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HomeMy WebLinkAboutApproved Minutes -January 12, 2023Finance Committee Meeting Minutes January 12, 2023 Page 1 of 14 CITY OF NEWPORT BEACH FINANCE COMMITTEE JANUARY 12, 2023 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. Chair O’Neill announced Council Member Stapleton would be absent due to a training session with the Association of California Cities – Orange County (ACC-OC) II. ROLL CALL PRESENT: Chair Will O’Neill, Mayor Noah Blom, Committee Member William Collopy, Committee Member John Reed, Committee Member Nancy Scarbrough ABSENT: Council Member Joe Stapleton STAFF PRESENT: City Manager Grace K. Leung, Finance Director Jason Al-Imam, Deputy Finance Director Michael Gomez, Budget Manager Shelby Burguan, Senior Budget Analyst Amber Haston, Purchasing and Contracts Administrator Sander Huang, Senior Management Analyst Trevor Smouse, Fire Chief Jeff Boyles, Administrative Assistant Amy Byrne MEMBERS OF THE PUBLIC: Jim Mosher, Resident, Charles Klobe, Resident, TJ Rokos, Resident OTHER ENTITIES: Kerry Worgan, CalPERS Pension Actuary Supervisor III. PUBLIC COMMENTS Chair O’Neill opened public comments. Seeing none, Chair O’Neill closed public comments. IV. CONSENT CALENDAR A. MINUTES OF NOVEMBER 10, 2022 Recommended Action: Approve and file. Chair O’Neill provided recommended changes to the November 10, 2022 minutes along with recommended changes provided by Committee Members Reed, Committee Member Scarbrough and Committee Member Collopy. Chair O’Neill opened public comments. Seeing none, Chair O’Neill closed public comments. MOTION: Commissioner Reed moved to approve the minutes of November 10, 2022 as amended, seconded by Commissioner Collopy. The motion carried 5 ayes – 0 noes, 1 absence (Commissioner Stapleton). V. CURRENT BUSINESS Finance Director Jason Al-Imam introduced himself to the Finance Committee as the new Finance Director and provided a brief history of his background. Finance Committee Meeting Minutes January 12, 2023 Page 2 of 14 A. CALPERS UPDATE Summary: 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. Recommended Action: Receive and file. Kerry Worgan, Supervising Pension Actuary from CalPERS, provided a brief overview of the fiscal status of CalPERS, which had $440 billion in assets as of June 30, 2022. He reported the statewide pension system was 72% funded as of June 30, 2022, which includes the 7.5% loss on investments in Fiscal Year 2021-22. Mr. Worgan reported that for every dollar that CalPERS pays to a retiree or beneficiary $0.60 comes from investment earnings, $0.29 comes from employers, and $0.11 comes from employee contributions. He noted that pension funding breakdown varies based on safety versus miscellaneous employees and Public Employees' Pension Reform Act of 2013 (PEPRA) employees. Finance Director Al-Imam explained that the slide being presented represents CalPERS as a statewide pension system, which means it does not represent the City of Newport Beach. He advised the City has taken great strides towards cost sharing with employees and expressed his belief that the breakdown between the employee and the employer is closer to a 50/50 split. Mr. Worgan presented the CalPERS Portfolio Composition and advised the current asset allocation on June 30, 2022 is public equity at 50%, private equity at 8%, fixed income at 28%, and real assets at 13%. He noted that new target allocations were established in 2021 when CalPERS completed its Asset Liability Management Study. Committee Member Collopy inquired if the public has much visibility into private equity. Mr. Worgan explained that since they are private deals there is not a whole lot of public disclosure. He expressed his belief that some information can be requested from the CalPERS Board through the Investment Committee. Committee Member Collopy clarified the question that the private equity valuation is elusive. He inquired how the $52.8 billion is determined. Mr. Worgan explained there is a group that values private equity and noted it takes approximately 3 months to get that information. He advised the report is done every quarter for all the private equity deals that CalPERS is involved in. Committee Member Collopy asked Mr. Worgan to explain how private equity is valued. Mr. Worgan explained that real assets are similar to private equity and referenced for example that in real estate the City may own a building of some kind, and someone would need to place a value on that. Committee Member Collopy noted that last year private equity has come out of favor and noted that CalPERS is over the target in private equity by 4%. He commented that CalPERS is bullish on private equity and asked if CalPERS intended to trim that down and asked how the returns have been in private equity in relation to all the other investments. Mr. Worgan acknowledged that returns are coming down but there is a benchmark return and that private equity for that period earned 21%. Finance Committee Meeting Minutes January 12, 2023 Page 3 of 14 Committee Member Collopy inquired if private equity valuation growth was up 21% not private