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HomeMy WebLinkAboutFinance Committee Agenda - March 16, 2017CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D Thursday, March 16, 2017 - 3:00 PM Finance Committee Members: Diane Dixon, Chair / Council Member Kevin Muldoon, Mayor Will O'Neill, Council Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, Committee Member Larry Tucker, Committee Member Staff Members: Dave Kiff, City Manager Carol Jacobs, Assistant 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 MINUTES OF FEBRUARY 16, 2017A. Recommended Action: Approve and file. DRAFT MINUTES 021617 March 16, 2017 Page 2 Finance Committee Meeting V.CURRENT BUSINESS REVIEW OF BUDGET PREPARATION FRAMEWORK/PRINCIPLESA. Summary: The Finance Committee will review and provide comment on the Budget Preparation Framework, last reviewed by the Committee in August 2015. The Budget Preparation Framework consists of goals/principles, strategies and associated tactics to facilitate the allocation of resources. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A REVIEW OF LONG RANGE FISCAL FORECASTB. Summary: Staff will provide an oral update on the progress made on a long-term fiscal forecast. Recommended Action: Receive comments. PENSION DISCUSSIONC. Summary: Staff will prepare a presentation illustrating payment options to mitigate the City’s exposure to its long-term pension obligation. Recommended Action: Receive and file. ANNUAL REVIEW OF RESERVE POLICY F-2D. Summary: The Finance Committee will review and provide comment on Council Policy F-2. Recommended Action: Receive and recommend comment. STAFF REPORT ATTACHMENT A ATTACHMENT B March 16, 2017 Page 3 Finance Committee Meeting REVIEW OF OTHER FINANCIAL POLICIESE. Summary: Staff will present basic tenets of a new pension OPEB funding policy and an update to Budget Policy to account for multi-year funds and the need for long range fiscal planning. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A ATTACHMENT B DEMONSTRATION OF NEW FISCAL TRANSPARENCY SOFTWAREF. Summary: Staff will demonstrate “Socrata,” a new software that allows for access and transparency to City information by the public. Recommended Action: Comment as appropriate. 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 February 16, 2017 Page 1 of 9 CITY OF NEWPORT BEACH FINANCE COMMITTEE FEBRUARY 16, 2017 MEETING MINUTES I.CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II.ROLL CALL PRESENT:Council Member Diane Dixon (Chair), Mayor Kevin Muldoon, Council Member Will O’Neill, Committee Member Patti Gorczyca, and Committee Member Larry Tucker ABSENT (EXCUSED): Committee Member William Collopy and Committee Member Joe Stapleton STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Assistant City Manager Carol Jacobs, Budget Manager Susan Giangrande, Accounting Manager Rukshana Virany, Human Resources Director Barbara Salvini, Public Works Director Dave Webb, Deputy Public Works Director Mark Vukojevic Administrative Manager Angela Velazquez, Fire Assistant Chief Chip Duncan, Lifeguard Captain Brian O’Rourke, Lifeguard Operations Assistant Chief Rob Williams, Public Works/Finance Administrative Manager Jamie Copeland, Community Development Director Kimberly Brandt, and Administrative Specialist to the Finance Director Marlene Burns OUTSIDE ENTITIES: Jayson Schmitt and Mia Corral Brown (Chandler Asset Management); John Bartel and Bianca Lin (Bartel Associates LLC); and Bradley Zint (The Daily Pilot) MEMBERS OF THE PUBLIC: Joy Brenner, Carl Cassidy, Jim Mosher, and Mary Lou Hergel III.PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher discussed the revamped Finance Department webpage including budget, salaries, and performance plan. He also stated the City published its required State annual balance sheet in the Daily Pilot and suggested the information be posted on the webpage. In response to Chair Dixon, Finance Director Matusiewicz explained that a Performance Plan was not prepared during the preliminary stages of the budget but the City did prepare a Performance Plan along with the final adopted budget. Joy Brennan asked how the public could connect with the Finance Committee to ensure the Corona del Mar Library project continued. Mary Lou Hergel asked about funds set aside for the Library. Committee Member O’Neill suggested moving the FFP forward on the agenda to allow the public to address the Committee regarding the Corona del Mar project. Finance Committee Meeting Minutes February 16, 2017 Page 2 of 9 Chair Dixon closed public comments. IV. CONSENT CALENDAR A. MINUTES OF NOVEMBER 10, 2016 Recommended Action: Approve and file. Committee Member Tucker presented corrections to the minutes. MOTION Committee Member Gorczyca moved and Council Member O’Neill seconded a motion to approve the corrected minutes of November 10, 2016. The motion carried 4-1-2, Mayor Muldoon abstaining and Committee Members Collopy and Stapleton absent. V. CURRENT BUSINESS A. REVIEW OF INVESTMENT POLICY, FINANCIAL MARKETS, INVESTEMENT PORTFOLIO, AND INVESTMENT STRATEGIES Summary: Staff and/or one or more investment advisors will discuss the City’s investment policy’s conformance to the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Committee will receive a financial markets overview and a performance report of the City’s investment portfolio through December 31, 2016. Staff will also recommend changes to the City’s investment strategy. Recommended Action: a) Review and comment on staff’s proposed changes to Council Investment Policy F-1. b) Direct staff to bring amended policy to Council for approval. c) Review and comment on staff’s proposed investment strategies. Jayson Schmitt, Chandler Asset Management, introduced Mia Corral Brown, Senior Vice President and Relationship Manager of the Client Team. He discussed the current economy, including the possibility of increased Federal fund rates, how the Trump administration may impact future fed rate monetary policy, employment rates, Producer Price Index, retail sales and consumer confidence, economic activity, housing, manufacturing, gross domestic product, and bond yields. In response to Mayor Muldoon, Mr. Schmitt explained that the Government Code and the City’s investment policy established the five-year maximum maturity. In response