 1.00 5.00 1.00 - - City Attorney 7.00 1.00 7.00 1.60 7.00 1.60 7.00 1.60 7.00 1.60 - - City Manager 6.00 1.50 6.00 1.30 6.00 1.30 6.00 1.80 8.50 0.50 2.50 (1.30) Human Resources 11.00 0.50 11.00 1.25 11.00 1.25 11.00 1.25 11.00 1.25 - - Finance 32.00 4.26 32.00 4.55 33.00 4.55 33.00 4.55 35.00 3.05 2.00 (1.50) Police 231.00 14.87 232.00 14.87 232.00 14.87 232.00 14.87 233.00 14.87 1.00 - Fire 143.90 42.17 143.90 43.12 143.80 43.12 143.80 42.56 143.80 42.56 - - Community Development 50.10 8.37 50.10 10.22 49.20 10.20 50.20 10.20 53.20 6.70 3.00 (3.50) Library 36.00 22.83 36.00 22.83 36.00 22.83 36.00 22.83 35.00 22.83 (1.00) - Recreation and Senior Services 42.00 37.96 42.00 38.00 42.00 38.00 42.00 39.43 43.50 38.48 1.50 (0.95) Public Works 90.50 5.08 85.50 5.68 85.50 5.67 85.50 10.63 87.50 12.25 2.00 1.62 Utilities 1.00 - 9.50 - 9.50 - 9.50 - 9.50 - - - Total 655.50 139.54 660.00 144.42 660.00 144.39 661.00 150.72 672.00 145.09 11.00 (5.63) Harbor (Tidelands)3.00 9.39 3.00 9.39 - - Information Technology 15.50 0.50 15.50 0.50 - - Utilities (Water Fund)33.25 2.73 33.25 2.73 - - Utilities (Wastewater Fund)10.75 1.23 10.75 1.23 - - Public Works (Equipment Fund)6.50 0.80 6.50 0.80 - - Public Works (Environmental Liability)- - - 1.00 - 1.00 Grand Total 726.00 151.00 728.00 158.21 728.00 160.12 730.00 165.37 741.00 160.74 11.00 (4.63) Total Full-Time Equivalents 877.00 886.21 888.12 895.37 901.74 6.37 Proposed Change FY 23 Proposed FY 19 FY 20 FY 21 FY 22 Adopted Adopted Adopted Adopted 15.73 70.50 11.46 68.00 13.79 68.00 City of Newport Beach – Finance Department 42 Summary of Recommended Enhancements • Program enhancements of $4.2 million address: • Key City Council priorities • Maintaining adequate service levels • Enhanced budgeting accuracy • Previously identified personnel adjustments 1These enhancements are budgeted as transfers out of the General Fund and are not included in the earlier table showing the components of the 8.1% operating budget variance. Fund Department Item Description Budget Impact General Fund City Manager Additional Homeless Services Funding 1,000,000 Police Body Worn Camera, Taser, and ISF Funding 393,000 Fire Vehicle Ventilation and Station Alerting Systems 1 909,000 Community Development One-Time Professional Services Funding 298,000 Library Additional Funding for Materials Purchases 50,000 Public Works Equipment for Sand Management 251,000 Various New Vehicles to Reduce Surplus Vehicle Utilization 189,000 Various Miscellaneous Personnel Budget Changes 647,000 Miscellaneous Non-Personnel Budget Changes 359,000 Total General Fund 4,096,000 Tidelands Harbor Lifesaving Equipment for Patrol Boats 25,000 Wastewater Utilities Rate Study 100,000 Various Various Miscellaneous Personnel Budget Changes 21,000 Total Other Funds 146,000 Total FY 2022-23 Program Enhancements 4,242,000 41 42 04/14/2022 22 Unfunded Pension Liability 43City of Newport Beach – Finance Department City of Newport Beach – Finance Department 44 Recent Changes to the City’s Pension Liability • Actual data is delayed by one fiscal year, requiring projections to model the current status • The City’s unfunded liability had not changed much in the prior three years due to the ongoing actuarial changes and investment losses, even with sizable discretionary payments • Phased discount rate reduction from 7.5% to 7.0% • Two years below the target return • The 21.3% investment return in FY 2020-21 has significantly reduced the City’s liability, even with the recent discount rate reduction to 6.8% June 30, 2018 June 30, 2019 June 30, 2020 June 30, 2021 * Unfunded Liability $ 333,135,247 $ 326,289,861 $ 333,046,257 $ 234,909,163 Funded Percentage 66.9 %68.7 % 69.2 % 79.5 % Investment Return 8.6 % 6.7 % 4.7 % 21.3 % * Projected 43 44 04/14/2022 23 City of Newport Beach – Finance Department 45 CalPERS Historical Investment Returns Source: CalPERS City of Newport Beach – Finance Department 46 Turnover of Employees into Tiers 2 and 3 45 46 04/14/2022 24 City of Newport Beach – Finance Department 47 Adjusted Unfunded Liability Paydown Strategy • In November 2019, the Finance Committee endorsed staff’s recommendation to anticipate a future drop in the discount rate • $35 million base contribution to the unfunded liability to remain in place as part of the baseline budget • Additional $5 million per year contribution to be added for five years with a $2 million per year contribution thereafter • The Finance Committee and City Council revisit this strategy as part of each year’s budget process • Given the City’s recent revenue growth, staff is now recommending maintaining a $40 million per year payment from the baseline budget until the unfunded liability is eliminated • Staff also recommends maintaining an additional annual discretionary contribution at a minimum level of $5 million from year-end budget surplus per City Council Policy F-5 60.0% 65.0% 70.0% 75.0% 80.0% 85.0% 90.0% 95.0% 100.0% 105.0% 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036  2019 Projection  2020 Projection  2021 Projection  Budget Recommendation City of Newport Beach – Finance Department 48 Long-Term Pension Liability Reduction Projections • As can be seen in the chart, projections change from year to year, primarily as a result of market performance • With five years of increased $45.0 million annual payments, the City’s unfunded liability would be eliminated a year sooner in FY 2027-28, with a reduced $34.5 million payment due that year 47 48 04/14/2022 25 City of Newport Beach – Finance Department 49 Recap: Key Messages Strong budget surplus for FY 2021-22 Record General Fund revenues for FY 2022-23 Proposed General Fund budget is balanced Increased budget accuracy Updated and comprehensive savings plans for long-term needs Increased pension UAL payment of $45.0 million resulting in paydown of the liability one year earlier than previously planned Structural General Fund budget surplus of $9.6 million subject to the Council’s direction as to possible additional resource allocations City of Newport Beach – Finance Department 50 Questions? 49 50 04/14/2022 1 OPEB Actuarial Valuation Report Update Finance Committee April 14, 2022 City of Newport Beach – Finance Department 2 Background • There is no requirement to pre-fund long-term OPEB costs, but the City has voluntarily chosen to do so as is a best practice under sound financial management principles • Funding guidelines established under the City Council-approved Reserve Policy F-2 • Policy is to pre-fund the explicit portion of the Actuarial Accrued Liability (AAL) over a 20-year amortization period, or less • Prefunding also allows for a higher discount rate to be utilized for the City’s OPEB financial statement disclosures, which significantly reduces the liability reported on the City’s statement of net position (balance sheet) • The City’s current policy is to fund OPEB costs annually in an amount equal to the Actuarially Determined Contribution (ADC) established by the City’s actuary, which includes funding for both the explicit and implicit portions of the OPEB liability • Change occurred as a result of the implementation of GASB Statement No. 75, which required recognition of the implicit subsidy liability, but Policy F-2 was not amended 1 2 04/14/2022 2 City of Newport Beach – Finance Department 3 Background • The City’s OPEB actuarial valuation is updated once every two years by the City’s actuary – Nyhart, most recently in March of 2022 for a measurement date as of June 30, 2021 • The City established an OPEB trust with the California Employers’ Retiree Benefit Trust (CERBT) in FY 2007-08, which is managed by CalPERS • The initial contribution was $8.8 million • Funds held by the City in an internal service fund can only be invested under the limited California Government Code investment criteria • Funds on hand with CERBT are invested like the City’s pension funds in stocks, real estate, and other asset classes not permissible for the funds in the City’s pooled investment portfolio • The Finance Committee last reviewed the status of the City’s unfunded OPEB liability at the January 16, 2020, meeting City of Newport Beach – Finance Department 4 Recap of January 2020 Discussion • The City’s retiree medical plan was projected to be fully funded in FY 2027-28, assuming actuarial assumptions were achieved • Staff recommended funding the ADC at a 5.5% discount rate in lieu of a 6.5% discount rate • Based on assumed weaker investment returns in future near-term years • Staff also recommended transitioning from CERBT Strategy 1 to the more conservative CERBT Strategy 3 gradually over time and ultimately reducing the discount rate to 4.5% • This proposal was designed to reduce volatility risk from investment earnings as the