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HomeMy WebLinkAboutFinance Committee Agenda - November 10, 2016CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D Thursday, November 10, 2016 - 3:00 PM Finance Committee Members: Tony Petros, Chair / Council Member Diane Dixon, Mayor Keith Curry, Council Member Patti Gorczyca, Committee Member William C. O’Neill, Committee Member Larry Tucker, Committee Member John Warner, Committee Member Staff Members: Dave Kiff, City Manager Dan Matusiewicz, Finance Director / Treasurer Steve Montano, Deputy Director, Finance Marlene Burns, Administrative Specialist to the Finance Director The Finance Committee meeting is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that the Finance Committee agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that the public be allowed to comment on agenda items before the Committee and items not on the agenda but are within the subject matter jurisdiction of the Finance Committee. The Chair may limit public comments to a reasonable amount of time, generally three (3) minutes per person. The City of Newport Beach’s goal is to comply with the Americans with Disabilities Act (ADA) in all respects. If, as an attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, we will attempt to accommodate you in every reasonable manner. Please contact Dan Matusiewicz, Finance Director, at least forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is feasible at (949) 644-3123 or dmatusiewicz@newportbeachca.gov. NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance Department 24 hours prior to the scheduled meeting. I.CALL MEETING TO ORDER II.ROLL CALL III.PUBLIC COMMENTS Public comments are invited on agenda and non-agenda items generally considered to be within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for the record. The Finance Committee has the discretion to extend or shorten the speakers’ time limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all speakers. As a courtesy, please turn cell phones off or set them in the silent mode. IV.CONSENT CALENDAR November 10, 2016 Page 2 Finance Committee Meeting MINUTES OF OCTOBER 13, 2016A. Recommended Action: Approve and file. DRAFT MINUTES 100316 V.CURRENT BUSINESS CITY CALPERS PENSION ISSUESA. 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. Recommended Action: Receive and file; discuss next steps. VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) VII.ADJOURNMENT Finance Committee Meeting Minutes October 13, 2016 Page 1 of 6 CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 13, 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, and Committee Member John Warner STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, IT Manager Rob Houston, Accounting Manager Rukshana Virany, Assistant City Manager Carol Jacobs, Budget Manager Susan Giangrande, and Administrative Specialist to the Finance Director Marlene Burns MEMBERS OF THE PUBLIC: Max Johnson, Jim Mosher, John Bartel (Bartel Associates), and Hannah Fry (Daily Pilot) III. PUBLIC COMMENTS Jim Mosher commented on Finance Director’s recommendations to use a longer-term investment strategy for non-expendable trust funds and other long-term holdings, which was discussed at the prior committee meeting. He also stated Moody’s bond rating service upgraded the City’s bond rating and apparent confusion over which property serves as collateral for the 2010 Certificates of Participation. He recommended that this could be discussed during a future Public Facilities Corporation meeting. Chair Petros closed public comments. IV. CONSENT CALENDAR A. MINUTES OF SEPTEMBER 15, 2016 Recommended Action: Approve and file. Jim Mosher and Chair Petros noted corrections to the minutes. MOTION Committee Member Warner moved and Committee Member Tucker seconded a motion to approve the September 15, 2016, Finance Committee Minutes, as amended. The motion carried unanimously. V. CURRENT BUSINESS A. PRELIMINARY FISCAL YEAR 2017-2018 PENSION FUNDING RECOMMENDATION Summary: Finance Committee Meeting Minutes October 13, 2016 Page 2 of 6 At this meeting, staff will present a status update and primer on the City’s Pension and OPEB liabilities. A consulting actuary will be present should the Committee have specific questions for an actuary. Based on a review of the most current valuations, staff has prepared preliminary pension funding recommendation prior to the input and comment from our consulting actuary. Recommended Action: 1) Receive and file staff recommendations. 2) Direct consulting actuary to comment on staff recommendations at a subsequent meeting. 3) Provide the consulting actuary direction as to Committee expectations for the November 10, 2016, Finance Committee meeting. Finance Director/Treasurer Dan Matusiewicz introduced John Bartel, actuary, as having extensive knowledge of CalPERS and pension liabilities. He reviewed terminology including: normal costs, projected benefit, accrued liability, market value of assets, and actuarial accrued liability. Chair Petros requested allowing members of the public to interject at will during the presentation. Finance Director/Treasurer Matusiewicz continued reviewing terms including: UAAL, unfunded pension liability, changes in actuarial assumptions and experience, gains and losses. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained minimum contributions and amortization rates. Finance Director/Treasurer Matusiewicz provided an example of a 49-year old employee to explain the difference between an accrued liability and projected benefit obligation. Chair Petros asked the legal instrument for assigning the 7.5 percent discount rate to the employer and could it be unwound. Mr. Bartel discussed Proposition 162, allowing CalPERS board to set the actuarial assumptions. He explained the CalPERS capital market assumption process to determine the rate. He stated the 7.5 percent would be revisited, which he anticipated would drop to 7.25 or 7 percent. He stated the City did not have the ability to change the rate but could set money aside if the City were concerned that the rate would not be met. Chair Petros discussed how private sector retirement plans differ from public employee pension plans. He stated the employee should assume the risk, not the employer. Mr. Bartel stated the City could negotiate with employees to cost share for the employee contribution. Mr. Bartel suggested the Committee consider increasing