to Council Member O’Neill, Finance Director Matusiewicz explained that the portfolio’s pooled assets are representative of all fund balances in the budget. Mr. Schmitt discussed the City’s portfolio objectives including safety of principle, liquidity, and rate of return. In response to Council Member O’Neill, Finance Director Matusiewicz stated the City had two advisors with the funds largely split equally Chandler and PFM. Finance Director Matusiewicz stated there were also funds in local investment pools and cash outside either portfolio. Committee Member Gorczyca asked Mr. Schmitt to explain supranationals. Mr. Schmitt explained that supranationals were agencies like the World Bank and Inter-American Development Bank that pooled capital to be lent out to different countries for humanitarian projects. Finance Director Matusiewicz explained why supranationals were added to the Government Code. Mr. Schmitt discussed that asset diversification reduces the overall risk to the portfolio. Finance Committee Meeting Minutes February 16, 2017 Page 3 of 9 Mr. Schmitt reviewed portfolio characteristics and associated yields, types of securities, issuers, quality distribution, duration distribution, and investment performance. Chair Dixon stated the rate of return was 4.35 percent since inception. Mr. Schmitt continued reviewing the short-term portfolio, portfolio allocation, individual holdings, ratings, and liquidity. Finance Director Matusiewicz explained that LAIF funds were sometimes diverted into the short- term portfolio in an effort to obtain a better yield. Mr. Schmitt discussed the performance of the short term-portfolio. Finance Director Matusiewicz suggested LAIF as a benchmark for the portfolio. Mr. Schmitt reviewed the combined portfolio and individual holdings. Committee Member Tucker noted the negative rate of return over the last three months. Mr. Schmitt explained the small amount of securities sold and mentioned that unsold securities are reflected as unrealized losses unless they are sold. An unrealized loss occurs when the portfolio holding decreases after the City buys it, but has yet to sell it. Committee Member Tucker noted the increased stock market and decreased bond market impacting CalPERS. Mr. Schmitt discussed the possibility of moving towards a longer term strategy. He explained sector allocations, durations, ten-year annualized returns, and diversification. Finance Director Matusiewicz discussed his recommendation to segment the portfolio into individual strategies and the Committee’s recommendation to consider the 1-5-year strategy. Committee Member Tucker asked how much of the portfolio would be beyond 3 years. Mr. Schmitt stated there was no limit per the policy that could be invested in the 3-5-year band based on the strategy. Finance Director Matusiewicz stated half the portfolio could be 0-1 and half at 5, with the average duration at 2.6. Chair Dixon asked if the strategy should be quantified. Mr. Schmitt suggested that the strategy could be guided by a management directive. Finance Director Matusiewicz suggested that providing limitations may nullify the benefit of active portfolio management and recommended that no such constraint be added to the strategy or policy. Council Member O’Neill stated the Council policy already allowed 1-5 years. Finance Director Matusiewicz requested concurrence with the change in strategy prior to changing a long-term practice. In response to Mayor Muldoon, Mr. Schmitt discussed various mechanisms utilized by his clients in implementing strategies. He stated the most successful cities provided a duration benchmark and strategy. Chair Dixon asked for a recommendation. Deputy Finance Director Montano stated staff was looking for approval of a one to five-year duration strategy. Finance Director Matusiewicz stated published benchmark would be selected for performance measurement. Mr. Schmitt stated there was no limitation on the duration of the portfolio, rather a limitation on investment at five years. Council Member O’Neill recommended staff follow Policy F-1. Finance Committee Meeting Minutes February 16, 2017 Page 4 of 9 Mr. Schmitt discussed other proposed changes to the Policy based on Government Code changes. He discussed the changed language for money market mutual funds. In response to Council Member O’Neill, Finance Director Matusiewicz suggested approval of Chandler’s recommendation. In response to Mayor Muldoon, Mr. Schmitt stated there was no downside to the language, but now there was an investment that could be purchased but would require further investigation. He stated money market reform could produce different mutual funds in the future, but none were yet identified. In response to Committee Member Tucker, Mr. Schmitt stated there may be a launch of new money market funds. He stated the policy and Government Code established maximum investments at 10 percent of the portfolio. Committee Member Gorczyca asked about the restriction from investing in the Orange County Investment Pool (OCIP) which had been outperforming LAIF. She suggested due diligence on OCIP and a comparative analysis between LAIF and OCIP. Mayor Muldoon asked if that would create double risk. Committee Member Gorczyca suggested due diligence. Mr. Schmitt discussed the differential between LAIF and OCIP. Chair Dixon suggested informally watching OCIP. Finance Director Matusiewicz stated the OCIP Treasurer would appreciate the opportunity to present to the Committee. Committee Member Tucker questioned the amount of money in OCIP. Finance Director Matusiewicz stated the City could not opt out of funds that County was temporarily holding on the City’s behalf but could choose not to invest idle discretionary fund in the City’s possession. Mr. Schmitt explained mandatory versus voluntary participation in OCIP. Chair Dixon suggested staff review the matter and provide a recommendation on whether the Committee should be considering OCIP. MOTION Committee Member O’Neill moved and Council Member Gorczyca seconded a motion to approve the staff recommended changes to Policy F-1 and forward the Committee’s recommendation to the City Council. Jim Mosher stated the policy changes were confusing and suggested proposed language. He discussed endowment funds and the importance