plan approaches full funding • It should be noted that current staff discussed this concept with the CERBT staff, and they have indicated that it is not currently possible to be in two investment strategies at once, though they do have one agency in a pilot program 3 4 04/14/2022 3 City of Newport Beach – Finance Department 5 Recap of January 2020 Discussion • The Finance Committee deferred to staff to make the call regarding the discount rate reduction • Staff implemented a 5.5% discount rate for contribution purposes for FY 2020-21 • This had a budgetary impact of $815,000, which was maintained for FY 2021-22 • CERBT Strategy 1 earned returns of 27.43% in FY 2020-21 Overview of Retiree Medical Benefits 6City of Newport Beach – Finance Department 5 6 04/14/2022 4 City of Newport Beach – Finance Department 7 OPEB Benefit Plan Overview • The City’s original retiree medical benefit was provided via a defined benefit plan that paid a fixed monthly amount to each retired employee to offset the cost of their health insurance premiums • Effective January 1, 2006, the City implemented a Retiree Health Savings (RHS) program for all new full-time employees • The current and former plan only cover health insurance premiums and do not cover dental or vision insurance premiums • Retirees are provided access to the City’s dental and vision insurance plans • Health insurance for retirees is provided through CalPERS • The same pre-Medicare plans are available as are available to active employees • After retirees become eligible for Medicare, they are required to participate in one of several Medicare supplement plans offered by CalPERS City of Newport Beach – Finance Department 8 OPEB Benefit Plan Overview • While the RHS plan is a defined contribution plan, the Public Employees’ Medical and Hospital Care Act (PEMHCA) does require an annual minimum contribution (a defined benefit), which causes post-January 2006 employees to still be included in the OPEB actuarial valuation • The PEMHCA minimum is $149.00 in 2022 and increases annually based on Medical CPI • Part-time employees otherwise not eligible for retiree medical benefits can elect to continue coverage at retirement and the City must pay the PEMHCA minimum toward their premiums • Once there are no non-RHS retirees remaining in the plan, the OPEB liability will be reduced to the future annual PEMHCA minimum contributions for employees assumed to elect coverage • Active employees and retirees are categorized into one of four categories for purposes of eligibility for retiree medical benefits • Existing employees whose age plus years of service as of January 1, 2006, was less than 46 for Safety and 50 for Miscellaneous were required to transition to the RHS plan and other employees could do so voluntarily 7 8 04/14/2022 5 City of Newport Beach – Finance Department 9 Retiree Medical Benefit Categories Plan Provision Category 1(Defined Contribution)Category 2(Defined Contribution)Category 3(Hybrid)Category 4(Defined Benefit) Employee Contribution 1% of base pay to RHS 1% of base pay to RHS 1% of base pay to RHS $100 per month to City N/A City Contribution 1 $2.50 per month x years of age + years of service $2.50 per month x years of age + years of service None N/A Leave Conversion Percentage based on unit Percentage based on unit Percentage based on unit N/A Conversion Contribution 2 None $100 / month in old plan w/ $18,000 cap $75 per month in old plan w/ $13,500 cap N/A Post-Retirement Contribution PEMHCA Minimum after RHS Plan Balance is $0 PEMHCA Minimum after RHS Plan Balance is $0 $400-$450 per month $400-$450 per month • Category 1 – New hires on or after January 1, 2006 • Category 2 – Existing employees hired prior to January 1, 2006, who were required to join or opted into the RHS Plan • Category 3 – Existing employees hired prior to January 1, 2006, who opted out of the RHS Plan • Category 4 – Existing retirees as of December 31, 2005 1 Subject to a five-year vesting period.2 Employee must retire from the City to receive this benefit. City of Newport Beach – Finance Department 10 Summary of Plan Participants Active Employees Employee Count Average Age Average Service Payroll Hybrid Plan 37 59.2 30.4 $ 3,894,000 RHS Plan 630 42.0 11.9 $ 66,533,000 Part-Time 154 39.0 7.9 $ 9,057,000 Total Active Employees 821 42.2 11.9 $ 79,484,000 • 94% of active full-time employees are now