the time allocated to discuss the matter. Committee Member O’Neill asked what happened if the rate was reduced to 6.5 percent. Finance Director/Treasurer Matusiewicz explained the sensitivity analysis performed by staff and the likely result if the CalPERS board were to adopt a 6.5 percent discount rate. He stated the City was most vulnerable in the next 17 years. He then stated the payment on the unfunded liability would increase from $24 million today to $55 million in 2034, if the pension plans were only able to achieve a 6.5 percent return Finance Director/Treasurer Matusiewicz continued the presentation illustrating the difference in amortization schedule including level payment, level percent of pay, and level percent of pay with a 5-year phase in, and discussing the pros and cons of each schedule and recommends an amortization term not to exceed 20 years. Finance Committee Meeting Minutes October 13, 2016 Page 3 of 6 Finance Director/Treasurer Matusiewicz stated it was more cost effective to amortize experiences losses over 20 years versus the 30 year default schedule. He encouraged this use of the 20-year option and illustrating the significant savings and amortization efficiency. Committee Member Tucker stated the amortization efficiency ratio referred to the fact that you are amortizing more quickly and paying less interest. Chair Petros stated there were efficiencies, but the initial cost was higher. He stated it would be imprudent to cut revenues, as a result. Council Member Curry stated CalPERS historically hit their rate of return target on the average but they do not always make up for lost ground from years where returns are less than the target rate. Mayor Dixon stated they were still trying to make up for the 2008 and 2009 recession. Committee Member Tucker suggested projecting 5 years out and plug in a variety of return rates. He stated it was necessary to be prepared. Committee Member Gorczyca suggested City multi-year budget projections. Committee Member O’Neill asked who else went to a fresh start program. Council Member Curry stated Irvine did. Finance Director/Treasurer Dan Matusiewicz stated Huntington Beach and some agencies had opted for lump sum discretionary payments to bring down the unfunded liability. Finance Director/Treasurer Dan Matusiewicz continued his presentation and described the City of Newport’s amortization as compared to other cities. He suggested skipping the 5-year phase-in option and recommended making a budgetary goal move to a level-dollar payment plan. He reviewed the status of the current plans. He recited a number of statistics about the current employee population including the number employees receiving the reduced PEPRA benefit level. Committee Member Gorczyca asked how the City compared to other employers statewide. Mr. Bartel described the trend for safety employees to pay both employee and a portion of the employer contribution. Finance Director/Treasurer Matusiewicz stated the City’s unfunded liability had reached $273 million and the plans were 67.5 percent funded as of the most recent actuarial valuation. He stated the 2016 investment experience loss would increase the City’s unfunded pension liability to approximately $315 million. Committee Member Tucker expressed concern about the status of the unfunded liability. Mr. Bartel suggested looking where contributions would go and determine if the City would be able to afford it. In response to Committee Member Gorczyca, Mr. Bartel discussed clients that prepare budget forecasts. He stated the unfunded liability would take care of itself by shortening the amortization period, but would become more volatile. In response to Committee Member Tucker, Mr. Bartel explained that contributions would be more volatile as plan assets increased. Finance Committee Meeting Minutes October 13, 2016 Page 4 of 6 Finance Director/Treasurer Matusiewicz quantified the impact of 2015-2016 investment experience loss. He described various CalPERS efforts including the risk mitigation strategy, flexible glide path and asset allocation study. He discussed the status of the OPEB plan and relatively smaller unfunded liability. With respect to the pension plans, he recommended starting to pay on the 2016 loss, amortize the loss no longer than 20 years, leave 2014 experience gain as a future credit, consider a gradual movement toward a level payment plan starting with the 2017-2018 budget, and establish a pension and OPEB funding policy. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained the significance of the 2014 experience gain and compared it to a store credit that could be used of offset contribution rates in future years. Committee Member Gorczyca what the rate of projected revenue growth will be. Finance Director/Treasurer Matusiewicz estimated the average to be 3-5 percent. Committee Member Warner left the meeting at 5:20 p.m. Finance Director/Treasurer Matusiewicz suggested memorializing policies. In response to Mayor Dixon, City Manager Kiff suggested the Committee determine the plan it wished the consulting actuary review, along with his recommendations. Committee Member O’Neill discussed having data, then making policy. He asked what data was used in 2014. Finance Director/Treasurer Matusiewicz explained how the contribution rates were determined and that the Committee recommended a fresh start as a form of forced fiscal discipline. Council Member Curry explained that the data provided an affordability opportunity. Chair Petros explained the prior review and clarified that the fresh start was necessary. Mayor Dixon questioned how it was different in a private situation. Committee Member Tucker stated that in the City environment the City is at risk for pension liabilities; whereas, retirement contributions in the private sector are predefined. Mayor Dixon agreed that budget forecasting was important. She expressed concern with decreasing development agreements fund and the need to use general funds. She suggested the budget planning and projections be considered with actuarial plan. In response to Committee Member O’Neill, Finance Director/Treasurer Matusiewicz clarified where the 2014 fresh start and 2016 partial fresh start were included in the current budget. Council Member Curry suggested focusing efforts on affordability rather than chasing the unfunded liability. Committee Member Gorczyca questioned the 100 percent target policy. She