of appropriate yield for these assets. The motion carried 5-2. Committee Members Collopy and Stapleton absent. A. PENSION UPDATE Summary: Staff will provide a status update of our CalPERS Pension plans based on recently announced discount rate changes. Staff will review the impact to our plans and make recommendations how to lessen the long-term cost of implementing the phased-in implementation plan contemplated by the CalPERS board. Recommended Action: Receive and file. Finance Committee Meeting Minutes February 16, 2017 Page 5 of 9 John Bartel of Bartel Associates LLC, participating via conference line, reviewed the CalPERS discount rate change and scenario comparison. He discussed contribution projections for safety. City Manager Kiff explained that it was necessary to set aside $.72 to $.84 cents for pension for every dollar in salary. Mr. Bartel indicated support for shortening the amortization period. He suggested targeting specific amortization bases to save money by paying less interest. He discussed Slide 35 and the assumption that investment returns on CalPERS would be 6.5 percent. In response to Chair Dixon, Mr. Bartel stated 6.5 percent was what the investment advisors determined. City Manager Kiff asked how other cities were reacting and whether there was traction for additional pension reforms. Mr. Bartel presented three categories of clients: 1) those that can afford; 2) those that had difficulty affording and were trying to mitigate; and 3) those that could not afford it and could not mitigate it. He stated the City of Newport Beach was in Category 1 and would be better in the long-term. He stated most of his clients were in Category 2, which were looking towards supplemental pension trusts. In response to Chair Dixon, Mr. Bartel explained supplemental pension trust providing more flexibility than CalPERS. Committee Member Tucker explained the pitfall that the City would control the money, but 7 percent was still accruing on unfunded liability. He asked if the amortization assumed for the sudden shortfall depicted. Mr. Bartel stated it was based on a 20-year amortization. Committee Member Tucker stated 70 percent of the General Fund went to salaries which would be a $14 million increase in annual contribution. City Manager Kiff confirmed. Finance Director Matusiewicz discussed Slide 14 outlining current amortization schedule and various alternative payment options. He stated it was necessary to determine how much the City could afford. Council Member O’Neill stated the change of discount rate had an immediate impact on the cost to the City. In response to Chair Dixon, Finance Director Matusiewicz explained the concept of ramp up and how it contributes to more cost over the long-run. Council Member O’Neill pointed out that the graphs depicted only the unfunded portion. Finance Director Matusiewicz anticipated the cost of salaries would increase 3.5-4.0 percent. Mr. Bartel suggested the cost would be slightly lower due to PEPRA and the decreasing discounted rate. In response to Council Member O’Neill, Deputy Finance Director Montano stated the current pension budget net of employee contributions was about $32 million, including the payment on the unfunded liability. Finance Director Matusiewicz reviewed Slide 10 and suggested taking on the expenses now rather than at the default roll out that would defer payment on known losses over several years. Finance Committee Meeting Minutes February 16, 2017 Page 6 of 9 Council Member O’Neill referred to CAFR page 17 indicating the City would continue to fund its pension rate at 6.5 percent. Finance Director Matusiewicz clarified that that was the stretch goal. Council Member O’Neill expressed concern with that statement. Chair Dixon stated the Finance Committee needed to consider the unfunded pension liability when considering the budget. Finance Director Matusiewicz explained that proposed payment options on the unfunded liability ranged from $25-$41 million depending how budget resources are ultimately prioritized. Chair Dixon reiterated that the Committee had to determine how much of the $16 million the City should spend towards unfunded liability. Mayor Muldoon discussed the need for the State to make changes and the City to remain healthier than the critical mass. Finance Director Matusiewicz stated he was not suggesting increasing the unfunded liability payment by $16 million in one year but was presenting the range of options identifying what the City might aspire to achieve over a period of time. Chair Dixon stated the problem would be gone in 20 years after the bulk of the unfunded liability was paid off. Committee Member Tucker discussed the potential of future experience losses. Chair Dixon stated the City Manager had indicated it would be difficult to come up with $10 million. City Manager Kiff confirmed that it would be hard to maintain the City’s current level of service. Finance Director Matusiewicz stated legislation would not likely have a material impact the unfunded liability. Mr. Bartel concurred. City Manager Kiff discussed the possibility of a bail out or the reduction in retiree COLAs. Mr. Bartel stated modification to the COLA would impact the unfunded liability. He stated he had made suggestions to CalPERS without response. Committee Member Tucker stated it was speculation until the California Supreme Court ruled. Council Member O’Neill stated the City would be billed on its normal and UAL pension cost. He stated Council Policy F-13 had to be considered. Chair Dixon stated the surplus might have to change. She thanked Mr. Bartel for his input. Finance Director Matusiewicz stated the Committee had a standing agenda item for future pension discussion and inquired whether it was the Committee’s intent to have Mr. Bartel participate in each and every one. Chair Dixon stated yes. In response to Committee Member Gorczyca, Mr. Bartel stated the next CalPERS experience study would occur in November 2017. B. REVIEW OF FACILITIES FINANCING PROGRAM Summary: Staff will present a draft of Facilities Financing Program reviewing the timing, means of financing, and fiscal impacts associated with funding Council prioritized capital projects. Recommended Action: Review and comment. City Manager Kiff explained the Facilities Financing