HomeMy WebLinkAbout2022-43 - Amending City Council Policy F-2, Reserve Policy, and City Council Policy F-28, Facilities and Harbor and Beaches Financial Planning ProgramsRESOLUTION NO. 2022-43
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH, CALIFORNIA, AMENDING CITY
COUNCIL POLICY F-2, RESERVE POLICY, AND CITY
COUNCIL POLICY F-28, FACILITIES AND HARBOR AND
BEACHES FINANCIAL PLANNING PROGRAMS
WHEREAS, the City of Newport Beach ("City") is governed, in part, by its Charter,
Municipal Code, and adopted City Council Policies;
WHEREAS, the City Council has a long and established history of being good
guardians and stewards of the public's money;
WHEREAS, appropriations, expenditures and other budgetary matters are a
primary concern of the City Council;
WHEREAS, the City Council has adopted various policies regarding financial
matters;
WHEREAS, the City Council adopted City Council Policy F-2 on January 24, 1994,
to administer reserve funds in accordance with governmental accounting standards and
prudent financial management practices;
WHEREAS, the City Council adopted City Council Policy F-28 on August 11, 2009,
to formalize the objectives, parameters, and procedures for the management of City
Facilities funded by the general Fund with a primarily emphasis on financing and
scheduling matters;
WHEREAS, the Finance Committee is charged with a variety of tasks including,
but not limited to, reviewing and monitoring events and issues that may affect the financial
status of the City and making recommendations to the City Council regarding
amendments to financial policies;
WHEREAS, the Finance Committee recently reviewed the adequacy of the annual
contributions to the City's internal service funds and savings programs for facilities,
vehicle, and equipment replacement and maintenance;
WHEREAS, the Finance Committee has recommended changes to those funding
programs as part of the fiscal year 2022-23 proposed budget, which necessitated
changes to City Council Policies F-2 and F-28, attached hereto as Exhibits 1 and 2;
Resolution No. 2022-43
Page 2 of 3
WHEREAS, the Finance Director / Treasurer recommends other minor changes
to these policies for clarity, consistency, or to conform to current governmental accounting
guidance; and
WHEREAS, the City Manager has reviewed the recommended revisions to the
policies suggested by the Finance Committee and Finance Director / Treasurer and
recommends that the City Council amend these City Council policies.
NOW, THEREFORE, the City Council of the City of Newport Beach hereby
resolves as follows:
Section 1: The City Council hereby approves and adopts City Council Policies F-
2 and F-28, attached hereto as Exhibits 1 and 2, and incorporated herein by this
reference.
Section 2: The City Council hereby repeals all prior versions of City Council
Policies F-2 and F-28.
Section 3: The recitals provided in this resolution are true and correct and are
incorporated into the operative part of this resolution.
Section 4: If any section, subsection, sentence, clause or phrase of this resolution
is, for any reason, held to be invalid or unconstitutional, such decision shall not affect the
validity or constitutionality of the remaining portions of this resolution. The City Council
hereby declares that it would have passed this resolution, and each section, subsection,
sentence, clause or phrase hereof, irrespective of the fact that any one or more sections,
subsections, sentences, clauses or phrases be declared invalid or unconstitutional.
Section 5: The City Council finds the adoption of this resolution is not subject to
the California Environmental Quality Act ("CEQA") pursuant to Sections 15060(c)(2) (the
activity will not result in a direct or reasonably foreseeable indirect physical change in the
environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378)
of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it
has no potential for resulting in physical change to the environment, directly or indirectly.
Resolution No. 2022-43
Page 3 of 3
Section 6: This resolution shall take effect immediately upon its adoption by the
City Council, and the City Clerk shall certify the vote adopting the resolution.
ADOPTED this 14t" day of June, 2022
Kevin Muldoon
Mayor
ATTEST:
W.. lI,I no �L
Brown
City Clerk
APPROVED AS TO FORM:
CITY ATTORNEY'S OFFICE
Aaron C. Harp
City Attorney
Attachments: Exhibit 1 —Amended City Council Policy F-2
Exhibit 2 —Amended City Council Policy F-28
Exhibit 1
1
F-2
RESERVE POLICY
PURPOSE
To establish City Council policy for the administration of Reserves defined as
fund balances in governmental funds and net working capital in proprietary
funds.
BACKGROUND
Prudent financial management dictates that some portion of the funds available to
the City be reserved for future use.