requested additional training on pensions. She stated multi-year budget projections were necessary before determining affordability. Chair Petros suggested the discussion be continued as the only item on the next meeting and starting the meeting at 3:00 p.m. Committee Member Tucker stated it was necessary to understand the issue. He agreed that it was futile to chase the unfunded liability. Finance Committee Meeting Minutes October 13, 2016 Page 5 of 6 Mr. Bartel recommended looking at the City’s history and preparing a contribution projection and where the unfunded liability was likely to go. Committee Member Gorczyca requested information on other agencies and their practices. Committee Member Tucker requested a 5-year estimate with different rates of returns. Mr. Bartel stated he would bring back information on the history, unfunded liability, contribution rates, and comparison of other entities. Council Member Curry stated he was interested in what the City can do and the most efficient policies. Committee Member Gorczyca requested information on the various CalPERS payment plans. Chair Petros left the meeting at 5:44 p.m. B. BUDGET AMENDMENTS Summary: Receive and file a staff report on the budget amendments for the last quarter of Fiscal Year 2015-2016 and for the first quarter of Fiscal Year 2016-2017. Recommended Action: Receive and file. Budget Manager Giangrande presented the staff report. Committee Member O’Neill clarified that the amendments were for the last budget. In response to Mayor Dixon, Budget Manager Giangrande clarified that budget amendments were related to the current budget and stated the City Council had already approved the items. Committee Member O’Neill asked about use of surplus funds. Finance Director/Treasurer Matusiewicz explained that some of the surplus used is from restricted funding sources. In response to Committee Member Gorczyca, City Manager Kiff explained the CalOptima reimbursement for transportation of Medicare patients. Jim Mosher suggested indicating how much was added to the budget that was not planned to be spent. 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 5:52 p.m. to the next regular meeting of the Finance Committee on November 10, 2016, at 3:00 p.m. Filed with these minutes are copies of all materials distributed at the meeting. Finance Committee Meeting Minutes October 13, 2016 Page 6 of 6 The agenda for the Regular Meeting was posted on October 10, 2016, at 1:00 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. Attest: ___________________________________ _____________________ Tony Petros, Chair Date Finance Committee Chair November 10, 2016, Finance Committee Agenda Comments These comments on items on the Newport Beach City Council Finance Committee agenda are submitted by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229) Item V.A. CITY CALPERS PENSION ISSUES Slide 6 at the October 13, 2016, meeting indicated the City has 718 active employees and 564 retirees, but did not clearly indicate how much is being paid to the retirees each year. The following is information on CalPERS pension payments to beneficiaries listing “City of Newport Beach” as their last employer per Transparent California: Newport Beach’s Defined Benefit Pension Burden (?) Source: http://transparentcalifornia.com/agencies/pensions/employer/ As to where the payments come from, page 3 of 6 of the draft minutes from October 13th indicates the City’s pension obligations are 67.5% funded with a current unfunded liability of $273 million based on an expected return of 7.5%. I believe the 67.5% figure implies the City’s invested funds with CalPERS must be around $567 million (but if fully funded should be around $273 + 567 = $840 million). To me, this means that in a year when CalPERS meets its 7.5% target, the investment income available to pay the retirees should be: $567 million x 0.075 = $42.5 million per year and if fully funded would be around: $840 million x 0.075 = $63 million per year That would suggest to me that if the retiree pool remained stable (as many retirees dropping out as are being added each year) and CalPERS hit its 7.5% target the City might already have enough funds on deposit to meet its future obligations using the investment income alone. It might be helpful at today’s meeting to clarify how much Newport Beach has on deposit with CalPERS, why the number of retirees in the City presentation is substantially smaller than in the Transparent California data, and what is wrong with the above simple reasoning. Doing so might help the public better understand the pension dilemma. Year Number of Pensions Total Pension & Benefit Paid 2012 600 $34,013,848.67 2013 630 $36,004,207.54 2014 715 $40,183,009.08 2015 740 $41,840,721.12 Item No. 3A1 Public Comments Correspondence November 10, 2016 From:Matusiewicz, Dan To:"Jim Mosher"; Burns, Marlene Cc:Petros, Tony Subject:RE: Additional comment for Finance Committee (Nov. 10, 2016) Date:Thursday, November 10, 2016 11:55:34 AM Jim, Regarding the October 13th Finance Committee presentation: ·Slide 17 (Census Data) shows there are 779 active employees (including PT employees in PERS), 286 members that transferred to other PERS agencies, 336 members that have terminated (presumably not working for a PERS agency) and 1,029 retirees or living beneficiary.  I don’t see the 564 retirees you are referencing. ·Slide 19 clearly shows the market value of our assets with PERS at $573 million, accrued liability (what we should have in the bank today for past service) $848 million and an unfunded liability of $276 million.  To reach the future Projected Benefit upon retirement, the pension plan  is counting on the future interest earnings at 7.5% and regular contributes for service not yet rendered. ·Transparent California is only reporting contributions to the system during the year and does not reflect payments to beneficiaries.  Their counts do not include transferred, terminated and retired members referenced in my first bullet.  