in the RHS plan • Between July 1, 2019, and July 1, 2021: • Active participants increased from 790 to 821 • Retired participants increased from 730 to 777 • Active Hybrid Plan participants decreased from 60 to 37 1These employees are receiving the PEMHCA minimum contribution only.2These employees are typically covered by a health insurance plan obtained other than through CalPERS. Retirees Total Average Age Full-Time 406 70.6 Part-Time 1 44 61.9 Waiving Coverage 2 327 68.1 Total Retirees 777 69.1 9 10 04/14/2022 6 City of Newport Beach – Finance Department 11 Summary of Plan Participants 4% 77% 19% Active Participants Hybrid Plan RHS Plan Part-Time 52% 6% 42% Retired Participants Full-Time Part-Time Waiving Coverage Overview of the City’s Participation in the CERBT Program 12City of Newport Beach – Finance Department 11 12 04/14/2022 7 City of Newport Beach – Finance Department 13 CERBT Overview • CERBT has three investment strategies that provide for three alternative levels of tolerance for investment volatility risk • CERBT investments are managed by State Street Global Advisors in lieu of CalPERS investment staff with investment criteria dictated by an investment policy adopted by the CalPERS Board • 591 California public agencies currently participate in CERBT • Participating agencies own units of the portfolio rather than having direct ownership of securities • All-inclusive charge of 10 basis points for administrative, custodial, and investment fees Asset Class Strategy 1 Strategy 2 Strategy 3 Global Equity 59% 40% 22% Fixed Income 25% 43% 49% Global Real Estate 8% 8% 8% Treasury Inflation Protected Securities 5% 5% 16% Commodities 3% 4% 5% City of Newport Beach – Finance Department 14 CERBT Overview • Target returns for the three CERBT investment strategies range from 6.22% to 7.59% • 84% of CERBT participants are in Strategy 1 • Strategy 1 has earned 7.94% over the past 10 years, which is 35 basis points above the target and 23 basis points above the benchmark • The FY 2020-21 investment returns of 27.3% are a significant factor in that performance Option Assets 1 Target Return 10-Year Benchmark Strategy 1 $ 14.2 Billion 7.59% 7.94% 7.71% Strategy 2 $ 1.9 Billion 7.01% 6.72% 6.52% Strategy 3 $ 0.8 Billion 6.22% 5.57% 5.37% 1As of February 2022. 84% 11% 5% Strategy 1 Strategy 2 Strategy 3 13 14 04/14/2022 8 City of Newport Beach – Finance Department 15 Historical Performance of the City’s Trust Account • As of December 31, 2021 • Total contributions in excess of withdrawals of $18.3 million • Total investment earnings (net of fees) of $18.7 million • Total assets of $37.0 million • Annualized rate of return over 13.6 years of 7.68% $(5,000,000) $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 Cummulative Net Contribution Assets from Investment Earnings June 30, 2021, OPEB Actuarial Valuation 16City of Newport Beach – Finance Department 15 16 04/14/2022 9 City of Newport Beach – Finance Department 17 June 30, 2021, Actuarial Valuation • Purpose is to provide an updated analysis of the City’s OPEB liability as well as to set the required ADC for FY 2022-23 • Also provides required disclosures under GASB Statement No. 75 for the City’s financial statements • The City’s actuary, Nyhart, collects census data and rate information from the City and CalPERS and then analyzes the validity of prior demographic and financial assumptions • Future cash flows are then determined and discounted to the measurement date to determine the present value of the future cost of the City’s OPEB benefits that are allocable to past, current, and future service based on actuarial standards • Significant changes since the prior valuation • Implementation of 2017 CalPERS mortality tables – small decrease to liability • Implementation of new health care cost trend rates –increase to liability • Updated census data reflecting additional employees and retirees –increase to liability City of Newport Beach – Finance Department 18 Summary of Valuation Results • Actuarial assumption changes and census data changes have resulted in an increase in the total OPEB liability of $5.5 million or 12.0% • Assets on hand with CERBT as of June 30, 2021, increased by $9.2 million or 35.6% • The City’s unfunded OPEB liability decreased by $3.7 million or 18.0%, resulting in an increase in the funded percentage to 67.8% when measured against the total OPEB liability June 30, 2020 1 June 30, 2021 2 Change Total OPEB Liability $ 46,094,000 $ 51,604,000 $ 5,510,000 Trust Assets ($ 25,796,000) ($ 34,970,000) ( $9,174,000) Net OPEB Liability $ 20,297,000 $ 16,634,000 ( $3,663,000) Funded Percentage 56.0% 67.8% + 11.8% 1Measurement date, rolled forward from June 30, 2019, valuation data on a no loss / no gain basis. 