Program (FFP) and the Council’s suggestions at its February 14, 2017, meeting. He requested the Finance Committee provide Finance Committee Meeting Minutes February 16, 2017 Page 7 of 9 input on how to reduce the General Fund contribution and move to a Facilities plus Harbor Plan. He stated the staff would propose options. He presented current allocations and surplus. Chair Dixon stated she wanted to determine how to pay facilities, harbor, pension, enterprise funds and debt. She stated $8.5 million was currently contributed to the FFP. City Manager Kiff explained the process of determining the amount for the FFP. Mary Lou Hergel asked about the funds set aside for new construction on the Library and Fire Station. City Manager Kiff explained that the budget was a plan for an expenditure. He stated $7 million was set aside for the Library/Fire Station project. He recommended shelving the project while determining mechanisms to handle the pension issue. He stated it was necessary to balance community needs with debt obligations. Chair Dixon suggested retaining the project on the plan with the funding year set at 2022. City Manager Kiff stated the project was not funded until the construction contract was let. Chair Dixon explained the West Newport Community Center was on the list as a targeted project but was not funded. Finance Director Matusiewicz explained that money was accumulated and saved for building replacement but stated it was up to Council to determine the ultimate prioritization. Chair Dixon stated developer fees had paid for City facilities for 30 years. She stated she supported modest development due to the investment in the community by the developer. Ms. Hergel stated she did not realize that construction of the Fire Station and Library were dependent on developer fees. Ms. Hergel asked if the project would have started if the bids had come in as expected. City Manager Kiff stated he would have still recommended a stop due to CalPERS. Ms. Hergel suggested minor repairs in the meantime. Chair Dixon requested information on the necessary modest improvements. City Manager Kiff stated the Council set aside funds for facility maintenance. Committee Member Tucker suggested the Library / Fire Station project be retained in the Capital Improvement Program (CIP) and proceed within 3-5 years. Ms. Hergel discussed the possibility of fundraising for the project. City Manager Kiff stated staff would return with recommended funding levels on all obligations. Committee Member Tucker stated determining the funds to be spent was not within the Committee’s purview. City Manager Kiff suggested the Finance Committee comment and provide theme ideas. Mayor Muldoon suggested actual projects be determined by the Council. Jim Mosher questioned whether the CIP contained current commitments. City Manager Kiff stated the commitment was firm when the contract was let. C. REVIEW INITIAL DRAFT OF LONG-TERM FINANCIAL FORECAST Summary: Finance Committee Meeting Minutes February 16, 2017 Page 8 of 9 Staff will present the bare bones of a high-level Long-term Financial Forecast that summarizes future assumptions and key elements of the City’s finances culled from other long-term plans such as the Facilities Financing Program, Pension Projections, Harbor Master plan, etc. Recommended Action: Review and comment. Deputy Finance Director Montano presented a prototype for a long range financial forecasting, including revenue growth, maintenance and operations, salary and benefits, revenue categories, General Fund transfers, and expenditures. In response to Mayor Muldoon, Deputy Finance Director Montano explained the means for future projections. Finance Director Matusiewicz explained that all financial plans would be incorporated into the forecast. Committee Member Tucker asked the assumptions utilized. Finance Director Matusiewicz reminded the Committee that it was a draft model. Jamie Copeland explained that the harbor plan included the capital long term needs and maintenance and operation commitments. Committee Member Gorczyca discussed the General Fund surplus process. Carl Cassidy commended staff for presenting the need for a forecast. Jim Mosher questioned the input from Dr. Thornberg. D. REVIEW DRAFT WORKPLAN Summary: Staff will present and seek approval of the tentative Finance Committee agenda topics scheduled for the calendar year. The work plan represents the planned topics of discussion; however, is subject to change based on the availability of information and the need to schedule other topics as they arise. Recommended Action: Review and comment. In response to Committee Member Tucker, Susan Giangrande and Steve Montano discussed the timing for budget approval. Chair Dixon indicated she was unavailable March 2. Committee Member Gorczyca indicated she was also unavailable. Jim Mosher reminded the Committee that the Council requested the Committee’s formal written recommendation on the budget. E. BUDGET AMENDMENTS Summary: Staff report on the budget amendments for the prior quarter. Recommended Action: Receive and file. Finance Committee Meeting Minutes February 16, 2017 Page 9 of 9 Finance Director Matusiewicz presented the staff report. In response to Chair Dixon, Finance Director Matusiewicz stated the increase or decrease on specific funds were indicated. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON- DISCUSSION ITEM) Chair Dixon requested a policy outlining the Committee’s budget principles. VII. ADJOURNMENT The Finance Committee adjourned at 6:06 p.m. to the Finance Committee scheduled on March 16, 2017. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on February 9, 2017, at 5:59 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: ___________________________________ _____________________ Diane Dixon Date Finance Committee Chair CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5A March 16, 2017 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Finance Department Dan Matusiewicz, Finance Director (949) 644-3123, danm@newportbeachca.gov SUBJECT: REVIEW OF BUDGET PREPARATION FRAMEWORK/PRINCIPLES SUMMARY: During the August 13, 2015, Finance Committee meeting, members discussed actions for bringing greater transparency and accountability during the annual budget development process. The Finance Committee along with staff developed a Budget Preparation Framework (the Framework) that consists of goals, strategies and associated tactics as an ideal means of establishing priorities, guiding program activities, and allocating resources. The framework was used to guide the development of the Fiscal Year 2016-2017 budget. Members of the Finance Committee recently requested a review the Framework once again as the Fiscal Year 2017-2018 budget is being developed. Staff has updated, and will discuss the changes to, the Framework. RECOMMENDED ACTION: Receive and file. DISCUSSION: The Finance Committee expressed an interest in having greater involvement in the review of the proposed budget prior to its adoption by the City Council. During the August 13, 2015, Finance Committee meeting members discussed and generally agreed to bring greater transparency and accountability during the annual budget development process. To this end, the Framework was established to guide priorities, program activities, and the allocation of resources (see Appendix A). Goals or “budget principles” represent statements that identify the broad goals that provide overall direction for the City and serve as a basis for decision making. Strategic objectives are major accomplishments Review of Budget Preparation Framework/Principles March 16, 2017 Page 2 that the City seeks to achieve over a specified period of time to achieve its long term goals. Tactics identify what should be done, that is, outline the specific tasks that must be accomplished to achieve the strategic objectives. In furtherance of Tactic 11.1, the Finance Committee conducted a series “deep dives” into the Fiscal Year 2015-2016 Adopted Budget. This action provided members with the context and understanding of the City’s programs in advance of the Fiscal Year 2016-2017. The Committee reviewed several of the City’s largest budget divisions and programs, and received explanations about the budget detail including salaries, benefits, contract service accounts, and more as indicated on the schedule below. Finance Committee “Deep Dive” Budget Review Summary (in preparation for the FY 2017 budget) 10/15/2015 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 1 (Recreation and Senior Services Department). 11/12/2015 Implementation of Budget Preparation Framework - Review of Operating Fiscal Year 2016 Budget, Session 2 (Police Department) 12/10/2015 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 3 (Fire Department). 01/14/2016 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 4 (Public Works Department). 02/11/2016 Implementation of Budget Preparation Framework - Review of Fiscal Year 2016 Operating Budget, Session 5 (Municipal Operations Department) Due to the Committee’s time constraints with its normally busy annual work plan schedule, staff proposes that the Committee undertake these deep dives every other year or as needed. With regard to the goal of providing government transparency to the citizenry (Goal 5 and Tactic 8), staff is preparing an online citizen financial transparency module. This hosted service will organize the City’s budgetary data into graphs and charts to meet the public’s need for real numbers and clarity. Citizens will be able to access the transparency portal directly from the City website. It features easy-to-navigate graphics with data organized by department, division, program, expenditure/revenue groupings, and fund. Staff has also recently developed a long range fiscal forecast model to identify future challenges and opportunities, causes of fiscal imbalances, and strategies to secure financial sustainability in furtherance of Goal 4 – Fiscal Sustainability. A new tactic was added to describe this effort. This model will be shared with the Finance Committee as it is used for the development of the Fiscal Year 2017-2018 proposed budget. Review of Budget Preparation Framework/Principles March 16, 2017 Page 3 Prepared and Submitted by: /s/ Dan Matusiewicz _____________________________ Dan Matusiewicz Finance Director Attachment: A Proposed Budget Preparation Framework for Newport Beach ATTACHMENT A Proposed Budget Preparation Framework for Newport Beach Appendix A Proposed Budget Preparation Framework for Newport Beach 1 of 3 GOALS- Our Stated Budget Principles: • Follow the Fiscal Sustainability Plan (FSP) • Five key budget principles of our “Shining City by the Bay”: G.1 Keeping the community safe. G.2 Providing the quality of and mix of services that Newport Beach residents expect in a cost effective manner. G.3 Keeping Newport Beach looking great. G.4 Maintain a fiscally stable and sustainable city government (as articulated in our broad financial goals and the FSP). G.5 Providing Government Transparency to our citizenry1 STRATEGIC OBJECTIVES - We want to: S.1 Attract and retain quality employees within our marketplace. (in furtherance of G.2) S.2 Be as efficient as possible, while still providing strong customer service. (G.2) S.3 Seek outsourced service provision where it makes good sense and saves resources (acknowledging that prevailing wage law changes and legacy unfunded liability costs factor in here, too). (G.2) S.3.1 Review these concepts with the Finance Committee S.3.2 Use outside consultants to review this for us to avoid bias S.3.3 No sacred cows, at least for discussion purposes. S.4 Use technology to improve customer service and reduce costs, but still have real persons for our residents to connect with. (G.2) S.5 Avoid the “crowd-out” – where pension and OPEB costs cause us to under-invest in roads, buildings, parks, community safety, and other community amenities. (G.3 and G.4) S.6 Invest as much resources as we can in capital projects that enhance and protect community value – such as sea walls, park upgrades, transportation systems (signals, roads, bike lanes), water quality, and more. This can involve trying to reduce staffing costs to provide enough funding for capital obligations. (G.3) 1 Via the City Charter, it’s still the City Manager’s role to prepare and present the budget to the City Council for consideration. Other input is always welcomed, but a path that does not have the City Manager directly presenting the Budget to the Council is not one any city manager would ever accept. Appendix A