In my opinion, I do not believe the Transparent California website leaved the reader with a clear or complete picture of agency pension plans. I am always available to discuss these questions with you. Best regards, _____________________________________ Dan Matusiewicz | Finance Director/Treasurer City of Newport Beach 100 Civic Center Drive | Newport Beach, CA | 92660 Phone: (949) 644-3123 | Fax: (949) 644-3339 danm@newportbeachca.gov From: Jim Mosher [mailto:jimmosher@yahoo.com] Sent: Thursday, November 10, 2016 11:13 AMTo: Burns, Marlene Item No. 3A2 Public Comments Correspondence November 10, 2016 Cc: Petros, Tony; Matusiewicz, DanSubject: Additional comment for Finance Committee (Nov. 10, 2016) Marlene, Please find attached an additional submission for this afternoon's Finance Committee meeting -- this time an undoubtedly very naive comment/question regarding Item V.A (the pension discussion). Yours sincerely, Jim Mosher Finance Committee Meeting Minutes October 13, 2016 Page 1 of 6 CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 13, 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, and Committee Member John Warner STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, IT Manager Rob Houston, Accounting Manager Rukshana Virany, Assistant City Manager Carol Jacobs, Budget Manager Susan Giangrande, and Administrative Specialist to the Finance Director Marlene Burns MEMBERS OF THE PUBLIC: Max Johnson, Jim Mosher, John Bartel (Bartel Associates), and Hannah Fry (Daily Pilot) III. PUBLIC COMMENTS Jim Mosher commented on Finance Director’s recommendations to use a longer-term investment strategy for non-expendable trust funds and other long-term holdings, which was discussed at the prior committee meeting. He also stated Moody’s bond rating service upgraded the City’s bond rating and apparent confusion over which property serves as collateral for the 2010 Certificates of Participation. He recommended that this could be discussed during a future Public Facilities Corporation meeting. Chair Petros closed public comments. IV. CONSENT CALENDAR A. MINUTES OF SEPTEMBER 15, 2016 Recommended Action: Approve and file. Jim Mosher and Chair Petros noted corrections to the minutes. MOTION Committee Member Warner moved and Committee Member Tucker seconded a motion to approve the September 15, 2016, Finance Committee Minutes, as amended. The motion carried unanimously. V. CURRENT BUSINESS A. PRELIMINARY FISCAL YEAR 2017-2018 PENSION FUNDING RECOMMENDATION Summary: Finance Committee Meeting Minutes October 13, 2016 Page 2 of 6 At this meeting, staff will present a status update and primer on the City’s Pension and OPEB liabilities. A consulting actuary will be present should the Committee have specific questions for an actuary. Based on a review of the most current valuations, staff has prepared preliminary pension funding recommendation prior to the input and comment from our consulting actuary. Recommended Action: 1) Receive and file staff recommendations. 2) Direct consulting actuary to comment on staff recommendations at a subsequent meeting. 3) Provide the consulting actuary direction as to Committee expectations for the November 10, 2016, Finance Committee meeting. Finance Director/Treasurer Dan Matusiewicz introduced John Bartel, actuary, as having extensive knowledge of CalPERS and pension liabilities. He reviewed terminology including: normal costs, projected benefit, accrued liability, market value of assets, and actuarial accrued liability. Chair Petros requested allowing members of the public to interject at will during the presentation. Finance Director/Treasurer Matusiewicz continued reviewing terms including: UAAL, unfunded pension liability, changes in actuarial assumptions and experience, gains and losses. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained minimum contributions and amortization rates. Finance Director/Treasurer Matusiewicz provided an example of a 49-year old employee to explain the difference between an accrued liability and projected benefit obligation. Chair Petros asked the legal instrument for assigning the 7.5 percent discount rate to the employer and could it be unwound. Mr. Bartel discussed Proposition 162, allowing CalPERS board to set the actuarial assumptions. He explained the CalPERS capital market assumption process to determine the rate. He stated the 7.5 percent would be revisited, which he anticipated would drop to 7.25 or 7 percent. He stated the City did not have the ability to change the rate but could set money aside if the City were concerned that the rate would not be met. Chair Petros discussed how private sector retirement plans differ from public employee pension plans. He stated the employee should assume the risk, not the employer. Mr. Bartel stated the City could negotiate with employees to cost share for the employee contribution. Mr. Bartel suggested the Committee consider increasing the time allocated to discuss the matter. Committee Member O’Neill asked what happened if the rate was reduced to 6.5 percent. Finance Director/Treasurer Matusiewicz explained the sensitivity analysis performed by staff and the likely result if the CalPERS board were to adopt a 6.5 percent discount rate. He stated the City was most vulnerable in the next 17 years. He then stated the payment on the unfunded liability would increase from $24 million today to $55 million in 2034, if the pension plans were only able to achieve a 6.5 percent return Finance Director/Treasurer Matusiewicz continued the presentation illustrating the difference in amortization schedule including level payment, level percent of pay, and level percent of pay with a 5-year phase in, and discussing the pros and cons of each schedule and recommends an amortization term not to exceed 20 years. Finance Committee Meeting Minutes October 13, 2016 Page 3 of 6 Finance Director/Treasurer Matusiewicz stated it was more cost effective to amortize experiences losses over 20 years versus the 30 year default schedule. He encouraged this use of the 20-year option and illustrating the significant savings and amortization efficiency. Committee Member Tucker stated the amortization efficiency ratio referred to the fact that you are amortizing more quickly and paying less interest. Chair Petros stated there were efficiencies, but the initial cost was higher. He stated it would be imprudent to cut revenues, as a result. Council Member Curry stated CalPERS historically hit their rate of return target on the average but they do not always make up for lost ground from years where returns are less than the target rate. Mayor Dixon stated they were still trying to make up for the 2008 and 2009 recession. Committee Member Tucker suggested projecting 5 years out and plug in a variety of return rates. He stated it was necessary to be prepared. Committee Member Gorczyca