2Measurement date. 17 18 04/14/2022 10 City of Newport Beach – Finance Department 19 Funded Status and Components of the Liability 81% 19% Retiree Liabilty Active Employee Liability 42.8% 49.0% 51.5% 56.0% 67.8% 30.00% 35.00% 40.00% 45.00% 50.00% 55.00% 60.00% 65.00% 70.00% FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 FY 2020-21 Funded Status City of Newport Beach – Finance Department 20 Update on the Actuarially Determined Contribution • The ADC has 2 components: • The normal cost, which is the current accrual of benefits being earned • A payment toward amortization of the unfunded liability • Ignoring the additional funds sent to CERBT over the past two years due to setting the discount rate for contribution purposes at 5.5%, the ADC amount is increasing by 5.7% • Growth in covered payroll • Other actuarial assumption changes FY 2021/22 FY 2022/23 Change ADC $ 4,125,000 $ 4,360,000 $ 235,000 19 20 04/14/2022 11 City of Newport Beach – Finance Department 21 Projected Future Amortization of Unfunded Liability • Based on current actuarial assumptions, Nyhart projects that the unfunded OPEB liability, including both the explicit and implicit components, will be eliminated by FY 2028-29. • 63% of the remaining unfunded liability relates to the implicit subsidy liability, or $10.3 million of the $16.6 million total • The ADC for funding purposes is set at the higher of the calculated ADC or the expected benefit payments to ensure that a positive contribution to the trust occurs each year prior to achieving full target-level funding Fiscal Year Normal Cost Amortization of  Unfunded  Liability Calculated ADC Expected  Benefit  Payments 2022/23 622,078$               2,850,988$           3,473,066$           4,359,593$            2023/24 599,816                 2,850,988             3,450,804             4,331,623              2024/25 578,761                 2,850,988             3,429,749             4,299,354              2025/26 562,986                 2,850,988             3,413,974             4,276,853              2026/27 546,850                 2,850,988             3,397,838             4,228,032              2027/28 531,532                 2,850,988             3,382,520             4,203,899              2028/29 515,764                 2,850,988             3,366,752             4,144,643              2029/30 498,989                  ‐                          498,989                 4,105,413              2030/31 481,313                  ‐                          481,313                 4,016,055              2031/32 462,418                  ‐                          462,418                 3,858,042              City of Newport Beach – Finance Department 22 Discount Rate Analysis • The discount rate utilized for the valuation of OPEB liabilities is set based on the long-term expected rate of return on the OPEB plan investments • Must be sufficient to pay for the projected benefit payments • Plan assets must be invested under a strategy sufficient to achieve that return • If the plan assets are not determined to be sufficient to pay for the projected benefit payments, then the yield for a 20-year tax-exempt general obligation municipal bond must be used with an average rating of AA/Aa or higher • Nyhart has determined that the City’s investment of its OPEB assets through CERBT Strategy 1 will generate sufficient returns to justify a discount rate of 6.5% • The discount rate was adjusted downward from 7.0% in 2017 based on the implementation of GASB Statement No. 75 and the fact that the plan was closed to new defined benefit plan entrants 21 22 04/14/2022 12 Implicit Subsidy Discussion 23City of Newport Beach – Finance Department City of Newport Beach – Finance Department 24 Explicit and Implicit Subsidies • Under the City’s retiree medical plan, two types of subsidies are provided to retirees • Explicit subsidy – The difference between the premium for a retiree and the amount paid by the retiree • Implicit subsidy – The difference between the premium