equity return. Mr. Worgan clarified that private equity return growth was up 21%. Finance Director Al-Imam explained that the 21% return on private equity includes both realized and unrealized returns. Committee Member Collopy inquired if the unrealized return in private equity is real. He expressed concern that it is overweight even though the returns have been great. He noted if those returns are accurate, he will admit he was incorrect but if it is now valued higher because a private equity venture capitalist said so, he would be skeptical. Finance Director Al-Imam inquired if the investment holding for private equity was 20 years. Mr. Worgan did not know if they were 20 years but indicated that he thought the holdings were more like 10 to 15 years. He noted the private equity target was 8% through the last cycle and was increased to 13% as a target. Mr. Worgan reported the actuarial assumptions were changed and noted this happens every 4 years. He indicated that the salary growth assumption increased from 2.75% to 2.8% and the inflation assumption dropped from 2.5% to 2.3%. He noted that these assumptions were built and based on capital market assumptions as of January 2021. He explained that when inflation was teetering down those were the assumptions that were looked at and then inflation started to spike up. Mayor Blom inquired if CalPERS was going to wait another 4 years to revisit these assumptions. Mr. Worgan confirmed it would be another 4 years before CalPERS would reevaluate the assumption for inflation. He explained that there is a lot of work that goes into it, and it takes approximately one year to review all the assumptions and build them into the valuation. Committee Member Collopy acknowledged it was a lot of work but at the same time, the City is about to make some critical decisions on additional pension contributions towards its Unfunded Actuarial Liability (UAL). He noted that the inflation number is patently wrong and CalPERS knows it. Mr. Worgan explained that CalPERS knows it is wrong today but what is unknown is if it is wrong for the next 20 years. Committee Member Reed inquired if the 2.3% is the 20-year inflation cap. Chair O’Neill inquired how inflation factors into the cost to the City. Mr. Worgan explained inflation is one of the components of salary increases. He advised they take inflation and add on merit and productivity. He explained if inflation is running at 2.3% assuming that people will probably earn 3% to 4% until retirement. It also gets built into the cost of living in terms of their cost-of-living adjustment (COLA) when they retire. He advised most plans have a 2% COLA limit and that is what is factored into their benefits in retirement. He noted those are the two primary ways that inflation affects the valuation of the pension liability. Chair O’Neill inquired if the City’s plan for retirees has a COLA cap of 2%. City Manager Leung confirmed there is a cap. Finance Committee Meeting Minutes January 12, 2023 Page 4 of 14 Mr. Worgan confirmed there is a 2% COLA cap but there is also the Pension Protection Act (PPA) by which the legislature makes CalPERS pay up to 80% of full inflation. He explained that 80% of a retiree benefit at retirement is fully indexed to whatever inflation may be. He noted if there is a year where the inflation cap may be 2%, the PPA would kick them up by 3% or 4%. He explained there is a carry-forward as well and noted that the retiree is always guaranteed a 2% cumulative. He advised inflation is 8% for this year and explained retirees will get their 2% and bank the other 6% so when inflation is lower, they can tie into the bank age to get their full 2%. Committee Member Collopy inquired if the City’s number is $333,046,257 would it move the needle if the salary goes up 5 basis points and inflation comes down 20 basis points. Mr. Worgan agreed it would not move the needle too much. He explained demographic impacts hardly move the needle. He explained investment returns are really what drive costs. He explained mortality is another significant assumption that is based on the 80% of the Society of Actuaries (SOA) mortality table. He reported that due to the pandemic, 2021 had a 20% excess mortality rate and 2022 had a 15% excess mortality rate and are driving a lot of the costs. He acknowledges there is currently turmoil in terms of demographic impacts between inflation, mortality, and salaries. He noted there will be another salary increase on the horizon due to inflation and is unsure how the State through their bargaining is going to react to that. Mr. Worgan presented the 2021 Asset Liability Management Study and the new asset mix that was adopted by the CalPERS board. He noted there was a large drop in Global Equity from 50% to 42%. He advised Private Equity increased from 8% to 13%. He noted Private Debt is a new capital that is going from 0% to 5%. Committee Member Reed inquired about the private debt and inquired if CalPERS was buying private bonds. Finance Director Al-Imam explained the new asset mix adds up to 105%, which means CalPERS will borrow up to 5% to fund its investment