Proposed Budget Preparation Framework for Newport Beach 2 of 3 S.7 Maintain low or no levels of debt, and stay current on all debt obligations. (G.4) S.8 Be aggressive in addressing our pension obligations – in the short- and long-term. (G.4) S.9 Manage income properties so that they recover fair market value (FMV) and/or reflect a purposeful community benefit as an offset to FMV. (G.4) S.10 Provide a safe and healthy environment for all community members and visitors by maintaining adequate funding for programs that in Police, Fire, Lifeguard and Building Safety. (G.1) TACTICS - Preparing the Budget: T.1 Our budget will be balanced. (G.4) T.2 We will follow the Council’s reserve policies, the Fiscal Sustainability Plan, our Master Plans, and the Facilities Financing Plan. (G.3 and G.4) T.3 We will be conservative but practical in our revenue estimates. (G.4) T.4 Will be conservative with an eye towards past performance in our expenditure estimates. (G.4) T.5 We will undertake long-term financial planning to identify future challenges and opportunities, causes of fiscal imbalances, and strategies to secure financial sustainability. (G.4) T.5 6 As a staff, we will be protective of all known sources of revenue – existing and potential. (G.4) T.6 7 Our budget will maximize, to the extent practical, our community’s capital needs. (G.3) T.7 8 Our budget and our budget process will be clear, transparent, and as available to the public as possible. (G.5) T.8 9 We welcome anyone’s questions about any aspect of the budget or the budget process. We are here to educate, answer questions, consider new ideas, listen and course-correct if need be. (G.5) T.9 10 Our longer-term goal is to provide budget information on a program-by-program basis, with good metrics that allow performance measurement of these programs. This requires the new ERP to be more fully implemented. o Why not use zero-based budgeting? It’s not a crazy approach, but it can be an exercise with minimal value compared with the time it takes to do it. I.e., Appendix A Proposed Budget Preparation Framework for Newport Beach 3 of 3 would you really do this with fire suppression or the traffic control program in the PD? MOUs and labor laws complicate implementation, too. T.10 11 Ways to Better Involve the Public and/or the Finance Committee (G.5): T.110.1 Staff would take the Finance Committee (FC) through a series of three to four “deep dives” into specific budget divisions or programs, with explanations about the Budget Detail and salaries, benefits, contract service accounts, and more. Set aside enough time to do this without anyone feeling rushed. • Have each member of the FC identify 2-3 areas of interest – or questions they want answered before they have a final discussion about the budget – and complete these to general satisfaction prior to having the Council’s spring 2016 budget sessions for FY 16-17the next fiscal year. T.110.2 Provide an open public informal workshop on reading and understanding the budget documents as well as the budget preparation process (especially revenue assumptions, how new programs are analyzed). Take one program to have a “deep dive” into as an example. Cover key interest areas – PERS/OPEB, reserves, salaries and MOUs, Master Plans, more. Encourage folks to become more expert in budget issues by answering any and all questions. T.110.3 Schedule the aforementioned 3-4 outsourcing reviews each year by the FC. CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5D March 16, 2017 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Dan Matusiewicz, Finance Director (949) 644-3123 or danm@newportbeachca.gov SUBJECT: ANNUAL REVIEW OF RESERVE POLICY F-2 ABSTRACT: Prudent financial management requires that some portion of available funds be reserved for future use. Council Reserve Policy F-2 establishes reserve requirements for the City and reiterates funding policies associated with pension and other post-employment benefits (OPEB). Staff has prepared a summary of Council Reserve Policy F-2 for discussion purposes. For a more in depth look at each reserve policy, please refer to Reserve Policy F-2 included as Attachment A. RECOMMENDATION: Staff welcomes input and recommendations on Council Reserve Policy F-2. Finance staff will bring Committee recommendation, if any, to the City Council for consideration. DISCUSSION: Background Prudent long-term financial management compels the City to strategically reserve resources. Reserve accounts provide a mechanism for saving current resources for future use. City Council has full discretion on appropriating funds from reserve accounts and these funds may only be used for the specific purpose for which the reserve account was established, unless alternate uses are specified in the annual budget or action is taken by Council. Council Reserve Policy F-2 establishes the requirements and guidelines for the administration of such reserves. Annual Review of Reserve Policy F-2 March 16, 2017 Page 2 Fund Categories Council Reserve Policy F-2 references two categories of funds in which the City’s reserves reside. It is essential to understand the differences between the two categories of funds in order to understand the nature of the reserves. Governmental Funds The first fund category is Governmental Funds. Funds that fall into this category have a short-term measurement focus and basis of accounting that exclude long-term assets and long-term liabilities. The majority of the City’s funds, including the General Fund, fall into this category. Fund balance is the term used to describe the total assets that accumulate in Governmental Funds net of related liabilities. Proprietary Funds The other fund category is Proprietary Funds which differ from Governmental Funds in that they have a long-term measurement focus and basis of accounting that includes long- term assets and long-term liabilities. This basis of accounting is more similar to private sector accounting. Examples of proprietary funds are the City’s Water Enterprise Fund and Wastewater Enterprise Fund, and Internal Service Funds, such as the Equipment Fund and Insurance Reserve Fund. Net Assets, or equity, in a proprietary fund include long-term assets such as property, plant and equipment net of related long-term liabilities as they do