As a general budget principle concerning the use of reserves, the City Council
decides whether to appropriate funds from Reserve accounts. Even though a
project or other expenditure qualifies as a proper use of Reserves, the Council may
decide that it is more beneficial to use current year operating revenues or bond
proceeds instead, thereby retaining the Reserve funds for future use. Reserve funds
will not be spent for any function other than the specific purpose of the Reserve
account from which they are drawn without specific direction in the annual budget
or by a separate City Council action. Information regarding Annual Budget
Adoption and Administration is contained in City Council Policy F-3.
GOVERNMENTAL FUNDS AND FUND BALANCE DEFINED
Governmental Funds including the General Fund, Special Revenue Funds, Capital
Projects Funds, Debt Service Funds, and Permanent Funds have a short-term or
current flow of financial resources, measurement focus, and basis of accounting,
and therefore exclude long-term assets and long-term liabilities. The term Fund
Balance, used to describe the resources that accumulate in these funds, is the
difference between the fund assets and fund liabilities of these funds. Fund
Balance is similar to the measure of net working capital that is used in private
sector accounting. By definition, both Fund Balance and Net Working Capital
exclude long-term assets and long-term liabilities.
PROPRIETARY FUNDS AND NET WORKING CAPITAL DEFINED
Proprietary Funds including Enterprise Funds and Internal Service Funds have a
long-term or economic resources measurement focus and basis of accounting, and
2
F-2
therefore include long-term assets and liabilities. This basis of accounting is very
similar to that used in private sector. However, instead of Retained Earnings, the
term Net Assets is used to describe the difference between fund assets and fund
liabilities. Since Net Assets include both long-term assets and liabilities, the most
comparable measure of proprietary fund financial resources to governmental
Fund Balance is Net Working Capital, which is the difference between current
assets and current liabilities. Net Working Capital, like Fund Balance, excludes
long-term assets and long-term liabilities.
GOVERNMENTAL FUND RESERVES (FUND BALANCE)
For Governmental Funds, the Governmental Accounting Standards Board
("GASB") Statement No. 54 defines five specific classifications of fund balance. The
five classifications are intended to identify whether the specific components of
fund balance are available for appropriation and are therefore "Spendable." The
classifications also are intended to identify the extent to which fund balance is
constrained by special restrictions, if any. Applicable only to governmental funds,
the five classifications of fund balance are as follows:
CLASSIFICATIONS
Non-spendable
Restricted
Committed
Assigned
Unassigned
NATURE OF RESTRICTION
Cannot be readily converted to cash
Externally imposed restrictions
City Council imposed commitment
City Manager assigned purpose/intent
Residual balance not otherwise
restricted
A. Non-spendable fund balance: That portion of fund balance that includes
amounts that are either (a) not in a spendable form, or (b) legally or
contractually required to be maintained intact. Examples of Non-spendable
fund balance include:
1. Reserve for Inventories: The value of inventories purchased by the City but
not yet issued to the operating Departments is reflected in this account.
3
F-2
2. Reserve for Long Term Receivables and Advances: This Reserve is used to
identify and segregate that portion of the City's financial assets which are
not due to be received for an extended period, so are not available for
appropriation during the budget year.
3. Reserve for Prepaid Assets: This reserve represents resources that have been
paid to another entity in advance of the accounting period in which the
resource is deducted from fund balance. A common example is an insurance
premium, which is typically payable in advance of the coverage period.
Although prepaid assets have yet to be deducted from fund balance, they
are no longer available for appropriation.
4. Reserve for Permanent Endowment - Bay Dredging: The endowment
specifies that the principal amount will not be depleted and represents the
asset amounts to be held in the Bay Dredging Fund.
5. Reserve for Permanent Endowment – Ackerman Fund: The endowment
specifies that the principal amount will not be depleted and represents the
asset amount to be held in the Ackerman Fund.
B. Restricted fund balance: The portion of fund balance that reflects constraints
placed on the use of resources (other than non-spendable items) that are either
(a) externally imposed by creditors, grantors, contributors, or laws or
regulations of other governments; or (b) imposed by law through constitutional
provisions or enabling legislation. Examples of restricted fund balance are:
1. Reserve for Debt Service: Funds are placed in this Reserve at the time debt
is issued. The provisions governing the Reserve, if established, are in the
Bond Indenture and the Reserve itself is typically controlled by the Trustee.
2. Affordable Housing: A principal provision of the Newport Beach Housing
Element requires developers to provide housing units for lower income
households, the number of which is to be negotiated for each development
project. In lieu of constructing affordable housing, developers have paid into
this reserve which is used at the City Council's discretion to provide
alternate methods for the delivery of affordable housing for lower income
households.