portfolio. Mr. Worgan confirmed CalPERS introduced leverage to the portfolio to take an extra 5% loan to invest in assets. Committee Member Collopy referenced the fact that the private debt is leverage and emphasized that is extremely aggressive for what CalPERS is paid to do. Mr. Worgan presented the June 30, 2021, Actuarial Valuation Reports which were published in July 2022, and noted the next report will be available in July 2023. He reported the Fiscal Year 2020-21 investment return was 21.3%, which brought the City’s funded status to 80% compared to 69% funded as of June 30, 2020. He explained the -7.5% loss on investments in Fiscal Year 2021-22 is not reflected in the June 30, 2021 valuation. However, Mr. Worgan projects the City’s funded status as of June 30, 2022 will be back to where it was in the 2020 valuation. Mr. Worgan reported that when the investment return reached 21.3% it triggered the Funding Risk Mitigation Policy, which resulted in a decrease in the discount rate. He explained the thinking behind this is that some of these excess gains are used to pay down some of the risk in the portfolio to lower the volatility in the portfolio but comes with additional costs. He noted it is a cost versus risk tradeoff. He explained when there is a system as large as CalPERS with this many stakeholders it is hard to meet everyone’s needs and expectations. He encouraged stakeholders to talk to the CalPERS Board on some of the issues in terms of how much risk they are comfortable with. Finance Committee Meeting Minutes January 12, 2023 Page 5 of 14 Mr. Worgan explained that because the discount rate is now 6.8% if the returns are more than 8.8% in the current fiscal year, the discount rate will be dropped to 6.75%. He noted that was good news if good returns can be earned but it comes with additional costs. Chair O’Neill explained one of the things he is thinking about is what happens to cities when they pay the default amount only because most of the cities in Orange County are paying the default amount. Finance Director Al-Imam reported some cities are making additional discretionary payments on the same scale as Newport Beach. He noted some cities are also putting money into a separate Section 115 Trust which is restricted but does not get credited towards the funded status. Finance Director Al-Imam explained a Section 115 Trust falls under the IRS Treasury regulations that allows for the investment of pension funds that is not constrained by local government investing standards which are typically limited. Finance Director Al-Imam explained the City has a minimum payment of $30 million per year but is paying $45 million, which means future increases in amounts required to be paid to CalPERS do not have a direct impact on the City. Committee Member Collopy explained the City is paying that additional $15 million to reduce the time dimension. He noted he could also make the argument that the City is putting in the ADP to make it 7 years and not 12 years. Chair O’Neill asked Mr. Worgan to talk about the Fresh Start Funding Option. Mr. Worgan explained the City did this over 6 years ago when it took all of its basis into a fresh start pick-up period. He explained the blue line is the City’s current baseline of costs projected with the -7.5% loss on investments for Fiscal Year 2021-22. He explained the chart shows that if a fresh start was initiated to level the City’s payments for the next 12 years, it would be fully funded at the end of those 12 years. He explained that the danger to this is that the new minimum payments are locked in and cannot be undone. Chair O’Neill inquired if he was talking about the difference between $30 million to $37 million. Mr. Worgan confirmed it would be $30 million climbing to $42 million that would be replaced with a level payment of $37 million. Chair O’Neill noted the City is currently paying $45 million. Mr. Worgan explained that the yellow line models what would hypothetically happen if there were another bad year again with a -7.5% loss. Chair O’Neill inquired if the City initiated a Fresh Start based on the most recent valuation it would be $37 million which is the orange line but if there was a 7.5% loss again it would be reflected in the yellow line. Finance Director Al-Imam explained the City has been proactive at shortening that amortization schedule, but CalPERS has a policy that says it cannot be extended out because they do not want cities refinancing and spreading it out over 30 years. He further explained that since the City has been so proactive about shrinking it, it is constrained to a 12-year period where it cannot be pushed out and would lock it in a $37 million. Committee Member Collopy inquired if the staff foresees a recommendation back to the City Council with our review of the Fresh Start. Finance Committee Meeting Minutes January 12, 2023 Page 6 of 14 City Manager Leung advised staff has not talked about it further and noted the City is in a good place with its long-term financial plan. She reported the City has been disciplined in the last 4 years and does not see a change in this piece. Chair O’Neill