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HomeMy WebLinkAboutApproved Minutes - September 15, 2016Finance Committee Meeting Minutes September 15, 2016 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE SEPTEMBER 15, 2016 MEETING I. CALL MEETING TO ORDER The meeting was called to order at 4:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Council Member Tony Petros (Chair), Council Member Keith Curry, Mayor Diane Dixon, Committee Member Patti Gorczyca, Committee Member William C. O’Neill, Committee Member Larry Tucker (arrived at 4:01 p.m.), and Committee Member John Warner STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Municipal Operations Director George Murdoch, Budget Manager Susan Giangrande, and Administrative Specialist to the Finance Director Marlene Burns MEMBER OF THE PUBLIC: Jim Mosher III. PUBLIC COMMENTS Jim Mosher discussed the fee schedule adopted by the City Council and questioned the basis for the rate schedule for facility rentals. Chair Petros suggested staff look into Mr. Mosher’s concerns. Committee Member Tucker arrived at 4:01 p.m. Chair Petros closed public comments. IV. CONSENT CALENDAR A. MINUTES OF MAY 12, 2016 Recommended Action: Approve and file. Committee Member Gorczyca noted corrections to the minutes, which Finance Director/Treasurer Matusiewicz would verify. MOTION Committee Member Curry moved and Chair Petros seconded a motion to approve the May 12, 2016, Finance Committee Minutes, as amended. The motion carried 6-1, Mayor Dixon abstaining. B. MINUTES OF JUNE 2, 2016 Recommended Action: Approve and file. Committee Member Gorczyca noted corrections to the minutes. Finance Committee Meeting Minutes September 15, 2016 Page 2 of 8 MOTION Committee Member Tucker moved and Committee Member Gorczyca seconded a motion to approve the June 2, 2016, Finance Committee Minutes, as amended. The motion carried unanimously. C. MINUTES OF JUNE 16, 2016 Recommended Action: Approve and file. Committee Member Tucker and Committee Member Gorczyca noted corrections to the minutes. MOTION Committee Member Warner moved and Committee Member Gorczyca seconded a motion to approve the June 16, 2016, Finance Committee Minutes, as amended. The motion carried unanimously. V. CURRENT BUSINESS A. ANNUAL INVESTMENT PORTFOLIO PERFORMANCE REVIEW Summary: Staff and/or one or more investment advisors will describe the performance of the City's investment portfolio. Recommended Action: Receive and file. Finance Director/Treasurer Matusiewicz presented a PowerPoint, discussed market volatility and value of the portfolio. In response to Committee Member Warner, Finance Director/Treasurer Matusiewicz confirmed that when, yield would go up, price volatility would also go up. Finance Director/Treasurer Matusiewicz stated the City was in compliance with all 29 investment policy rules. Committee Member Warner requested a comparison of sister cities. Committee Member Gorczyca also requested a comparison of the City’s investment portfolio performance with that of the Orange County investment pool. City Manager Kiff clarified that Committee Member Warner was requesting a comparison of the City’s investment portfolio performance with that of 4-5 other cities. Committee Member O’Neill congratulated staff on the returns. B. INVESTMENT ADVISOR RECOMMENDATION Summary: Staff will summarize the results of our recent investment advisor RFQ and make recommendations for the contracting of investment advisory services. Recommended Action: With Finance Committee concurrence of staff’s recommendation to retain the services of Chandler Asset Management (Chandler) as the sole investment manager, staff will proceed with the recommended action and bring the new investment advisor contract to the City Council for approval. Finance Committee Meeting Minutes September 15, 2016 Page 3 of 8 Finance Director/Treasurer Dan Matusiewicz discussed the portfolio and interview process. He explained the decision to select Chandler over PFM and the opportunity to focus more on strategies and a more comprehensive investment program. Mayor Dixon expressed concern with “putting all the eggs in one basket.” She stated she had reviewed the funds of the other cities managed by Chandler and the City of Newport Beach would be the largest amount. She suggested keeping a second firm for a check and balance. She questioned the calculation of fees. Finance Director/Treasurer Dan Matusiewicz explained it was a tiered structure. He stated the bids were submitted in $25 million increments. Mayor Dixon stated her preference would be to have two firms. Committee Member