3. Park In Lieu: Per Newport Beach Municipal Code (NBMC) Chapter 19.52
4
F-2
and California Government Code Section 664777 (The 1975 "Quimby Act"),
a dedication of land or payment of fees for park or recreational purposes in
conjunction with residential development is required. The fees collected can
only be used for specific park or recreation purposes as outlined in NBMC
Sections 19.52.030 and 19.52.070.
4. Upper Newport Bay Restoration Reserve: This reserve is the repository for
funds mandated by SB573, as well as special fees charged to permit holders
as an alternative to meeting certain specified mitigation criteria. In addition
to the mitigation fees, ten percent (10%) of Beacon Bay lease revenue is
placed in this Reserve. Funds in the Reserve are restricted for Upper
Newport Bay restoration projects.
5. Permanent Endowment for Bay Dredging: The endowment also specifies
that the interest earnings on the principal amount can only be used for
dredging projects in the Newport Bay.
6. Permanent Endowment for Ackerman Fund: The endowment also specifies
that the interest earnings on the principal amount can only be used for
scholarships provided by the City and high-tech library equipment.
7. Oceanfront Encroachment Reserve: In the early 1990's, it was discovered by
survey that improvements to several ocean front parcels were encroaching
onto the public beach. The encroachment was relatively minor. The
negotiated solution was for the property owners to pay a permit fee each
year to the City. Revenue thus generated may only be used for ocean front
restoration projects and incidental costs of improvements and maintenance
to enhance public access and use of ocean beaches as approved by the City
Council. This Reserve is the repository for those funds. Appendix C of
NBMC Title 21 (Local Coastal Program Implementation Plan) contains
additional background and details about the encroachment issue. The
external restriction on this balance is imposed by the Local Coastal Program
(LCP).
C. Committed fund balance: That portion of a fund balance that includes amounts
that can only be used for specific purposes pursuant to constraints imposed by
formal action by the government's highest level of decision making authority,
and remain binding unless removed in the same manner. The City considers a
resolution to constitute a formal action for the purposes of establishing
committed fund balance. The action to constrain resources must occur within
5
F-2
the fiscal reporting period; however, the amount can be determined
subsequently. City Council imposed Commitments are as follows:
1. Facilities Financial Planning (FFP) Program: In conjunction with the City's
Facilities Financial Plan, a sinking fund has been established to amortize the
cost of critical City facilities such as, but not limited to, the Civic Center,
Police Department buildings, Fire Stations, Library Branches, and other
Facility Improvement Projects.
The Facilities Financial Planning Program establishes a level charge to the
General Fund that will perpetually replenish the cash flows necessary to
finance the construction of critical City facilities. This plan will be updated
annually as part of the budget process, or as conditions change. Specific
requirements for annual funding and minimum reserve balance for the FFP
Program can be found in City Council Policy F-28.
The eligible uses of this reserve include the cash funding of public facility
improvements or the servicing of related debt.
2. Off Street Parking: Per NBMC Section 12.44.025 the City Council may direct
revenues into the Off-Street Parking Facilities Fund for purposes of the
acquisition, development, and improvement of off street parking facilities,
and for any expenditures necessary or convenient to accomplish such
purposes.
3. In Lieu Parking: Per NBMC Section 12.44.125 the City requires commercial
businesses to provide adequate off-street parking or where this is not
possible, businesses are afforded the opportunity to pay an annual fee and
use parking spaces in a municipal lot, providing such a lot is located within
specified proximity to the business. These funds can only be used to provide
additional parking.
4. Neighborhood Enhancement – A: Funds previously accumulated to
Neighborhood Enhancement Area "A" pursuant to a prior version of NBMC
Section 12.44.027 shall continue to be used only for the purpose of enhancing
and supplementing services to the West Newport area. Both the nature of
the supplemental services and the definition of the area served are set forth
in NBMC Section 12.44.027.
5. Neighborhood Enhancement – B: Funds previously accumulated to
6
F-2
Neighborhood Enhancement Area "B" pursuant to a prior version of NBMC
Section 12.44.027 shall continue to be used only for the purpose of enhancing
and supplementing services in the Balboa Peninsula. Both the nature of the
supplemental services and the definition of the area served are set forth in
NBMC Section 12.44.027.
6. Cable Franchise: Pursuant to the provisions of the Newport Beach Municipal
Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in return for
the use of the City's streets and public ways for the purpose of installing,
operating, maintaining, or reconstructing a cable system to provide cable
service, fees are collected by the City from cable providers. Those fees are to
be used by the City for support of Public, Education, and Government access
programming only.