in private sector accounting. Net Assets, therefore, is not a good measure of liquid resources available to satisfy near-term obligations and should not be compared to fund balance in governmental funds. Net Working Capital, is the difference between current (liquid) assets and current (near-term) liabilities and represents a closer approximation of fund balance in a governmental fund. The table outlining the major differences between Governmental Funds and Proprietary Funds is found on Page 3. Annual Review of Reserve Policy F-2 March 16, 2017 Page 3 GOVERNMENTAL FUNDS PROPRIETARY FUNDS Fund Examples General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds Water Enterprise Fund, Sewer Enterprise Fund, Equipment Fund, Insurance Reserve Fund Measurement Focus Short-Term, excludes long-term assets and long-term liabilities. Long-Term, includes long-term assets and long-term liabilities. Measurement of Resources for Comparative Purposes Fund Balance Net Working Capital GOVERNMENTAL FUND RESERVES (FUND BALANCE) Governmental Funds make five further distinctions of fund balance that identify the levels of restrictions, if any, on fund balance. The five classifications of fund balance/reserves in order from most restricted to least restricted are listed below: CLASSIFICATIONS NATURE OF RESTRICTION RESERVE EXAMPLES Non-spendable Cannot be readily converted to cash. Inventories, Prepaid Assets, Permanent Endowment Restricted Externally imposed restrictions. Debt Service, Affordable Housing, Park In Lieu, Oceanfront Encroachment Committed City Council imposed commitment. Facilities Financial Planning, Parking Assigned City Manager assigned purpose/intent. None at this time. Unassigned Residual balance not otherwise restricted. Contingency, Residual Fund Balance *Not all governmental fund reserves are listed in the above table. Internally, the City has divided the five categories into two distinct categories: non- discretionary and discretionary. The reserves classified as non-spendable or restricted, are typically described by the City as non-discretionary reserves since these resources Annual Review of Reserve Policy F-2 March 16, 2017 Page 4 are not readily convertible to cash and/or may be subject to externally imposed restrictions. Reserves classified as committed, assigned, or unassigned are included as discretionary reserves since City Council can remove any restrictions imposed on this group. Therefore, these resources are more readily available to Council in the event of an emergency. Externally, creditors and rating agencies often take a more conservative approach simply categorizing fund balance as “Reserved” or “Unreserved Fund Balance.” Unassigned fund balance is deemed to be unrestricted while all other categories are deemed to be “Reserved” in some fashion and therefore, potentially not available to management to pay creditors. For this reason, we have classified our contingency reserve as “Unassigned.” The following excerpt from a Fitch Rating Agency article on “Twelve Habits of Highly Successful Finance Officers” demonstrates the importance of maintaining a contingency reserve or “Rainy day reserve”: Fund Balance Reserve Policy/Working Capital Reserves Maintaining an operating reserve or rainy day fund is perhaps the most effective practice an issuer can use to enhance its credit rating. It is also the most frequently implemented practice, adopted by both large and small local government issuers. A financial reserve may be used to address unanticipated revenue shortfalls or unforeseen expenditures. This provides a first defense against deficit spending and helps maintain liquidity when budgeted drawdowns become inevitable. The appropriate size of such a reserve depends on the potential variability of the entity’s revenues and expenses, as well as its working cash needs to handle seasonality of revenues or expenditures. Governments can issue cash flow notes — tax anticipation notes or revenue anticipation notes — when revenue receipts and/or expenditure disbursements are uneven throughout the fiscal year or mismatched with one another. In such cases, short-term borrowings can be an effective means to even out lumpy or unbalanced cash flows. However, in several instances, governments have issued sizeable amounts of cash flow notes to compensate for unanticipated year-end cash and fund balance deficits. A need for notes in situations of fiscal stress may indicate weakened credit quality and is a leading cause of downgrades. Issuers that can meet their seasonal cash flow needs from working cash on hand can avoid all the potential problems that issuing notes in finance shortfalls might create. As a matter of practice, the City does not issue short-term obligations, as mentioned in the Fitch article, to bridge the gap between revenue cash flow and expenditures. The City’s liquidity is most challenged during the latter half of August through October when property tax installments stop coming in. The City has been able to manage cash flows Annual Review of Reserve Policy F-2 March 16, 2017 Page 5 by matching security maturities with cash flow needs and use of the Local Agency Investment Fund (LAIF). General Fund Contingency (Rainy Day) Reserve The General Fund Contingency Reserve, which is classified as unassigned, is viewed as the most important reserve of the City especially to creditors. The basic purpose of the contingency reserve, also known as a rainy day reserve, is to protect the budget from unexpected or unforeseen fiscal disruptions such as catastrophic loss of critical infrastructure, unanticipated revenue shortfalls, and actions by another government that eliminates or shifts revenues from the City. GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unreserved fund balance in their general fund of no less than five percent to 15 percent of regular general fund operating revenues, or of no less than one to two months of regular general fund operating expenditures. More contemporary methods suggest a risk-based approach to determining appropriate reserve levels. To date the City has not undertaken this sort of assessment in sizing its reserves. Currently, the General Fund Contingency Reserve has a target balance of twenty-five (25%) percent of General Fund “Operating Budget” as originally