suggested City multi-year budget projections. Committee Member O’Neill asked who else went to a fresh start program. Council Member Curry stated Irvine did. Finance Director/Treasurer Dan Matusiewicz stated Huntington Beach and some agencies had opted for lump sum discretionary payments to bring down the unfunded liability. Finance Director/Treasurer Dan Matusiewicz continued his presentation and described the City of Newport’s amortization as compared to other cities. He suggested skipping the 5-year phase-in option and recommended making a budgetary goal move to a level-dollar payment plan. He reviewed the status of the current plans. He recited a number of statistics about the current employee population including the number employees receiving the reduced PEPRA benefit level. Committee Member Gorczyca asked how the City compared to other employers statewide. Mr. Bartel described the trend for safety employees to pay both employee and a portion of the employer contribution. Finance Director/Treasurer Matusiewicz stated the City’s unfunded liability had reached $273 million and the plans were 67.5 percent funded as of the most recent actuarial valuation. He stated the 2016 investment experience loss would increase the City’s unfunded pension liability to approximately $315 million. Committee Member Tucker expressed concern about the status of the unfunded liability. Mr. Bartel suggested looking where contributions would go and determine if the City would be able to afford it. In response to Committee Member Gorczyca, Mr. Bartel discussed clients that prepare budget forecasts. He stated the unfunded liability would take care of itself by shortening the amortization period, but would become more volatile. In response to Committee Member Tucker, Mr. Bartel explained that contributions would be more volatile as plan assets increased. Finance Committee Meeting Minutes October 13, 2016 Page 4 of 6 Finance Director/Treasurer Matusiewicz quantified the impact of 2015-2016 investment experience loss. He described various CalPERS efforts including the risk mitigation strategy, flexible glide path and asset allocation study. He discussed the status of the OPEB plan and relatively smaller unfunded liability. With respect to the pension plans, he recommended starting to pay on the 2016 loss, amortize the loss no longer than 20 years, leave 2014 experience gain as a future credit, consider a gradual movement toward a level payment plan starting with the 2017-2018 budget, and establish a pension and OPEB funding policy. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained the significance of the 2014 experience gain and compared it to a store credit that could be used of offset contribution rates in future years. Committee Member Gorczyca what the rate of projected revenue growth will be. Finance Director/Treasurer Matusiewicz estimated the average to be 3-5 percent. Committee Member Warner left the meeting at 5:20 p.m. Finance Director/Treasurer Matusiewicz suggested memorializing policies. In response to Mayor Dixon, City Manager Kiff suggested the Committee determine the plan it wished the consulting actuary review, along with his recommendations. Committee Member O’Neill discussed having data, then making policy. He asked what data was used in 2014. Finance Director/Treasurer Matusiewicz explained how the contribution rates were determined and that the Committee recommended a fresh start as a form of forced fiscal discipline. Council Member Curry explained that the data provided an affordability opportunity. Chair Petros explained the prior review and clarified that the fresh start was necessary. Mayor Dixon questioned how it was different in a private situation. Committee Member Tucker stated that in the City environment the City is at risk for pension liabilities; whereas, retirement contributions in the private sector are predefined. Mayor Dixon agreed that budget forecasting was important. She expressed concern with decreasing development agreements fund and the need to use general funds. She suggested the budget planning and projections be considered with actuarial plan. In response to Committee Member O’Neill, Finance Director/Treasurer Matusiewicz clarified where the 2014 fresh start and 2016 partial fresh start were included in the current budget. Council Member Curry suggested focusing efforts on affordability rather than chasing the unfunded liability. Committee Member Gorczyca questioned the 100 percent target policy. She requested additional training on pensions. She stated multi-year budget projections were necessary before determining affordability. Chair Petros suggested the discussion be continued as the only item on the next meeting and starting the meeting at 3:00 p.m. Committee Member Tucker stated it was necessary to understand the issue. He agreed that it was futile to chase the unfunded liability. Finance Committee Meeting Minutes October 13, 2016 Page 5 of 6 Mr. Bartel recommended looking at the City’s history and preparing a contribution projection and where the unfunded liability was likely to go. Committee Member Gorczyca requested information on other agencies and their practices. Committee Member Tucker requested a 5-year estimate with different rates of returns. Mr. Bartel stated he would bring back information on the history, unfunded liability, contribution rates, and comparison of other entities. Council Member Curry stated he was interested in what the City can do and the most efficient policies. Committee Member Gorczyca requested information on the various CalPERS payment plans. Chair Petros left the meeting at 5:44 p.m. B. BUDGET AMENDMENTS Summary: Receive and file a staff report on the budget amendments for the last quarter of Fiscal Year 2015-2016 and for the first quarter of Fiscal Year 2016-2017. Recommended Action: Receive and file. Budget Manager Giangrande presented the staff report. Committee Member O’Neill clarified that the amendments were for the last budget. In response to Mayor Dixon, Budget Manager Giangrande clarified that budget amendments were related to the current budget and stated the City Council had already approved the items. Committee Member O’Neill asked about use of surplus funds. Finance Director/Treasurer Matusiewicz explained that some of the surplus used is from restricted funding sources. In response to Committee Member Gorczyca, City Manager Kiff explained the CalOptima reimbursement for transportation of Medicare patients. Jim Mosher suggested indicating how much was added to the budget that was not planned to be spent. 