7. Oil and Gas Reserve: These funds generated by an annual amount being set
aside from oil and gas field production revenues are to be used to fund
abandonment of wells and facilities as they go out of service.
8. Capital Reappropriation: This reserve recognizes a portion of fund balance
that is not readily available to fund new appropriations because it has been
reappropriated through the budget adoption process or amendment process
for programs or projects authorized in a prior fiscal year that are not yet
complete.
D. Assigned fund balance: That portion of a fund balance that includes
amounts that are constrained by the City's intent to be used for specific
purposes but that are not restricted or committed. This policy hereby
delegates the authority to the City Manager or designee to modify or create
new assignments of fund balance. Constraints imposed on the use of
assigned amounts may be changed by the City Manager or his designee.
Appropriations of balances are subject to Council Policy F-3 concerning
budget adoption and administration.
E. Unassigned fund balance:
1. Contingency Reserve: The Contingency Reserve shall have a target balance
of twenty five percent (25%) of General Fund "Operating Budget" as
originally adopted. Operating Budget for this purpose shall include current
expenditure appropriations and shall exclude Capital Improvement
Projects, Transfers Out, and additional discretionary payments to the City’s
7
F-2
unfunded pension liability. Appropriation and/ or access to these funds are
generally reserved for emergency or unforeseen situations but may be
accessed by Council by simple budget appropriation. Examples may include
but are not limited to the following:
a. A catastrophic loss of critical infrastructure.
b. A State or Federally declared state of emergency.
c. Any settlement arising from a claim or judgment.
d. Deviation from budgeted revenue projections.
e. Any action by another government that eliminates or shifts revenues
from the City.
f. Inability of the City to meet its debt service obligations in any given year.
g. Other circumstances deemed necessary by City Council to meet the
claims and obligations of the City.
Should the Contingency Reserve be used, the City Manager shall present a
plan to City Council to replenish the reserve within five years.
2. Residual Fund Balance: The residual portion of available fund balance that
is not otherwise restricted, committed, or assigned and is above and beyond
the Contingency Reserve target reserve balance.
PROPRIETARY FUND RESERVES (NET WORKING CAPITAL)
In the case of Proprietary Funds (Enterprise and Internal Service Funds),
Generally Accepted Accounting Principles ("GAAP") do not permit the reporting
of reserves on the face of City financial statements. However, this does not
preclude the City from setting policies to accumulate financial resources for
prudent financial management of its proprietary fund operations. Since
proprietary funds may include both long-term capital assets and long-term
liabilities, the most comparable measure of liquid financial resources that is
similar to fund balance in proprietary funds is net working capital, which is the
difference between current assets and current liabilities. For all further references
to reserves in Proprietary Funds, Net Working Capital is the intended meaning.
8
F-2
A. Water Enterprise Fund.
1. Stabilization and Contingency Reserve: This Reserve is used to provide
sufficient funds to support seasonal variations in cash flows, and in more
extreme conditions to maintain operations for a reasonable period of time so
the City may reorganize in an orderly manner or effectuate a rate increase to
offset sustained cost increases. The intent of the Reserve is to provide funds
to offset cost increases that are projected to be short-lived, thereby partially
eliminating the volatility in annual rate adjustments. It is not intended to
offset ongoing, long-term pricing structure changes. The target level of this
reserve is fifty percent (50%) of the annual operating budget. This reserve
level is intended to provide a reorganization period of 6 months with zero
income or 24 months at a twenty-five percent (25%) loss rate. The City
Council must approve the use of these funds, based on City Manager
recommendation. Funds collected in excess of the Stabilization reserve target
would be available to offset future rate adjustments, while extended reserve
shortfalls would be recovered from future rate increases. Should catastrophic
losses to the infrastructure system occur, the Stabilization and Contingency
Reserve may be called upon to avoid disruption to water distribution.
2. Infrastructure Replacement Funding Policy: This funding policy is intended
to be a temporary repository for cash flows associated with the funding
of infrastructure replacement projects provided by the Water Master Plan.
The contribution rate is intended to level-amortize the cost of
infrastructure replacement projects over a long period. The annual funding
rate of the Water Master Plan is targeted at an amount that, when combined
with prior or future year contributions, is sufficient to provide for the
eventual replacement of assets as scheduled in the plan. This contribution
policy is based on the funding requirements of the most current Water
Master Plan. There are no minimum or maximum balances contemplated by
this funding policy. However, the contribution level should be reviewed
periodically or as major updates to the Water Master Plan occur. Annual
funding is contingent on many factors and may ultimately involve a
combined strategy of cash funding and debt issuance with the intent to
normalize the burden on Water customer rates.