reported that he asked for this analysis. Committee Member Collopy noted it is a great chart and a great discussion. He agreed that with the discipline and sophistication around the Finance Committee and in the City Council, hopefully, future City Council will get there with the current approach. City Manager Leung explained there is a very short cycle right now because of all the past discipline and structure in place. She noted if the City was still 20-plus years out there, it would be a different conversation. Chair O’Neill referenced the chart comparing the other Orange County cities and noted it would be great to see a comparison of how cities did in a bad year. He recalled that even in a couple of bad years, Newport Beach did better than most of the other agencies because of the ADPs but would be intrigued to see how other cities funded status changed in 2022. He acknowledged it is a lot of work but advised it would be very helpful to see the comparison. Committee Member Collopy inquired how pension costs related to public safety are accounted for in those cities that contract with the Orange County Fire Authority (OCFA) and Orange County Sheriff’s Department (OCSD). He inquired if their UAL is allocated to their members. Finance Director Al-Imam explained it is allocated to members in the form of required contributions from those cities that contract with the OCFA and OCSD. Committee Member Collopy clarified he was asking about whether the portion of the unfunded pension liability related to public safety for members of the OCFA and OCSD is reflected on the balance sheet of those cities. Finance Director Al-Imam explained it is not on the balance sheet of those cities that are members of the OCFA and OCSD. He explained that, for example, the City of Tustin contracts with OCFA and that they pay for their share of OCFA’s pension liability in the form of their budget contributions, but the portion of OCFA’s pension liability it is not on the City of Tustin’s financial statements. Chair O’Neill explained this is why the City would need to compare itself to Fullerton, Costa Mesa, and Anaheim. Mr. Worgan advised there are some new Pension Obligation Bonds (POBs) for Fiscal Year 2021-22. Chair O’Neill explained that one of the big reasons people said not to do POBs is that if there is a massively negative year the City has now taken on debt to take on more debt. Chair O’Neill noted it is always going to be a little off in showing other cities' funded status because they have to pay the debt no matter how it plays out. He noted the risk is always timing and if you believe the market is overvalued that is not the time to do it. Chair O’Neill noted he will only be on the Finance Committee for another 2 years and would not like to see a POB or Section 115 Trust. Chair O’Neill noted it would be helpful to see this chart but with the -7.5% loss. Finance Committee Meeting Minutes January 12, 2023 Page 7 of 14 Mr. Worgan agreed to provide that to the Finance Committee with that comparison. Chair O’Neill clarified that $330,881,000 million in UAL losing 7.5% resulted in a $107 million increase to the City’s UAL. Mayor Blom noted the City allocated funds towards the UAL to get it down. Chair O’Neill remarked that is why the City does not try to time the market. Mayor Blom noted it is not always 50% of the City’s surplus that needs to be allocated to this if the City is tepid about what is happening in the markets. Committee Member Collopy noted it all goes back to investment return. Finance Director Al-Imam indicated that the expected rate of return is 6.8%. Therefore, the -7.5% loss on investments for Fiscal Year 2021-22 equates to a 14.3% loss from an actuarial and funding perspective. Committee Member Collopy inquired if it is possible to pay less than the minimum payment. Finance Director Al-Imam explained if an agency elects to pay its annual UAL amount upfront at the beginning of the fiscal year on July 1st, a 3% to 3.5% discount is applied to the minimum amount that is required to be paid to CalPERS. City Manager Leung reported that has been done in the past. Mr. Worgan reported that 75% of the plans pay upfront and get a discount rate. Finance Director Al-Imam explained that CalPERS gives a discount on the annual UAL amount that is paid upfront because CalPERS expects it can earn effectively half of what they need to earn if you give to them 100% by July 1st. He noted the investment risk is when CalPERS does not earn 7%. Chair O’Neill recalled that staff decided to smooth it out and reduce the risk. Committee Member Collopy recalled the City earned 2% of its liquid portfolio last year and recommended considering the prepayment. Chair O’Neill and City Manager Leung agreed it is worth investigating. Committee Member Collopy noted the City is making 2.2% on all cash. Mayor Blom noted if the funds are sitting in the City’s accounts for 6 months, and even though CalPERS is giving the City a 3% discount, the City might absorb a larger loss over that 6 months. Committee Member Collopy noted the City would pay for that loss anyway without a return. Finance Director