for a retiree and the actual cost of their coverage given their age • In this example for a Category 4 retiree: • The explicit subsidy is the $400 per month City contribution toward retiree medical coverage • The implicit subsidy is the difference between the CalPERS premium paid of $669.77 and the actual cost to cover the retiree of $1,100.00 based on their age 23 24 04/14/2022 13 City of Newport Beach – Finance Department 25 Implicit Subsidy Explained • $10.4 million of the City’s $51.6 million OPEB liability relates to the implicit subsidy • Results from the pooling of non-Medicare retirees & active employees for premium purposes in the community rated CalPERS medical plans • Upon implementation of GASB Statement No. 75, the Governmental Accounting Standards Board required that the future value of the implicit subsidy be included in the City’s OPEB liability, even though these costs will be paid on a pay- as-you-go basis in the future via higher premiums for active employees • Cost is covered by the City’s cafeteria plan contribution and paid from the City’s operating budget, which if funded via the OPEB trust would result in a periodic reimbursement of these costs from the trust $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 25 30 35 40 45 50 55 60 65Annual Claim CostsAge Average Cost Actual Cost City of Newport Beach – Finance Department 26 Funded Status Versus Liability Category • The City’s OPEB plan is: • 68% funded versus the total OPEB liability • 85% funded versus the explicit subsidy liability • The City did not contribute to CERBT for the implicit subsidy liability until the implementation of GASB Statement No. 75 • Full funding is likely to be achieved within three years if the funding target is returned to the explicit subsidy liability as specified in City Council Policy F-2 versus the total liability • $6.2 million funding gap as of June 30, 2021 • Staff would like the Finance Committees guidance on whether it is preferred to target funding at 100% of the explicit subsidy liability or 100% of the total OPEB liability • Following City Council Policy F-2 would result in the $10.4 million implicit subsidy liability remaining on the City’s statement of net position Explicit Contributions Implicit InvestmentEarnings Unfunded $- $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 Total OPEB Liability CERBT Account Balance 25 26 04/14/2022 14 Closing Thoughts 27City of Newport Beach – Finance Department City of Newport Beach – Finance Department 28 Discount Rate, CERBT Strategy, and ADC • Staff believes that a 5.5% discount rate for contribution purposes is an unnecessarily conservative approach given recent investment performance and the funding level for the plan • The proposed budget for FY 2022-23 therefore returns to funding the ADC at a 6.5% discount rate • When adjusting for a return to the 6.5% discount rate, the budget for the ADC payment will decline by $580,000 in FY 2022-23 from $4,940,000 • Staff recommends remaining in CERBT Strategy 1 until the target funding level is achieved in lieu of transitioning to Strategy 3 • With the Finance Committee’s feedback, staff will either amend City Council Policy F-2 to specify a funding target equal to the total OPEB liability or comply with the current Policy 27 28 04/14/2022 15 City of Newport Beach – Finance Department 29 Current and Proposed OPEB Accounting • Currently, there are three internal service funds in which OPEB-related funds are held • The gradually shrinking liability for conversion payments to Category 2 and 3 employees is held in the Compensated Absences Fund, and this will continue until the liability is eliminated • Staff intend to enhance the disclosure related to this balance in the FY 2021-22 ACFR • The Retiree Medical Fund is no longer utilized but has a negative cash balance • The Retiree Medical Reserve Fund has a positive cash balance but is now just a pass-through fund, and the transactions will likely be relocated to the Payroll Fund Fund 760 Compensated Absences Fund Category 2 and 3 Conversion LiabilityCurrently $1,235,000 (Not Included in OPEB Liability) Fund 761 Retiree Medical Fund Payment of Retiree Dental and Vision Premiums Terminated in 2021 $353,000 Negative Cash Balance Fund 762 Retiree Medical Reserve Fund Formerly Held Funds Now in CERBT Now a Pass-Through for Funds $878,000 Positive Cash Balance City of