B. Wastewater Enterprise Fund.
1. Stabilization and Contingency Reserve: This Reserve is used to provide
9
F-2
sufficient funds to support seasonal variations in cash flows, and in more
extreme conditions to maintain operations for a reasonable period of time so
the City may reorganize in an orderly manner or effectuate a rate increase to
offset sustained cost increases. The intent of the Reserve is to provide funds
to offset cost increases that are projected to be short-lived, thereby partially
eliminating the volatility in annual rate adjustments. It is not intended to
offset ongoing, long-term pricing structure changes. The target level of this
reserve is fifty percent (50%) of the annual operating budget. This reserve
level is intended to provide a reorganization period of 6 months with zero
income or 24 months at a twenty-five percent (25%) loss rate. The City
Council must approve use of these funds, based on City Manager
recommendation. Funds collected in excess of the Stabilization reserve target
would be available to offset future rate adjustments, while extended reserve
shortfalls would be recovered from future rate increases. Should catastrophic
losses to the infrastructure system occur, the Stabilization and Contingency
Reserve may be called upon to avoid disruption to wastewater service.
2. Infrastructure Replacement Funding Policy: This funding policy is intended
to be a temporary repository for cash flows associated with the funding
of infrastructure replacement projects provided by the Wastewater Master
Plan. The contribution rate is intended to level-amortize the cost of
infrastructure replacement projects over a long period of time. The annual
funding rate of the Wastewater Master Plan is targeted at an amount that,
when combined with prior or future year contributions, is sufficient to
provide for the eventual replacement of assets as scheduled in the plan. This
contribution policy should be updated periodically based on the most
current Wastewater Master Plan. There are no minimum or maximum
balances contemplated by this funding policy. However, the contribution
level should be reviewed periodically or as major updates to the Wastewater
Master Plan occur. Annual funding is contingent on many factors and may
ultimately involve a combined strategy of cash funding and debt issuance
with the intent to normalize the burden on Wastewater customer rates.
C. Internal Service Funds Background.
Internal Service Funds are used to centrally manage and account for specific
program activity in a centralized cost center. Their revenue generally comes
from internal charges to departmental operating budgets rather than external
revenue sources. They have several functions.
10
F-2
--They work well in normalizing departmental budgeting for programs that
have life-cycles greater than one year, thereby facilitating level budgeting for
expenditures that will, by their nature, be erratic from year to year. This also
facilitates easier identification of long term trends.
--They act as a strategic savings plan for long-term assets and liabilities.
--From an analytical standpoint, they enable appropriate distribution of city-
wide costs to individual departments, thereby more readily establishing true
costs of various operations.
Since departmental charges to the internal service fund duplicate the ultimate
expenditure from the internal service fund, they are eliminated when
consolidating entity-wide totals.
The measurement criteria, cash flow patterns, funding horizon and
acceptable funding levels are unique to each program being funded. Policy
regarding target balance and/ or contribution policy, gain/loss amortization
assumptions, source data, and governance for each of the City's Internal
Service Funds is set forth as follows:
1. For all Internal Service Funds: The Finance Director may transfer part or all
of any unencumbered fund balance between the Internal Service Funds
provided that the withdrawal of funds from the transferred fund would not
cause insufficient reserve levels or insufficient resources to carry out its
intended purpose. This action is appropriate when the decline in cash
balance in any fund is precipitated by an off-trend non-recurring event. The
Finance Director will make such recommendations as part of the annual
budget adoption or through separate Council action.
2. Equipment Maintenance Fund and Equipment Replacement Fund: The
Equipment Maintenance and Replacement Funds receive operating money
from the Departments to provide equipment maintenance and to fund the
regular replacement of major pieces of equipment (mostly vehicles) at their
economic obsolescence.
a. Equipment Maintenance Fund: The Equipment Maintenance Fund acts
solely as a cost allocation center (vs. a pre-funding center) and is funded
on a pay-as-you-go basis by departmental maintenance charges by
vehicle type and usage requirement. Because of this limited function, the
11
F-2
target year-end balance is zero.