Al-Imam explained the -7.5% loss extends out the pension paydown plan by two years, which means the City expects to have its pension liability paid off in 2032 instead of 2030. He also presented the normal cost rates for active employees and the shift in the demographics. Committee Member Collopy inquired if the City has PEPRA Safety. Chair O’Neill confirmed the City has PEPRA safety and it is almost 50/50. Finance Committee Meeting Minutes January 12, 2023 Page 8 of 14 Finance Director Al-Imam explained that every year the City looks at the actuarial valuation, the investment return, and demographic-related impacts. He noted it is a moving target, which is why the pension paydown strategy is revisited each year. Chair O’Neill reported his general takeaways from this are that he agrees that the City maintains its course. He noted the fresh start slides were very helpful, but he is not inclined to recommend doing that again at this time. He recommended taking another look at it in a year or two depending on how the next couple of years go. He noted investment returns may change and a partial fresh start may make sense in the future. Chair O’Neill opened public comments. Seeing none, Chair O’Neill closed public comments. Mr. Worgan noted that so far, the City’s been applying these additional payments to the long-term base. He advised it may be worth analyzing some short-term strategies. Committee Member Collopy inquired if the City has the option to do that. Finance Director Al-Imam explained the City picks the basis that gives it the greatest savings. He advised that some cities do opt for the shorter basis because it gives them more savings in the upcoming years. Chair O’Neill noted that the goal is not to smooth out payments, but the goal is to pay it off. Committee Member Collopy inquired if the portfolio can be blended. Chair O’Neill explained the City is not allowed to pick how it is invested only where it is applied. He explained that in some years where the return is 21% it will be a credit and in some years with a 7.5% loss it will be a debit. He noted in theory, the City could apply the ADP toward that 7.5% and essentially get rid of that slice of the pie. He explained that fresh start takes the basis points that are individually sliced and puts them together but at that point, there is a minimum amount to pay. He explained when the City was doing its partial fresh start it was not taking all of the basis and putting them together. He advised the rule is the City cannot do that and have a lower normal payment out of it. He noted that was the higher default payment the City was making. He advised the City does not need to do that. The item was received and filed. B. LONG RANGE FINANCIAL FORECAST UPDATE Summary: Staff will brief the Committee regarding the results of the updated LRFF analysis. Recommended Action: Receive and file. Finance Director Al-Imam reported the Long-Range Financial Forecast is a planning tool that guides fiscal policy and sets the stage for the development of the budget for the upcoming fiscal year, which is Fiscal Year 2023-24. Looking at next year, General Fund Revenues are projected to increase approximately $7 million offset with a comparable increase in expenditures, resulting in a projected operating surplus of $7 million. The General Fund is expected to maintain a balanced operating budget for the foreseeable future and is well-positioned to maintain long-term fiscal sustainability. Finance Director Al-Imam explained that General Fund revenues are primarily derived from Property Tax, Sales Tax, and Transient Occupancy Tax, which accounts for approximately 73% of total General Fund revenues. 60% of the General Fund’s expenditures relate to personnel, which includes salaries, benefits, and pension related payments to CalPERS. The balance is spent on capital related transfers to other funds, and other operating costs such as contract services. Finance Committee Meeting Minutes January 12, 2023 Page 9 of 14 Finance Director Al-Imam reported that the local economy is currently supported by a strong labor market with the unemployment rate in Orange County at 3%. However, consumer demand is cooling as the Federal Reserve continues to aggressively raise interest rates to fight inflation. Nonetheless, the economic outlook for the City is projected to remain positive for the foreseeable future, although a slower rate of growth is projected for the upcoming year compared to what has been seen in the past few years coming out of the recession. Committee Member Collopy inquired why the Tidelands Harbor Capital Fund was flat-lined to $4.5 million after 2030. Senior Budget Analyst Amber Haston reported staff made that recommendation to the Finance Committee last year based on the programming at that time to ensure that everything was funded. Committee Member Collopy recommended reconsidering it or at least continuing to inflate that because the seawall is going to be a huge expense. Mayor Blom concurred. Finance Director Al-Imam explained that bids for capital projects are coming in above the engineer’s estimate, which is due to inflation. He