Newport Beach – Finance Department 30 Staff Recommendations • Set the discount rate for contribution purposes at 6.5% • Remain in CERBT Strategy 1 until the target funding level is achieved and then evaluate alternatives • Set the target funding level either equal to the explicit subsidy liability, or set at the total OPEB liability and amend City Council Policy F-2 • Remit the net $525,000 balance on hand in the OPEB ISFs to CERBT as a one-time additional contribution • Return to the Finance Committee annually with an OPEB update, consistent with the Committee’s current annual CalPERS update to revisit the plan’s funded status and these recommendations 29 30 04/14/2022 16 City of Newport Beach – Finance Department 31 Questions? 31 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5C April 14, 2022 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Scott Catlett, Finance Director/Treasurer 949-644-3123 or scatlett@newportbeachca.gov SUBJECT: BUDGET AMENDMENTS FOR QUARTER ENDING MARCH 31, 2022 EXECUTIVE SUMMARY The purpose of this memorandum is to report on the budget amendments for the third quarter of Fiscal Year 2021-22. All budget amendments are in compliance with City Council Policy F-3, Budget Adoption and Administration. DISCUSSION City Council Policy F-3, Budget Adoption and Administration, identifies how appropriations can be transferred, increased or reduced. The Finance Committee reviews a quarterly report of City Council and City Manager budget amendments including their effect on fund balance. Please find the list of budget amendments included as Attachment A. Prepared by: Submitted by: /s/ Lisa Abbaszadeh /s/ Scott Catlett Lisa Abbaszadeh Scott Catlett Budget Analyst Finance Director/Treasurer Attachment: A. Budget Amendments Fiscal Year 2021-22 Quarter Ending March 31, 2022 14 ATTACHMENT A BUDGET AMENDMENTS FISCAL YEAR 2021-22 QUARTER ENDING MARCH 31, 2022 15 BA #Date Amendment Type Fund Revenues Expenditures Net Effect on Fund Balance Increase/(Decrease)Department Explanation 034 01/11/2022 City Council TIDE & SUBMERGED LANDS FUND - 85,765.00 (85,765.00) Public Works To increase expenditure appropriations from unappropriated Tidelands Maintenance Fund Balance to fund Newport Bay Water Wheel. 035 01/11/2022 City Council CONTRIBUTIONS FUND 28,717.00 28,717.00 - Public Works To increase revenue and expenditure budgets to accept and appropriate funds from Lumen Technologies, Orange County Water District, and Orange County Sanitation District for the Jamboree Road Pavement Rehabilitation and Reclaimed Water Conversion project.036 01/11/2022 City Council GENERAL FUND - 312,000.00 (312,000.00) Human Resources TIDE & SUBMERGED LANDS FUND - 2,000.00 (2,000.00) WATER ENTERPRISE FUND - 5,000.00 (5,000.00) IT ISF - 25,000.00 (25,000.00) 037 01/25/2022 City Council GENERAL FUND - 310,358.65 (310,358.65) Human Resources TIDE & SUBMERGED LANDS FUND - 4,918.49 (4,918.49) WATER ENTERPRISE FUND - 12,841.96 (12,841.96) WASTEWATER ENTERPRISE FUND - 2,570.04 (2,570.04) EQUIPMENT FUND - 1,787.09 (1,787.09) IT ISF - 11,137.12 (11,137.12) 038 01/25/2022 City Council GENERAL FUND - 148,523.31 (148,523.31) Human Resources WATER ENTERPRISE FUND - 69,835.52 (69,835.52) WASTEWATER ENTERPRISE FUND - 24,669.39 (24,669.39) EQUIPMENT FUND - 14,897.30 (14,897.30) 039 01/25/2022 City Council GENERAL FUND - 12,546.88 (12,546.88) Human Resources To increase salary & benefit appropriations to fund the new Employment Agreement with the City Manager.040 02/22/2022 City Council GENERAL FUND - 31,764.00 - Finance IT ISF04102/08/2022 City Council GENERAL FUND CAPITAL PROJECTS - 77,969.00 (77,969.00) Public Works To increase expenditure appropriations from the unappropriated General Fund Capital Improvement Program fund balance to fund the Dog Park Refurbishment project. 042 02/09/2022 City Manager GENERAL FUND 1,000.00 1,000.00 - Library To increase revenue estimates and expenditures appropriations by accepting a donation from a library patron to purchase materials for the Library's collection.043 03/08/2022 City Council GENERAL FUND 25,000.00 25,000.00 - Library To increase revenue estimates and expenditures appropriations by accepting a donation from Newport Beach Library Foundation to purchase materials for the children's library collection. 044 02/16/2022 City Manager GENERAL FUND - 31,250.00 - Finance To transfer existing expenditures appropriations in financial planning from part time salaries to professional services. 