Contribution rates (departmental charges) are set to include the direct
costs associated with maintaining the City vehicle fleet, including fleet
maintenance employee salaries and benefits, operating expenses, and
maintenance related capital outlay. Administrative overhead and
maintenance facility improvements and replacement costs are to be
provided outside of this cost unit. Governance is achieved through annual
management adjustment of contribution rates on the basis of maintenance
cost by vehicle and distribution of costs based on fleet use by department.
b. Equipment Replacement Fund: Operating Departments are charged
annual amounts sufficient to accumulate funds for the replacement of
vehicles, communications equipment, parking equipment, and other
equipment replacement determined to be appropriate by the Finance
Director. The City Manager recommends annual rate adjustments as
part of the budget preparation process. These adjustments are based
on pricing, future replacement schedules, and other variables.
The age and needs of the equipment inventory vary from year to year.
Therefore, the year-end fund balance will fluctuate in direct correlation to
accumulated depreciation. In general, it will increase in the years
preceding the scheduled replacement of relatively large percentage of the
equipment, on a dollar value basis. However, rising equipment costs,
dissimilar future needs, replacing equipment faster than their expected
life, or maintaining equipment longer than its expected life all contribute
to variation from the projected schedule.
Target funding levels shall be determined by the Finance Director after
considering the age, expected life, and cash flow anticipated by the
replacement equipment being funded. If departmental replacement
charges for equipment prove to be excessive or insufficient with regard to
this target funding level, new rates established during the next budget
cycle will be adjusted with a view toward bringing the balance back to the
target level.
3. Insurance Reserve Funds: The Insurance Reserve funds account for the
activities of general liability, workers' compensation, property, and other
insurance claims. General liability and workers’ compensation claims are
self-insured up to an established amount, with excess insurance policies
12
F-2
procured to address larger claims. Property and other insurance policies are
procured with appropriate deductibles, and related claims payments are not
funded from the City’s self-insurance program.
Background.
The City employs an actuary to estimate the liabilities associated with the
general liability and workers compensation activities. The costs typically
associated with these programs include claims administration, legal
defense, insurance premiums, self-insured retention, and the
establishment of appropriate loss reserves including "incurred-but-not
reported" (IBNR) claims. In a prescribed measurement methodology, the
Actuary estimates the liabilities in conformity with Generally Accepted
Accounting Principles (GAAP).
The Actuary refers to this measurement level in their report as the "Expected
Level." However, because actuarial estimates are subject to significant
uncertainties, actuaries typically recommend that a target funding level be
set at an amount in excess of expected liability as a margin to cover
contingencies. A typical target funding level would be set to obtain a
specified confidence level (the percent chance that resources set-aside will be
sufficient to cover existing claims).
Full funding of the Actuary's "Target Funding Level" establishes a seventy-
five percent (75%) confidence there will be sufficient resources (including
projected interest) to pay the full amount of existing claims without future
contributions. Funding at the "Expected Level" produces a confidence level
of only fifty percent to sixty-five percent (50%-65%). Therefore, the target
funding of insurance reserves should exceed the "Expected Level" to account
for adverse estimate deviation.
Policy & Practice.
The City should target funding of its risk management obligations at not less
than the Expected Level, described above; and not more than an amount
sufficient to establish an eighty percent (80%) Confidence Level. Actuarial
gains and losses should be amortized through rates over an appropriate
period of time. As part of the operating budget, each department will be
charged a rate equal to its proportionate share of the total "revenue" required
to fund the Insurance Reserve Fund at this level.
13
F-2
To lessen the impact of short-term annual rate change fluctuation, City
management may implement one-time fund transfers (rather than
department rate increases) when funding shortfalls appear to be due to
unusually sharp and non-recurring factors. Excess reserves in other areas
may be transferred to the internal service fund in these instances but such
transfers should not exceed the funding necessary to reach an eighty percent
(80%) confidence level interval.
4. Compensated Absences Fund:
Background.
The primary purpose of flex leave, vacation leave, and sick leave is to provide
compensated time off as appropriate and approved. However, under certain
circumstances, typically at separation from service, some employees have
the option of receiving cash-out payments for some accumulated leave
balances. The Compensated Absences Fund is utilized primarily as a budget
smoothing technique for any such leave bank liquidations. The primary
purpose of the Compensated Absences Fund is to maintain a balance
sufficient to facilitate this smoothing.
Policy and Practice.
The contribution rate will be set to cover estimated annual cash flows based
on a three-year trailing average.
The minimum cash reserve should not fall below that three-year average.
The maximum cash reserve should not exceed fifty percent (50%) of the long
term liability. The target cash reserve shall be the median difference between
the minimum and maximum figures.
Each department will make contributions to the Compensated Absences
Fund through its operating budget as a specified percentage of salary. The
Finance Director will review and recommend adjustments to the percentage
of salary required during the annual budget development process. This
percentage will be set so as to maintain the reserve within the parameters
established above.