explained that requests for additional funding will need to be evaluated on a case-by-case basis, and will need to be factored into the budget for next fiscal year. Mayor Blom noted as far as projections go the percentage locked in should be consistent and not assume that it will ever drop to a flat line projection. He advised whether it is a project programmed or not it makes sense for the City to budget through it rather than looking for savings within it. Committee Member Collopy reported he had a conversation with Finance Director Al-Imam before the meeting and noted this model is more sophisticated than he recalls on all their assumptions. He explained the inflation the City is seeing on projects has increased tremendously. He advised he spoke with Finance Director Al-Imam regarding the Police Department building and inquired how the City can accelerate it so it can afford it. He explained the building is likely going to cost more than staff thinks it will cost. Chair O’Neill advised he does not disagree with Committee Member Collopy. He advised he asked Finance Director Al-Imam and City Manager Leung to look at the Capital Improvement Projects (CIP). He noted there are a lot of projects in the CIP between now and then and anticipates all of them to be coming up higher than budgeted. He advised the City may not be able to pull forward the police station because of other priorities including the fire station and library at the end of Balboa that will happen between now and then. He advised it may end up that the expenditures, particularly the transfers-out or maybe even the non-personnel costs would shrink the anticipated surplus a bit. Finance Director Al-Imam reported that property tax revenues are primarily dependent on the assessed valuation established in January of each year. Projections for Fiscal Year 2022-23 property tax revenues reflect a 7.6% increase in assessed property values. Property tax revenues are projected to increase by $4.5 million or 3.4% in Fiscal Year 2023-24, which is largely related to the inflation adjustment indexed at the 2% cap allowed by Proposition 13, and due to changes in ownership, which is partially offset with an anticipated decrease in supplemental property tax revenue as home sales slow due to rising interest rates. Property tax revenues are projected to grow 2% to 4% per year over the next two decades, which is conservative considering the average annual growth rate was 5.8% over the past 18 years. Finance Committee Meeting Minutes January 12, 2023 Page 10 of 14 Finance Director Al-Imam reported sales tax revenue is projected to increase approximately $260,000 (0.5%) in Fiscal Year 2023-24 due to modest growth projected in sales tax revenue from Restaurants and Hotels and the State & County Pools, which is partially offset with projected decreases in General Consumer Goods and Autos & Transportation. It was noted that these four industry groups make up 86% of the City’s sales tax revenue. The sales tax forecast is based on most recent sales data for the quarter ending September 2022, which was up 10% on an adjusted basis compared to the same quarter a year ago versus 17% growth in the quarter ending September 2021. As a result, growth has been decelerating over the past two years, which is expected to continue as the Federal Reserve continues to raise interest rates. Finance Director Al-Imam reported on Transient Occupancy Tax (TOT) revenue and projected growth next year at 3% which is quite conservative. He advised the last 6 years it has been at 4%. He acknowledged the pandemic had an immediate impact, but the City bounced back quite quickly. Finance Director Al-Imam reported that other revenues include, services, charges, fines, penalties, property income, other miscellaneous revenues, and transfers in as well. He projects growth of $1.3 million on a dollar basis which is 1% over the prior year. He noted that includes annual lease revenue from the Dove Street property, which is expected to close escrow in the next couple of months. Senior Budget Analyst Haston reported on the expenditure side for salaries and benefits. She advised staff has incorporated all the recently approved increases in compensation through December 2024 and then thereafter 2% growth in salaries is projected. She reported that special and other pay are projected to grow at a rate of 3% annually. She noted that included in this category is the one-time allocation of the $880,000 which is to assist in fully staffing the Police Department. Senior Budget Analyst Haston reported benefits are projected to grow 2% annually which is consistent with salaries and noted it includes the continued funding of the City’s UAL at the $45 million level citywide. Committee Member Collopy inquired about the General Fund portion of UAL. Finance Director Al-Imam explained that $42 million is the General Fund’s portion of the $45 million UAL payment. Senior Budget Analyst Haston reported a 1.5% reduction in the employee’s share in pension contributions to CalPERS through Fiscal Year 2024-25 was also included in the forecast through December 2024. Senior Budget