Gorczyca expressed concern with the small firm. She asked if Chandler had firms with over $100 million. Finance Director/Treasurer Dan Matusiewicz stated multiple advisors were recommended when the portfolio was over $500 million. He stated he was hesitant to let go of multiple advisors but recommended moving down to one investment advisor and to focus on investment strategy and a comprehensive investment program. Deputy Finance Director Montano explained that the City could still maintain a diversification of asset classes. Finance Director/Treasurer Dan Matusiewicz stated the assets were registered in the City’s name and held by a custodial bank to eliminate the likelihood of embezzlement. Council Member Curry stated he shared Mayor Dixon’s concerns. He discussed the City’s experience with PFM. He discussed the advantage of two different advisors. He indicated support for two advisors. Committee Member Gorczyca indicated support for two different points of views, built in competition and built in benchmarks and the importance of diversification. In response to Chair Petros, Finance Director/Treasurer Dan Matusiewicz stated there was no regulatory scheme that two advisors were necessary. Chair Petros concurred with the other members. Jim Mosher stated he felt two was better than one, but Finance Director/Treasurer Matusiewicz’s experience should be considered. He asked how much was spent on the consultant advising the City on the matter. Deputy Finance Director Montano stated the consultant agreement was approximately $20,000. Chair Petros suggested proceeding with a recommendation for two advisors, but was also compelled by Finance Director/Treasurer Matusiewicz’s expertise. Committee Member Gorczyca questioned the recommendation that two advisors were not necessary until a portfolio exceeds $500 million, which is rare for a municipality. MOTION Committee Member O’Neill moved and Committee Member Gorczyca seconded a motion to recommend the City Council enter into five-year contracts with Chandler and PFM based on the terms of the RFPs provided to staff. Chair Petros suggested Finance Director/Treasurer Matusiewicz include his argument for a single advisor when it was presented to the City Council. Committee Member Warner questioned how responsive the Council would be to Finance Director/Treasurer Matusiewicz’s argument. City Manager Kiff thanked the Committee for its openness. Finance Committee Meeting Minutes September 15, 2016 Page 4 of 8 The motion carried 6-1, Council Member Curry abstaining. C. INVESTMENT PORTFOLIO RECOMMENDATIONS Summary: Staff will present a proposal to further segment the investment portfolio to better align assets with related objectives. Recommended Action: Staff recommends the Finance Committee direct staff to return with a proposed segmentation of the investment portfolio including a long-term segment, proposed investment strategies, and an appropriate risk analysis of the proposal. Finance Director/Treasurer Matusiewicz presented the portfolio strategy recommendations. He stated his recommendation was easier with one investment advisor. He explained the current strategy. He stated the proposed strategy was to refine cash flow forecasts and to continue to ladder out maturities when there was an opportunity to beat LAIF (Local Agency Investment Fund) yields. He suggested maintaining a medium portfolio with a 1-5 year strategy that would allow for a higher coupon rate on bonds; however, cautioned to expect greater market volatility with a 1-5 year strategy. Chair Petros asked if Finance Director/Treasurer Matusiewicz was introducing a concept and requesting concurrence that would be followed by a host of policies to reflect the concept. Finance Director/Treasurer Matusiewicz stated the next step would be to perform a risk analysis so that the risk and benefits could be weighed, then look at amending policies. Council Member Curry asked about the origin of the idea of going out ten years. Finance Director/Treasurer Matusiewicz stated the government code allowed deployment of a 1-10 year strategy which seemed appropriate given the equally long-term nature of some of the City’s holdings. Council Member Curry stated the Council had to adopt findings indicating it was aware it was doing something it probably should not be doing. He discussed the bond activity for the prior week. He stated rates would go up and prices would go down and a longer portfolio would not benefit. He indicated opposition to the proposed ten-year maturity. Committee Member Tucker stated it was not the business of the City to reach for