5. Post Retirement Funding Policies:
14
F-2
a. Pension Funding:
(i) California Public Employees Retirement System (CalPERS): The
City's principal Defined Benefit Pension program is provided
through contract with CalPERS. The City's contributions to the plan
include an actuarially determined employer contribution that
fluctuates each year based on an annual actuarial plan valuation.
This variable rate employer contribution includes the normal cost
of providing the contracted benefits plus or minus an amortization
of plan changes and net actuarial gains and losses since the last
valuation period.
It is the City's policy to make contributions to the plan equaling at
least one hundred percent (100%) of the actuarially determined
contribution. Any unfunded actuarial liability (UAL) is amortized
and paid in accordance with the actuary's funding
recommendations. The City will maintain its UAL within a range
that is considered acceptable to actuarial standards. The City
Council shall consider increasing the annual CalPERS contribution
should the UAL status fall below acceptable actuarial standards.
(ii) Laborer's International Union of North America (LIUNA): The City
provides a supplemental pension plan for some employee
associations through contract with LIUNA. This is funded via
employee contributions of a fixed percentage of total compensation
on a pay-as-you-go basis. The City is not contractually required to
guarantee the level of the ultimate LIUNA benefit to retirees, nor
does it do so. Therefore, the City's liability for this program is fully
funded each year.
b. Other Post Employment Benefits (OPEB Funding):
Background.
The City's OPEB funding obligations consists of two retiree medical plans.
New Plan. Effective January 2006, the City and its employee associations
agreed to major changes to the Post Employment Healthcare Plan. New
employees and all current employees participate in a program that
15
F-2
requires certain defined employee and employer contributions while the
employee is in active service. However, once the contributions have been
made to the employee's account, the City has transferred a substantial
portion of the funding risk to the employee.
Old Plan. Eligible employees who retired prior to the "New Plan" and
certain active employees were eligible to continue to receive post-
retirement medical benefits (a defined benefit plan). The cost was divided
among the City, current employees, and retirees. In the past, this program
was largely funded on a pay-as-you-go basis, so there was a significant
unfunded liability. Recognizing this problem, the City began
contributing to this obligation in 2001. In 2008, these assets were placed
in a pre-funding trust. The City's intention is to amortize the remaining
unfunded liability within 20 years.
Policy & Practice.
New Plan. Consistent with agreements between the City and Employee
Associations, the new defined contribution plan will be one hundred
percent (100%) funded, on an ongoing basis, as part of the annual budget
process. Funds to cover this expenditure will be contained within the
salary section of each department's annual operating budget.
Old Plan. The City's policy is to pre fund the explicit (cash subsidy)
portion of the Actuarial Accrued Liability (AAL) of the remnants of the
old plan over a 20-year amortization period, or less. This amount will be
based on the Annual Required Contribution (ARC) determined by a
biennial actuarial review, subject to review and analysis by the City. The
City will strive to maintain a funded status that will be within a range that
is considered acceptable to actuarial standards. The City Council shall
consider increasing the annual OPEB contribution should the funded
status fall below acceptable actuarial standards.
Adopted – January 24, 1994
Amended – April 10, 1995
Amended – February 26, 1996
Amended – April 27, 1998
Amended – March 14, 2000
Amended – May 8, 2001
16
F-2
Amended – April 23, 2002
Amended – June 10, 2003
Amended – April 13, 2004
Amended – September 13, 2005
Amended – September 15, 2008
Amended – November 12, 2008
Amended – May 24, 2011
Amended – September 27, 2011
Amended – May 14, 2013
Amended – June 10, 2014
Amended – May 12, 2015
Amended – September 25, 2018
Amended – June 14, 2022
Exhibit 2
F-28
FACILITIES AND HARBOR AND BEACHES FINANCIAL PLANNING PROGRAMS
W)WOM
To establish the policy for the administration of the City of Newport Beach's ("City")
Facilities and Harbor and Beaches Financial Planning Programs ("Programs").
DISCUSSION
In addition to the annual Capital Improvement Program ("CIP"), the City has established
a long-term plan for major renovation or replacement of aging facilities and installation
of new infrastructure. The emphasis is on structures and adjacent grounds, rather than
transportation, environmental, or other projects funded either in whole or in part by the
General Fund.
OBJECTIVES
A. To ensure that long-term programs addressing large, non -recurring projects for
replacement of facilities is part of the budget process each year.