045 03/08/2022 City Council GENERAL FUND - 48,148.57 (48,148.57) Human Resources TIDE & SUBMERGED LANDS FUND - 4,253.24 (4,253.24) ENVIRONMENTAL LIABILITY FUND - 540.89 (540.89) WATER ENTERPRISE FUND - 599.08 (599.08) WASTEWATER ENTERPRISE FUND - 353.96 (353.96) EQUIPMENT FUND - 90.81 (90.81) COMPENSATED ABSENCE FUND - 3,562.09 (3,562.09) IT ISF - 87.13 (87.13) 046 03/08/2022 City Council NEIGHBORHOOD ENHANCEMENT - 378,566.00 (378,566.00) Public Works To increase expenditure appropriations to fund the Neighborhood Enhancement CIP account from the unappropriated Neighborhood Enhancement fund balance. 047 03/22/2022 City Council GENERAL FUND - 5,303.32 (5,303.32) City Attorney To increase salary & benefit appropriations to fund the new Employment Agreement with the City Attorney. To increase salary & benefit appropriations to fund the new MOU for the Part Time Employees Association. To increase salary & benefit appropriations to fund the new MOU and lump sum payments in accordance with the MOU Agreement for the Newport Beach Employees League (League). To increase salary & benefit appropriations to fund the new MOU and lump sum payments in accordance with the Agreement for the members of Key and Management (K&M). City of Newport BeachFiscal Year 2021-22 Budget Amendments Quarter Ending March 31, 2022 To increase expenditure appropriations for a lump sum payment to each member of CEA and Prof-Tech in accordance with the Side Letter of Agreements. To increase appropriations relating to the fiscal year 2021-22 quarter two staff report. 16 4/6/22 Scheduled Date Agenda Title Report Type Agenda Description 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. 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. Budget Amendments for Quarter Ending March 31, 2022 Receive and File Staff will report on the budget amendments from the prior quarter. 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. New Item Moving Recycle- and Sewer-Only Utility Bills to the Property Tax Roll Presentation Staff will provide a briefing regarding collection challenges associated with utility bills for customers who are billed for recycling and/or sewer service but are not served by the City for water service. Staff are investigating utilizing the property tax roll as a means to bill these customers annually for these services. Internal Audit Program Update Presentation Bi-monthly progress update on the internal audit program. Tuesday, May 24, 2022 Joint City Council and Finance Committee Study Session Presentation Staff will present the FY 2022-23 proposed budget to the City Council and Finance Committee. 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 Newport Beach Finance Committee Work Plan April 2022 June 2022 May 2022 Committee Recess August 2022 Committee Recess I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2022\WORK PLAN 2021-22 - 4-6-2022 1 17 4/6/22 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. 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 Presentation 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 Presentation Bi-monthly progress update on the internal audit program. October 2022 September 2022 November 2022 December 2022 Committee Recess I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2022\WORK PLAN 2021-22 - 4-6-2022 2 18 4/6/22 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. Thursday, February 16, 2023 Capital Improvement Program (CIP) Update Presentation Staff from Public Works will provide an update on what is planned for inclusion in the FY 2023-24 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. Staff will also highlight changes to the development fee funding projection methodology for the FFP. Second Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected FY 2022-23 budget performance. Thursday, March 10, 2022 Fiscal Year 2022-23 Fee Study Update Presentation Staff will present the Master Fee Schedule to the Finance Committee prior to presenting it to the City Council. 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 2023-24 budget preparation process. Internal Audit Program Update Presentation Bi-monthly progress update on the internal audit program. March 2023 February 2023 January 2023 I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2022\WORK PLAN 2021-22 - 4-6-2022 3 19