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 5:52 p.m. to the next regular meeting of the Finance Committee on November 10, 2016, at 3:00 p.m. Filed with these minutes are copies of all materials distributed at the meeting. Finance Committee Meeting Minutes October 13, 2016 Page 6 of 6 The agenda for the Regular Meeting was posted on October 10, 2016, at 1:00 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. Attest: ___________________________________ _____________________ Tony Petros, Chair Date Finance Committee Chair Finance Committee Meeting Minutes October 13, 2016 Page 3 of 6 Finance Director/Treasurer Matusiewicz stated it was more cost effective to amortize experiences losses over 20 years versus the 30 year default schedule. He encouraged this use of the 20-year option and illustrating the significant savings and amortization efficiency. Committee Member Tucker confirmed thatstated the “amortization efficiency ratio” refersred to the fact that an obligor is you are amortizing principal more quickly and therefore paying less interest. Chair Petros stated there were efficiencies, but the initial cost was higher. He stated it would be imprudent to cut revenues, as a result. Council Member Curry stated CalPERS historically hit their rate of return target on the average but they do not always make up for lost ground from years where returns are less than the target rate. Mayor Dixon stated they were still trying to make up for the 2008 and 2009 recession. Committee Member Tucker suggested that staff prepare a schedule that projectsing 5 years out and plug in a variety of assumed return rates so the Committee would have an idea of the magnitude of the problem if CalPERS continued to underperform the discount rate of 7.5% by varying amounts. He stated it was necessary to be prepared. Chair Petros noted that while that might be good information to know, any decision regarding what to do would likely not just be based upon assumed future returns that may or may not occur. Committee Member Gorczyca suggested City multi-year budget projections. Committee Member O’Neill asked who else went to a fresh start program. Council Member Curry stated Irvine did. Finance Director/Treasurer Dan Matusiewicz stated Huntington Beach and some agencies had opted for lump sum discretionary payments to bring down the unfunded liability. Finance Director/Treasurer Dan Matusiewicz continued his presentation and described the City of Newport’s amortization as compared to other cities. He suggested skipping the 5-year phase-in option and recommended making a budgetary goal move to a level-dollar payment plan. He reviewed the status of the current plans. He recited a number of statistics about the current employee population including the number employees receiving the reduced PEPRA benefit level. Committee Member Gorczyca asked how the City compared to other employers statewide. Mr. Bartel described the trend for safety employees to pay both employee and a portion of the employer contribution. Finance Director/Treasurer Matusiewicz stated the City’s unfunded liability had reached $273 million and the plans were 67.5 percent funded as of the most recent actuarial valuation. He stated the 2016 investment experience loss would increase the City’s unfunded pension liability to approximately $315 million. Committee Member Tucker expressed concern about the rapid growth status of the unfunded liabilitiesy. Mr. Bartel suggested looking where contributions would go and determine if the City would be able to afford it. PROPOSED CHANGES BY COMMITTEE MEMBER TUCKERItem No. 4A1 Draft Minutes October 13, 2016 Correspondence November 10, 2016 Finance Committee Meeting Minutes October 13, 2016 Page 4 of 6 In response to Committee Member Gorczyca, Mr. Bartel discussed clients that prepare budget forecasts. He stated the unfunded liability would take care of itself by shortening the amortization period, but would become more volatile. In response to Committee Member Tucker, Mr. Bartel explained that contributions would be more volatile as plan assets increased because even a relatively small shortfall in the rate of return when multiplied by a large asset base results in a big addition to unfunded liabilities. Finance Director/Treasurer Matusiewicz quantified the impact of 2015-2016 investment experience loss. He described various CalPERS efforts including the risk mitigation strategy, flexible glide path and asset allocation study. He discussed the status of the OPEB plan and relatively smaller unfunded liability. With respect to the pension plans, he recommended starting to pay on the 2016 loss, amortize the loss no longer than 20 years, leave 2014 experience gain as a future credit, consider a gradual movement toward a level payment plan starting with the 2017-2018 budget, and establish a pension and OPEB funding policy. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained the significance of the 2014 experience gain and compared it to a store credit that could be used of offset contribution rates in future years. Committee Member Gorczyca what the rate of projected revenue growth will be. Finance Director/Treasurer Matusiewicz estimated the average to be 3-5 percent. Committee Member Warner left the meeting at 5:20 p.m. Finance Director/Treasurer Matusiewicz suggested memorializing policies. In response to Mayor Dixon, City Manager Kiff suggested the Committee determine the plan it wished the consulting actuary review, along with his recommendations. Committee Member O’Neill discussed having data, then making policy. He asked what data was used in 2014. Finance Director/Treasurer Matusiewicz explained how the contribution rates were determined and that the Committee recommended a fresh start as a form of forced fiscal discipline. Council Member Curry explained that the data provided an affordability opportunity. Chair Petros explained the prior review and clarified that the fresh start was necessary. Mayor Dixon questioned how it was different in a private situation. Committee Member Tucker stated that in the City environment the City is at risk for shortfalls since pensions are in essence guaranteedliabilities; whereas, retirement contributions in the private sector are usually not predefined. Mayor Dixon agreed