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HomeMy WebLinkAboutApproved Minutes - November 10, 2016Finance Committee Meeting Minutes November 10, 2016 Page 1 of 5 CITY OF NEWPORT BEACH FINANCE COMMITTEE NOVEMBER 10, 2016 MEETING I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, 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, and Committee Member John Warner (arrived at 4:23 p.m.) STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Budget Manager Susan Giangrande, IT Manager Rob Houston, Budget Analyst Tam Ho, Senior Budget Analyst Shannon Espinoza, Accounting Manager Rukshana Virany, Budget Analyst Katherine Warnke Carpenter, and Administrative Specialist to the Finance Director Marlene Burns MEMBERS OF THE PUBLIC: Carl Cassidy, Jim Mosher, Barbara Arenado (City of Irvine), and John Bartel (Bartel Associates) III. PUBLIC COMMENTS Jim Mosher thanked Council Members Petros and Curry for their service to the City. Chair Petros closed public comments. IV. CONSENT CALENDAR A. MINUTES OF OCTOBER 13, 2016 Recommended Action: Approve and file. Committee Members Tucker and Gorczyca and Jim Mosher noted corrections to the minutes. MOTION Committee Member Gorczyca moved and Council Member Curry seconded a motion to approve the October 13, 2016, Finance Committee Minutes, as amended. The motion carried 5-1, Council Member Petros abstaining and Committee Member Warner absent. V. CURRENT BUSINESS A. CITY CALPERS PENSION ISSUES Summary: John Bartel (Bartel Associates) will discuss CalPERS pension issues, such as, current unfunded liability; projected contribution rates, including impact of investment return volatility; and CalPERS Risk Mitigation Policy and possible discount rate changes. In addition, there will be a review of the City’s current funding policy and of alternatives the City might consider. Finance Committee Meeting Minutes November 10, 2016 Page 2 of 5 Recommended Action: Receive and file; discuss next steps. Chair Petros requested Committee Member Tucker’s request from the previous meeting be addressed. Finance Director/Treasurer Matusiewicz explained that Committee Member Tucker requested a sensitivity analysis or market return stress test. He discussed the straight line sensitivity analysis for various investment rates of return including 7, 6, 5, and 4 percent and the impact on the City’s contribution schedule compared as a percentage of general fund revenue. John Bartel, President of Bartel and Associates, presented a PowerPoint presentation outlining the CalPERS contribution policy changes and assumption changes including mortality improvement In response to Committee Member Gorczyca, Mr. Bartel stated there was a modest impact from retirements occurring earlier than anticipated, particularly from safety. Mr. Bartel continued his presentation on CalPERS changes including risk mitigation strategy and Board review of Capital Market Assumptions. Council Member Petros stated the variables were in reaction to risk and market. Mr. Bartel anticipated the investment rate of return would go from 7 to 6 percent. Mr. Bartel presented the City’s discount rate used as of Actuarial Valuation Date and historical Market Value Investment Returns. Mr. Bartel reviewed the summary of demographic information, considering active versus receiving payment status. He stated miscellaneous employees have an average retirement age of 59 to 60. Chair Petros stated there was a perception that cutting staff was a means of reducing pension obligations. Mr. Bartel stated elimination of staff would not eliminate the unfunded liability. In response to Committee Member Tucker and other comments made regarding the use of contract fire employees in other cities, Mr. Bartel explained that benefits were built into contracts; therefore, not reducing costs. Committee Member Tucker stated there was no short-term benefit in contract employee costs but potential reduced exposure over the long term. Mr. Bartel provided an OPEB example of a County Fire Department’s hesitation of prefunding retirement liability. He sated there may be potential for long term advantage with hiring contract personnel as opposed to prefunding existing personnel. In response to Committee Member Tucker, Mr. Bartel stated there were different rules for Police versus Fire districts. Mr. Bartel continued the PowerPoint presentation with Slide 9 explaining the Plan Funded Status and actuarial accrued liability (AAL). He presented the history of the funded ratio and funded status. He discussed the impacts of benefit improvements and the dot com bubble. He presented the funded status depicting the actuarial liability and market value of assets. He discussed the PERS contribution holiday. He projected contribution rates using Current Amortization, Alternative #1 and Alternative #2. In response to Committee Member, Mr. Bartel stated it was better to pay the unfunded liability off sooner rather than later. He discussed investment gains versus losses and unusable excess assets. He stated it was fiscally prudent to pay the liability off sooner. He presented Slides 15, 16 and 17 depicting contribution projections. He discussed Funded Status with Risk Mitigation, Alternative #1 – 20-Year Level Percentage of Projected Payroll, and Finance Committee Meeting Minutes November 10, 2016 Page 3 of 5 Alternative #2 – 17-Year Level Dollar. He presented the Alternative Comparison and indicated that any of the three alternatives were fine; however, could be of limiting value depending on market return. He presented agency