yield. He stated a five-year term was not as costly. Chair Petros asked if the short, medium and long-term was a good approach. Committee Member Tucker stated it was a change from 1 to 3 to 1 to 5 and should be reviewed. Committee Member O’Neill asked if a laddered strategy makes sense when the City has a one-year budget. Finance Director/Treasurer Matusiewicz discussed the cash flow periods and potential need for liquidity during dry periods. He explained the 1 to 36-month term provided an opportunity to outperform LAIF yields while ensuring liquidity during the months that cash flow is most needed. He further stated investment advisors were managing to a specific benchmark and duration, which is not necessarily aligned with the City’s liquidity needs. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz discussed efforts to refine the current short-term matching investment maturities to cash flows and limiting the amount that was deposited into LAIF. Committee Member O’Neill discussed the F-1 Council Policy and questioned whether it was really being changed. Finance Committee Meeting Minutes September 15, 2016 Page 5 of 8 Committee Member Gorczyca concurred with Council Member Curry and discussed the requirement for legislative approval and requirement to wait 90 days after the option was taken. She stated government rarely went beyond the five-year term. Finance Director/Treasurer Matusiewicz stated the funds would not likely be liquidated; therefore, the yield would be higher and would outperform the 1 to 5-year portfolio. Mayor Dixon asked if other cities were taking similar risks. Finance Director/Treasurer Dan Matusiewicz stated water districts usually followed the strategy, which was designed for long term assets. Committee Member Curry discussed purchases of treasury and payment of premiums. He stated a higher yield would be obtained but the purchase prices were higher. Chair Petros stated the Committee seemed reluctant to extend the term even though current laws allowed for the strategy. He stated he would like to see the risk analysis. Council Member Curry stated the risk was spread over a rising rate but the price volatility was the same. He stated if rates were going to rise, long term was not the appropriate path. Finance Director/Treasurer Dan Matusiewicz discussed trigger points and risk simulation by an investment advisor. He stated the City Council would have to approve the process but the implementation triggers would be determined by staff and advisors, which could be reviewed by the Committee. Committee Member Tucker questioned whether it was worth it. MOTION Council Member Curry moved and Committee Member Gorczyca seconded a motion to request Finance Director/Treasurer Matusiewicz to return with recommendations for investment policy changes consistent with a maximum maturity of five years. The motion carried unanimously. Chair Petros commended Finance Director/Treasurer Matusiewicz for his creative efforts. D. IMPLEMENTATION OF FINANCE SUBCOMMITTEE RECOMMENDATIONS Summary: During the June 16, 2016, Finance Committee meeting, the Committee reviewed the Subcommittee’s 16 recommendations to improve the City’s general business practices. The Subcommittee members proposed, and the Committee as a whole assigned, each of the recommendations according to one of the following categories: 1) Incorporate into existing or new City Council policy; 2.) Create new or update General Plan policies; 3.) Action items only, no policy required; and 4.) Comment only - no policy or action required. Recommended Action: Staff recommends that the Finance Committee make recommendation(s) to the City Manager as to the next steps related to the report. Deputy Finance Director Montano presented the staff report. Committee Member Tucker stated it was a business person’s review of the City’s budgeting. He suggested the City Council consider the matter at a study session to determine if it was prepared to take it to the next step. Chair Petros reiterated that there was no further action until the Council provided guidance. Committee Member Tucker stated the committee had come up with recommendations and was ready to go to the Council. Finance Committee Meeting Minutes September 15, 2016 Page 6 of 8 Chair Petros asked if enterprise funds were indexed by CPI. Municipal Operations Director Murdoch stated they were property related and could not be increased. Mayor Dixon asked if more emphatic language could be included to increase fees. Municipal Operations Director Murdoch stated master plans were generally done every five years and that was the