Analyst Haston reported non-personnel costs make up 28% of the total expenditures and staff is projecting this to grow 5.1% annually and are comprised of a variety of expenditures. She mentioned the projection did take into account trends, inflation, contract services in recent Consumer Price Index (CPI), and historical trends. She advised staff projected those to increase at 5.5% each year but noted staff did not broadly project that increase taking into account that a lot of those contracts cap the rate at which the City can increase by CPI. She reported utilities are projected to grow at 6.8%. Senior Budget Analyst Haston reported there is no structural deficit projected at this time. She advised the City is facing potentially financially impactful events in the near term such as increases to CalPERS pension costs, future recessions or shifts in consumer habits, and a high inflationary environment impacting capital improvement projects. Finance Committee Meeting Minutes January 12, 2023 Page 11 of 14 Chair O’Neil noted that high inflationary capital improvement projects are either being transferred over to the Facilities Financial Plan (FFP) or it is coming out of a future General Fund. Chair O’Neil emphasized it is really important for the Finance Committee to absorb what the report is showing because it shows apples to apples when comparing year over year. He advised the Finance Committee has typically been looking at the Long Range Financial Forecast without transfers in but it is not listed in the actual budget. He noted that the projected Fiscal Year 2022-23 is up $9 million higher than anticipated on the revenue side. He reported the Finance Committee will continue to look at the surpluses which are there, but the numbers are not small and they continue to grow year over year on a projected basis. He projected a structural surplus of $12 million but expressed a belief that will shrink due to the cost of CIP. Mayor Blom advised the takeaway from this committee is that it is being conservative and responsible and doing everything it is supposed to do. He agrees there will be some kind of issue the City will need to deal with but does not think it will affect the City dramatically since it has good insulation. Chair O’Neill acknowledged some major projects are coming down the pike such as Balboa Island drainage and the seawalls. Committee Member Collopy noted that his point a few meetings ago was not that a surplus is as bad as a deficit. He noted it is good budgeting and believes the City has been conservative in its budgeting. Chair O’Neil advised if the City is doing everything correctly and there is still a surplus after that, then there is a fiscal policy in place that mandates putting half towards long-term liabilities and half towards neighborhood improvements. He noted the City needs to have the departments it has to meet the expectations of the residents. He explained that at the end of the year, there is a surplus, which goes into making the City look nicer, and in turn, property values go up which increases property tax revenue. He referenced the Street Pavement Index and explained when it gets below a certain threshold it starts escalating the costs exponentially. He noted if cities are not budgeting properly and do not end up with a surplus and are still not covering costs there is a massive problem. He expressed concern that the City is not setting aside enough for FFP for future projects. He recommends the Finance Committee take a look at that along with the Harbor Master Plan. Committee Member Reed noted that in CalPERS actuarial assumptions they modeled increased salaries of 2.8% in the long-term and the City is using 2% and would like to see the 2.8% in the model. He recommended as the City looks long term and talks about what is the increasing deficit over time, he would like it listed as a box underneath that has it listed as a percentage of total revenue so it can be relevant to something. Committee Member Collopy advised he and Chair O’Neill were on the Finance Committee when the Finance Team was asked to invent a model. He recalled hiring a consultant to get it started, but noted staff has taken it to the next level in all the assumptions and complimented the staff. Chair O’Neill opened public comments. Seeing none, Chair O’Neill closed public comments. The item was received and filed. C. INTERNAL AUDIT PROGRAM WORK PLAN REVIEW Summary: Selection of audit topics for the Fiscal Year 2022-23 audit program. Recommended Action: Receive and file. Finance Committee Meeting Minutes January 12, 2023 Page 12 of 14 Deputy Finance Director Michael Gomez reported the City’s internal audit program was initiated in 2020 with the goal of continuous review and improvements to financial operations. He reported there are currently three items being reviewed with an expectation that those will be completed and presented to the Finance Committee in March. He advised the initial assessment completed by Moss Adams determined the number of different recommendations of topics that staff could deep-dive into to continue with improvements in financial