that budget forecasting was important. She expressed concern with decreasing development agreements fund and the need to use general funds. She suggested the budget planning and projections be considered with actuarial plan. In response to Committee Member O’Neill, Finance Director/Treasurer Matusiewicz clarified where the 2014 fresh start and 2016 partial fresh start were included in the current budget. Council Member Curry suggested focusing efforts on affordability rather than chasing the unfunded liability. Committee Member Gorczyca questioned the 100 percent target policy. She requested additional training on pensions. She stated multi-year budget projections were necessary before determining affordability. Finance Committee Meeting Minutes October 13, 2016 Page 5 of 6 Chair Petros suggested the discussion be continued as the only item on the next meeting and starting the meeting at 3:00 p.m. Committee Member Tucker stated it was necessary to understand the issue. He agreed with Committee Member Curry that it was futile to chase the unfunded liability. Mr. Bartel recommended looking at the City’s history and preparing a contribution projection and where the unfunded liability was likely to go. Committee Member Gorczyca requested information on other agencies and their practices. Committee Member Tucker reiterated his requested for a 5-year estimate with different rates of returns being assumed. Mr. Bartel stated he would bring back information on the history, unfunded liability, contribution rates, and comparison of other entities. Council Member Curry stated he was interested in what the City can do and the most efficient policies. Committee Member Gorczyca requested information on the various CalPERS payment plans. Chair Petros left the meeting at 5:44 p.m. B. BUDGET AMENDMENTS Summary: Receive and file a staff report on the budget amendments for the last quarter of Fiscal Year 2015-2016 and for the first quarter of Fiscal Year 2016-2017. Recommended Action: Receive and file. Budget Manager Giangrande presented the staff report. Committee Member O’Neill clarified that the amendments were for the last budget. In response to Mayor Dixon, Budget Manager Giangrande clarified that budget amendments were related to the current budget and stated the City Council had already approved the items. Committee Member O’Neill asked about use of surplus funds. Finance Director/Treasurer Matusiewicz explained that some of the surplus used is from restricted funding sources. In response to Committee Member Gorczyca, City Manager Kiff explained the CalOptima reimbursement for transportation of Medicare patients. Jim Mosher suggested indicating how much was added to the budget that was not planned to be spent. 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 November 10, 2016, Finance Committee Agenda Comments These comments on items on the Newport Beach City Council Finance Committee agenda are submitted by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229) Item IV.A. MINUTES OF OCTOBER 13, 2016 The City presumably made some investment to have Mr. Bartel come to the October 13th meeting to discuss pensions, and at least one of the purposes of that meeting was to increase public understanding of the unfunded pension liability issues. Given the poor public attendance and the fact that the City intends, after one year (per Council Policy A-11), to destroy the audio recording of the meeting, which is not made readily available anyway, the present minutes will be one of the few means of preserving any insights achieved. While the following suggestions are intended to help correct what seem to be some obvious grammatical errors in the draft minutes, I think more substantive changes would be needed to properly memorialize the substance of the October 13th conversation, or even remind those present at the meeting of what actually was said. Changes to the draft minutes passages shown in italics are suggested in strikeout underline format. Page 1, Item III (PUBLIC COMMENTS) : “Jim Mosher commented on the Finance Director’s recommendations … He also stated Moody’s bond rating service upgraded the City’s bond rating and commented on apparent confusion over which property serves as collateral for the 2010 Certificates of Participation.” Page 2, paragraph 5 from end: “Chair Petros asked what the legal instrument was for assigning the 7.5 percent discount rate to the employer and could it be unwound.” [?] Page 3, paragraph 6: “Committee Member Tucker suggested projecting 5 years out and plug plugging in a variety of return rates.” Page 3, paragraph 3 from end: “Mr. Bartel suggested looking where contributions would go and determine determining if the City would be able to afford it.” Page 4, paragraph 2: “In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained the significance of the 2014 experience gain and compared it to a store credit that could be used of to offset contribution rates in future years.” Page 4, paragraph 3: “Committee Member Gorczyca asked what the rate of projected revenue growth will be.” Page 4, paragraph 10: “Mayor Dixon agreed that budget forecasting was important. She expressed concern with decreasing development agreements fund agreement funds and the need to use general funds. She suggested the budget planning and projections be considered along with the actuarial plan.” Item No. 4A2 Draft Minutes October 13, 2016CorrespondenceNovember 10, 2016 Nov. 10, 2016, Finance Committee Item IV.A comments - Jim Mosher Page 2 of 2 Page 5, paragraph 4: “Mr. Bartel stated he would bring back information on the history, unfunded liability, contribution rates, and comparison of to other entities.” Page 5, Item B, paragraph 2: “Committee Member O’Neill clarified that the amendments were for the last budget.” [note: in the next paragraph, another speaker refers to “the current budget.” I believe by “last” and “current” they mean the same. That is, the FY16-17 budget.] Page 5, Item B, last paragraph: “Jim Mosher suggested indicating how much was added to the budget that was not planned to be spent and was not offset by new revenues.” Page 6, signature annotation: “Tony Petros, Chair” [redundant since the following line is “Finance Committee Chair”. Alternatively: “Tony Petros, Chair … Finance Committee”] Finance Committee Meeting Minutes October 13, 2016 Page 3 of 6 Finance Director/Treasurer Matusiewicz stated it was more cost effective to