comparisons of funded status, unfunded actuarial accrued liability as a percentage of payroll, employer normal cost rate, and total employer rate. In response to Committee Member Gorczyca, Mr. Bartel stated Irvine had a defined contribution plan but were less mature in terms of retirees. In response to Committee Member Tucker, Mr. Bartel explained that the actuarial accrued liability assumed 7.5 percent discount for every year. He stated the City would have significantly greater pension liabilities if CalPERS consistently earned low single digit rates of return. Mr. Bartel highlighted Slide 32, Total Employer Rate, and explained that Newport Beach’s higher rate was a by-product of paying off the unfunded liability sooner rather than later. Committee Member Warner arrived at 4:23 p.m. Mr. Bartel presented a summary of demographic information, members included in valuation, plan funded status, funded ratio, and funded status for safety employees. Finance Director/Treasurer Matusiewicz stated additional payments and fresh start were geared to accelerate the safety plan. Mr. Bartel discussed retirement of safety employees and expectation that growth in liability would continue at a steep rate. City Manager Kiff explained the jump due to the percentage of retirees and the level of disability. Mr. Bartel explained the contribution rates, contribution projections, funded status for safety employees. He presented alternative comparison graphs for safety. He stated he did not have a strong opinion on which way to go. He reviewed the California Public Employees’ Pension Reform Act (PEPRA) rates. Council Member Petros asked if the City could negotiate to differentiate formulas. Finance Director/Treasurer Matusiewicz stated the City does not have this ability. Mr. Bartel discussed recruiting with two tiers as an issue for miscellaneous employees. He discussed means of paying down the unfunded liability. Committee Member O’Neill asked if anyone in California had issued a pension obligation bond in the last two years. Mr. Bartel stated he was not aware of any in the past two years but there were notable agencies that did pension obligation bonds in 2007. In response to Council Member Petros, Mr. Bartel stated the he did not recommend pension obligations bonds for the City of Newport Beach. Finance Director/Treasurer Matusiewicz explained that pension obligation bonds were used when the agency was in trouble and had no other option. Mr. Bartel stated pension obligation bonds were included on the list of options to pay down unfunded liability so that the list was complete. He discussed irrevocable supplemental pension trusts as a means to smooth out volatility. In response to Council Member Curry, Mr. Bartel explained that conservative investments would not always trail CalPERS, rather would trail when markets were up and beat riskier investments when markets were down. Finance Committee Meeting Minutes November 10, 2016 Page 4 of 5 In response to Committee Member O’Neill, Mr. Bartel stated the City of Newport Beach was addressing the unfunded liability head on whereas most of the other clients reacted differently. Mr. Bartel stated CalPERS rates were more problematic for cities with more distressed areas and was dependent on revenue and reserves. Committee Member Tucker stated it might not be an issue until CalPERS funds ran out. Mr. Bartel stated CalPERS was aggressively pursuing agencies that were not paying. Committee Member Tucker suggested the State Legislature might step in and provide relief to distressed agencies. Mr. Bartel stated he did not doubt the Legislature would try that but he did not anticipate it happening. Mayor Dixon left the meeting at 5:00 p.m. In response to Council Member Petros, Mr. Bartel stated they had reviewed the alternatives and did not feel strongly one way or another. He suggested the Council continue to pay attention to its contribution and stay the course. In response to Committee Member Gorczyca, Mr. Bartel discussed CalPERS liquidity and he stated that problems may arise if the funded ratio dropped below 50 percent and assets were sold. In response to Jim Mosher, Mr. Bartel discussed Slide 34 and explained transfers and vested term employees. Mr. Mosher estimated retiree payment at $43 million per year. Mr. Bartel stated investment earnings and contributions covered the payment. Mr. Mosher asked why the retiree pool was growing. Mr. Bartel explained that safety employees retired earlier and lived longer; therefore, remain on the pension rolls longer. Finance Director/Treasurer Matusiewicz discussed the accrued liability and projected benefit. Mr. Bartel stated the number of retirees was expected to grow. He explained short-term retirees versus Tier 2 and PEPRA retirees. Carl Cassidy thanked Council Members Curry and Petros, the committee members and staff. Chair Petros suggested that the new Council and the Finance Committee should continue discussions about pensions. He thanked Council Member Curry for appointing him to the Committee, fresh start and for Mayor Dixon appointing him as Chair. Council Member Curry expressed his gratitude to Council Member Petros and the committee members. He presented two articles on Arizona and Wisconsin pension plans. Committee Member Tucker stated he had enjoyed serving and looked forward to continuing on the Committee. 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 5:19 p.m. to the next regular meeting of the Finance Committee. Filed with these minutes are copies of all materials distributed at the meeting.