operations. He reported that to date, five of these items have been completed, and three are near completion now. He advised one of the items has been delayed until the next fiscal year. Mayor Blom inquired why it was delayed until the next fiscal year. Deputy Finance Director Gomez explained it was delayed due to budgeting and Finance Committee agreed to move the Police Property Review to the next fiscal year so that additional funds could be requested during the budgetary process. Committee Member Collopy inquired about the cost. Deputy Finance Director Gomez explained the bids received were $85,000 on the high end and $40,000 on the low end. He noted the company that the City was going to award the work to came in at $67,000. He explained the Police Department is audited regularly. Committee Member Collopy inquired who was conducting the auditing. Finance Director Al-Imam noted the Police Department is audited by the Department of Justice. City Manager Leung explained there is a lot of governance around it because of the cash and drugs. Chair O’Neill noted this is an area of special concern for the Police Department’s Office of Professional Standards. City Manager Leung explained this was to look at the operational processes they have in place, from their management supervision to what controls they put in place. Committee Member Collopy advised he was concerned with the tactics and not the strategy. Chair O’Neill recommended the Newport Beach Police Chief speak to Committee Member Collopy to determine if Police Property Review is necessary. Deputy Finance Director Gomez reported staff recommends continuing on the path and going down the list in order as recommended by Moss Adams. He anticipates completing three items next fiscal year pending any discussion regarding the Police Property Review. He noted staff is open to any suggestions from the Finance Committee. Deputy Finance Director Gomez anticipates the work to come back to the Finance Committee for discussion in the January or February timeframe. Committee Member Collopy recommended moving Item No. 12 before Item No. 10 and solicited input from the dais. City Manager Leung noted she had no strong feelings either way. Deputy Finance Director Gomez mentioned the Moss Adams initial report when they were looking at the Business Continuity and Disaster Planning Assessment, and Finance Finance Committee Meeting Minutes January 12, 2023 Page 13 of 14 Customer Service Operational Review, which was looking at organizational structures, processes, and frameworks. He believes the City is well-armed in terms of responses to any type of disaster. Committee Member Collopy advised he is not concerned about Fire and Police but is concerned regarding the continuity of City Hall and governance of the City. He advised he would leave it up to City Manager Leung. City Manager Leung noted that some of the other topics would be helpful right now with Finance Director Al-Imam being new to the operation. She advised they might be able to do Items No. 10 through 13 if the Police Property Review is not conducted. Deputy Finance Director Gomez advised the balance of the list could go out for bid and could come back to the Finance Committee with recommended topics to tackle next year. Chair O’Neill opened public comments. Seeing none, Chair O’Neill closed public comments. The item was received and filed. D.BUDGET AMENDMENTS FOR QUARTER ENDING DECEMBER 31, 2022Summary:Staff will report on the budget amendments from the prior quarter.Recommended Action:Receive and file. Chair O’Neill reported budget amendments were almost entirely City Council this time around. Chair O’Neill opened public comments. Seeing none, Chair O’Neill closed public comments. The item was received and filed. E.WORKPLAN REVIEWSummary:Staff will report on the upcoming Finance Committee items.Recommended Action:Receive and file. Chair O’Neil reported the Finance Committee would be taking a look at the CIP update in February which will be very helpful because it covers much of what was discussed today. Headvised they will also look at the financial statement audit results and related communications along with the enabling resolution that deals with the responsibilities of the FinanceCommittee. He reported the Finance Committee will also be talking about the FFP and the Harbor Beaches Master Plan. He noted they will also be discussing the Harbor Departmentbudget, staffing reviews, and recommended changes from City Manager Leung. He noted they will be begin reviewing the upcoming budget shortly beginning with an overview of therevenue projections in March. The item was received and filed. VI.ADJOURNMENT The Finance Committee adjourned at 4:55 p.m. to the next regular meeting of the FinanceCommittee on February 16, 2023 at 3:00 p.m. The agenda for the Regular Meeting was posted on January 6, 2023, at 4:41 p.m., in the binderand on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 CivicCenter Drive. Finance Committee Meeting Minutes January 12, 2023 Page 14 of 14 Attest: ___________________________________ _____________________ Will O’Neill, Chair Date Finance Committee