amortize experiences losses over 20 years versus the 30 year default schedule. He encouraged this use of the 20-year option and illustrating the significant savings and amortization efficiency. Committee Member Tucker stated the amortization efficiency ratio referred to the fact that you are amortizing more quickly and paying less interest. Chair Petros stated there were efficiencies, but the initial cost was higher. He stated it would be imprudent to cut revenues, as a result. Council Member Curry stated CalPERS historically hit their rate of return target on the average but they do not always make up for lost ground from years where returns are less than the target rate. Mayor Dixon stated they were still trying to make up for the 2008 and 2009 recession. Committee Member Tucker suggested projecting 5 years out and plug in a variety of return rates. He stated it was necessary to be prepared. Committee Member Gorczyca suggested that the City employ multi-year budget projections. Committee Member O’Neill asked who else went to a fresh start program. Council Member Curry stated Irvine did. Finance Director/Treasurer Dan Matusiewicz stated Huntington Beach and some agencies had opted for lump sum discretionary payments to bring down the unfunded liability. Finance Director/Treasurer Dan Matusiewicz continued his presentation and described the City of Newport’s amortization as compared to other cities. He suggested skipping the 5-year phase-in option and recommended making a budgetary goal move to a level-dollar payment plan. He reviewed the status of the current plans. He recited a number of statistics about the current employee population including the number employees receiving the reduced PEPRA benefit level. Committee Member Gorczyca asked how the City compared to other employers statewide. Mr. Bartel described the trend for safety employees to pay both employee and a portion of the employer contribution. Finance Director/Treasurer Matusiewicz stated the City’s unfunded liability had reached $273 million and the plans were 67.5 percent funded as of the most recent actuarial valuation. He stated the 2016 investment experience loss would increase the City’s unfunded pension liability to approximately $315 million. Committee Member Tucker expressed concern about the status of the unfunded liability. Mr. Bartel suggested looking where contributions would go and determine if the City would be able to afford it. In response to Committee Member Gorczyca, Mr. Bartel discussed clients that prepare budget forecasts. He stated the unfunded liability would take care of itself by shortening the amortization period, but would become more volatilementioned Sunnyvale uses 20-year projections. Item No. 4A3 Draft Minutes October 13, 2016CorrespondenceNovember 10, 2016 PROPOSED CHANGES BY COMMITTEE MEMBER GORCZYCA Finance Committee Meeting Minutes October 13, 2016 Page 4 of 6 In response to Committee Member Tucker, Mr. Bartel explained that contributions would be more volatile as plan assets increased. Finance Director/Treasurer Matusiewicz quantified the impact of 2015-2016 investment experience loss. He described various CalPERS efforts including the risk mitigation strategy, flexible glide path and asset allocation study. He discussed the status of the OPEB plan and relatively smaller unfunded liability. With respect to the pension plans, he recommended starting to pay on the 2016 loss, amortize the loss no longer than 20 years, leave 2014 experience gain as a future credit, consider a gradual movement toward a level payment plan starting with the 2017-2018 budget, and establish a pension and OPEB funding policy. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz explained the significance of the 2014 experience gain and compared it to a store credit that could be used of offset contribution rates in future years. Committee Member Gorczyca inquired as to the City’s what the rate of projected revenue growth. will be. Finance Director/Treasurer Matusiewicz estimated the average to be 3-5 percent. Committee Member Warner left the meeting at 5:20 p.m. Finance Director/Treasurer Matusiewicz suggested memorializing policies. In response to Mayor Dixon, City Manager Kiff suggested the Committee determine the plan it wished the consulting actuary review, along with his recommendations. Committee Member O’Neill discussed having data, then making policy. He asked what data was used in 2014. Finance Director/Treasurer Matusiewicz explained how the contribution rates were determined and that the Committee recommended a fresh start as a form of forced fiscal discipline. Council Member Curry explained that the data provided an affordability opportunity. Chair Petros explained the prior review and clarified that the fresh start was necessary. Mayor Dixon questioned how it was different in a private situation. Committee Member Tucker stated that in the City environment the City is at risk for pension liabilities; whereas, retirement contributions in the private sector are predefined. Mayor Dixon agreed that budget forecasting was important. She expressed concern with decreasing development agreements fund and the need to use general funds. She suggested the budget planning and projections be considered with actuarial plan. In response to Committee Member O’Neill, Finance Director/Treasurer Matusiewicz clarified where the 2014 fresh start and 2016 partial fresh start were included in the current budget. Council Member Curry suggested focusing efforts on affordability rather than chasing the unfunded liability. Committee Member Gorczyca questioned the 100 percent target policy. She requested additional training on pensions. She stated multi-year budget projections were necessary before in order to determineing affordability. Chair Petros suggested the discussion be continued as the only item on the next meeting and starting the meeting at 3:00 p.m. Item No. 5A1 City CalPERS Pension Issues Presentation November 10, 2016 $217,900,000 $374,400,000 30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 50th Percentile Target (10,000) (5,000) 0 5,000 10,000 15,000 75th Percentile 50th Percentile 25th Percentile Item No. 5A2 City CalPERS Pension Issues Additional Materials Received November 10, 2016 Item No. 5A3 City CalPERS Pension Issues Additional Materials Received November 11, 2016 Item No. 5A4 City CalPERS Pension Issues Additional Materials Received November 10, 2016