B. To ensure that development fees and proceeds derived from redevelopment or
redeployment of existing land and capital assets owned by the City, and other non-
recurring revenues are dedicated to the replacement of infrastructure facilities,
rather than ongoing operating expenses.
C. To provide a consistent, level funding plan to the extent practicable so as to
minimize the peaks and valleys in General Fund support levels for elements of the
Programs.
D. To ensure that projects are properly prioritized and scheduled, taking into
consideration the relative age, condition, and functional viability of current
facilities; pairing of projects' implementation where prudent; and cost
implications of immediate projects for the overall long-term Programs.
E. Spreading or matching the costs of facilities over the useful life of such facilities
should be a goal of all long-term capital project financings. Debt financing that
extends beyond the useful life of the assets the debt was borrowed to finance
should be avoided.
1
F-28
SOURCES AND USES OF FUNDS
Funding for the Programs comes from development fees and proceeds derived from
redevelopment or redeployment of existing land and capital assets owned by the City
contributions from individuals and organizations within the community, annual budget
allocations from the General Fund, incremental rent or fees originating from harbor
activity received by the City, net proceeds of Certificates of Participation or other
financing instruments, and investment earnings on temporarily idle funds.
Funds for both Programs are used for actual site acquisition, design, construction, and
directly related costs, as well as debt service expenses.
POLICY AND PROCEDURE
A. In advance of the budget process, staff shall prepare an update of the Facilities
Financial Planning Tool and the Harbor and Beaches Capital Financial Plan for
review, modification, and approval by the City Council.
B. If requested by the City Council, the Finance Committee will review the fiscal
impacts associated with, and recommend the most advantageous methods to fund
the high -priority projects in, the Facilities Financial Planning Tool and the Harbor
and Beaches Capital Financial Plan. The City Manager will consider these
recommendations in the preparation and presentation of the City Manager's
annual budget to the City Council.
C. Unless otherwise specified in individual development agreements, other
governing documents, or as otherwise specifically directed by the City Council, all
development fees received by the City will be credited to the Facilities Financial
Planning Reserve fund.
D. Prudent assumptions regarding revenue and expenditure growth, inflation, and
all relevant factors will be included in each year's update of the Facilities Financial
Planning Tool and the Harbor and Beaches Capital Financial Plan
E. General Fund contributions to the Facilities Financial Plan shall generally not be
less than three percent (3%) of the total General Fund Revenue Budget or the total
annual debt service on outstanding Facilities Financial Plan -related debt,
2
F-28
whichever is greater. However, if there is a shortfall in General Fund revenue due
to a decline in economic activity or other unexpected circumstances and it is
necessary to reduce expenditures, General Fund contributions to the Facilities
Financial Planning Program can be temporarily reduced to under the three percent
(3 %) threshold.
F. General Fund contributions to the Harbor and Beaches Capital Financial Plan shall
be sufficient so as to adequately fund the identified long-term capital needs
included in the Plan and shall be incrementally increased to account for inflation.
G. The financing duration for any borrowed funds shall not exceed thirty (30) years
or the projected life of the new facility, whichever is less.
H. Transfers from the General Fund to the Facilities Financial Plan Fund for debt
service expenditures shall be separately shown in the City's budget so as to
highlight the portion of the transfer funding debt service.
I. The City shall strive to maintain fund balance in the Facilities Financial Plan Fund
at a level equal to or greater than the maximum annual debt service on existing
obligations.
J. The Facilities Financial Planning Tool and Harbor and Beaches Capital Financial
Plan may be amended by City Council action in the event of a natural disaster or
financial crisis.
Adopted - August 11, 2009
Amended - May 14, 2013
Amended - June 9, 2015
Amended - February 12, 2019
Amended - June 14, 2022
3
STATE OF CALIFORNIA
COUNTY OF ORANGE } ss.
CITY OF NEWPORT BEACH
I, Leilani I. Brown, City Clerk of the City of Newport Beach, California, do hereby certify that the
whole number of members of the City Council is seven, the foregoing resolution, being Resolution
No. 2022-43 was duly introduced before and adopted by the City Council of said City at a regular meeting
of said Council held on the 14th day of June, 2022; and the same was so passed and adopted by the
following vote, to wit:
AYES: Mayor Pro Tern Noah Blom, Council Member Brad Avery, Council Member,
Joy Brenner, Council Member Diane Dixon, Council Member Duffy Duffield, Council
Member Will O'Neill
NAYS: Mayor Kevin Muldoon
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the official seal of
said City this 151h day of June, 2022,
WIR PJ1,05MY da
Leilani I. Brown
City Clerk
Newport Beach, California