best time to review the revenue. Mayor Dixon stated it was necessary to bridge the gap so there was not a five or six-year delay. Committee Member O’Neill stated the subcommittee recommended at least every three years for rate review. Municipal Operations Director Murdoch discussed using the reserves to offset regular rate increases; however, when reserves approach minimum Council policy level, it is a good trigger to study rates. In response to Mayor Dixon, Municipal Operations Director Murdoch discussed the 2009 Wastewater Master Plan and reserve policy. Committee Member Tucker suggested updating at least every five years. Municipal Operations Director Murdoch stated major master plan was done every 20 years with updates every 5 years. He suggested a master plan study followed by a rate study every five years. In response to Committee Member Gorczyca, Municipal Operations Director Murdoch stated multi-year scheduled rate increases were utilized. MOTION Committee Member Tucker moved and Committee Member Gorczyca seconded a motion to advance the subcommittee’s recommendations to the City Council. The motion carried unanimously. E. COMMITTEE DISCUSSION OF FUTURE PENSION OPEB AGENDA ITEMS Summary: Provide staff further direction concerning Pension Primer presentation and Pension OPEB management strategy discussions at the October and November Finance Committee meetings. Recommended Action: Provide staff direction. Finance Director/Treasurer Matusiewicz referred to the work plan and proposed schedule. Committee Member Tucker suggested the primer process to ensure the Committee understood the issues. He stated the Council might want a recommendation on the options. He stated it was necessary to deal with the issue. Mayor Dixon clarified that an actuary would be presented to the Committee on October 13, 2016. She presented an article as additional material, Item No. 5E2, by Malanga (2016) entitled, “Covering Up the Pension Crisis”. Malanga, S. (2016, August 25). Covering Up the Pension Crisis. The Wall Street Journal. Retrieved September 16, 2016, from http://www.wsj.com/articles/covering-up-the- pension-crisis-1472184758 Committee Member Gorczyca distributed the article, Item No. 5E3, by Fellner (2016) entitled “CalPERS $100k Club Up 11% in Orange County as Newport Beach Experiences State’s Finance Committee Meeting Minutes September 15, 2016 Page 7 of 8 Largest Rate Hike” regarding Newport Beach’s pension liability increase. She stated it was important to have the actuary on board. Fellner, R. (2016, August 8). CalPERS $100k Club Up 11% in Orange County as Newport Beach Experiences State's Largest Rate Hike. Retrieved September 9, 2016, from https://voiceofoc.org/2016/08/calpers-100k-club-up-11-in-orange-county-as-newport-beach-experiences-states-largest-rate-hike/ City Manager Kiff explained the City having the largest rate hike. Council Member Curry discussed the Sanitation District paying off its liability but $37 million was back on the books. Committee Member Warner presented the additional material, Item No. 5E4, the document entitled, “City of Anaheim Steps taken to Address Pension and Other Post-Employment Benefits Costs”. City Manager Kiff stated the City was higher than necessary for the share of the pension cost. Mayor Dixon asked the funded level. City Manager Kiff stated the City was at 69 percent. F. QUARTERLY ERP UPDATE Summary: Staff will provide the Committee with a progress report on the Enterprise Resource Plan project to receive and file. Recommended Action: Receive and file. Deputy Finance Director Montano discussed implementation of two of four phases. He stated they were currently involved in implementation of the utility billing system, which was extended by four months. He stated the work order process was suspended. He stated all work was anticipated to be completed in February 2017. In response to Mayor Dixon, Deputy Finance Director Montano explained that staff could continue with the current work order solution or develop a workaround within Tyler. Committee Member Gorczyca asked if there would be a discount for not using a portion. Deputy Finance Director Montano stated a credit could be received for not using the software. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) None. VII. ADJOURNMENT The Finance Committee adjourned at 5:33 p.m. to the next regular meeting of the Finance Committee on October 13, 2016, at 4:00 p.m. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on September 8, 2016, at 5:34 p.m., in the binder and on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 Civic Center Drive.