adopted. Appropriations and access to these funds are reserved for emergency situations only, but may be accessed by Council through budget appropriation. If any portion of the Contingency Reserve is used, a plan to replenish the reserve within five years will be presented to Council. The contingency reserve balance at the end of Fiscal Year 2015-2016 was $45.8 million. Facilities Financial Planning (FFP) Reserve The FFP Reserve is also an important reserve. This reserve is used to earmark funds for the replacement or upgrade of critical City facilities in conjunction with the Facilities Financial Plan. The FFP Reserve is funded by an annual contribution from the General Fund, which is approved as part of the budget adoption process, and developer contributions. The funds accumulated in the FFP Reserve can only be used for specific purposes declared by the City Council. The minimum target balance of the FFP Reserve is equal to the maximum annual debt service payment for existing obligations (Currently General Fund Contingency Reserve 2015 2016 Contingency Reserve Cash Balance 41,314,870 45,763,058 Target Reserve Level (25% of General Fund Operating Budget)41,169,310 45,763,058 Percentage of Target Funded 100%100% Annual Review of Reserve Policy F-2 March 16, 2017 Page 6 $8.2 million). Target fund balance is determined based on cash flow projections of prioritized facility replacement projects. Harbor Capital Reserve (HCR) Fund The City has recently undertaken efforts to assess the long-term needs of the Harbor and should follow through to create a funding plan to accumulate resources based on the long-term, Harbor Master Plan. The current Tidelands Operating fund is too narrowly focused on near-term projects to be useful for a long-range financial planning. Staff recommends that the Harbor Committee continue to focus on prioritizing and quantifying critical harbor maintenance and improvements at least 30 years out updating the plan on an ongoing basis. This plan will better inform the City Council and the Finance staff of the financial requirements necessary to maintain our harbor at an acceptable level for the community. Funding recommendations and reserve requirements will be developed based on this plan. PROPRIETARY FUND RESERVES (NET WORKING CAPITAL) As previously mentioned, the most comparable measure of liquid financial resources in proprietary funds is net working capital. From this point forward, when referring to reserves, net working capital is the intended meaning (the net difference between liquid assets and near term liabilities). Water and Wastewater Enterprise Fund Reserves The Water Fund and Wastewater Fund operations are very similar in that they are both used to account for operations of a self-supporting activity that is entirely financed through user charges. As such, they both have two similar reserves. First, each fund has a Stabilization and Contingency Reserve that is used as a safeguard against seasonal variations in cash flows and short-lived cost increases that create annual rate volatility. In extreme conditions, having such a reserve allows the City to maintain operations for a reasonable period before instituting a rate increase to offset cost increases. This reserve provides a reorganization period of six months with zero income or 24 months at a 25 percent loss rate. The target funding level of this reserve is Facilities Financial Planning (FFP) Reserve 2015 2016 Unrestricted Fund Balance 10,387,218 13,680,787 Maximum Annual Debt Service 8,194,455 8,175,115 Percentage of Target Funded 127%167% Annual Review of Reserve Policy F-2 March 16, 2017 Page 7 50 percent of the annual operating budget. The City Council must approve any use of these funds. The Water Operating Reserve was at 107 percent of its reserve target of $10.7 million in 2016. The Wastewater system was at 43 percent of its reserve target of $1.9 million and was expected to worsen rapidly. In Fiscal Year 2016-2017, Council approved a one- time $3.5 million transfer of cash to mitigate the troubled wastewater fund which is not reflected in the balances below. Council should consider a rate or operational adjustments to Wastewater Enterprise in the near future. Effective water operations and wastewater operations require the use of an operable infrastructure system. Therefore, each service also has an Infrastructure Replacement Funding Reserve that is used as a temporary repository for cash flows associated with the funding of infrastructure improvement projects as outlined in the Water Master Plan and Wastewater Master Plan. The funding of this reserve is based on an annual contribution rate that when combined with prior or future year contributions would allow for updates to infrastructure as scheduled in their respective master plans. Currently, there are no minimum or maximum reserve levels, but the contribution level and reserve balance should be reviewed periodically to ensure that major infrastructure updates as outlined in the master plans can occur as planned. The Fiscal Year 2016-2017 annual capital savings plan amounts to $4.5 million for Water and $750,000 for Wastewater. Staff recommends the City consider an infrastructure reserve equal to at least two years’ worth annual capital contributions available in reserve for emergency repairs or unanticipated delays in rate implementation. Rates should be studied at least every five years and as major updates to the Master Plan occur. The table on Page 8 shows the historical cost an accumulated depreciation of the Water and Wastewater infrastructure as of fiscal year ended June 30, 2016. It is intended to Water Stabilization and Contingecy Reserve 2015 2016 Stabilization and Contingency Reserve 10,326,042 11,426,314 Target Funding Level (50% Operating Budget)10,243,775 10,688,762 Percentage of Target Funded 101%107% Wastewater Stabilization and Contingency Reserve 2015 2016 Stabilization and Contingency Reserve 1,593,406 826,246 Target Funding Level (50% Operating Budget)1,724,716 1,914,083 Percentage of Target Funded 92%43% Annual Review of Reserve Policy F-2 March 16, 2017 Page 8 provide a little insight to the historical cost, future improvement needs and the magnitude of loss that might occur in the event of a major earthquake. Internal Service Fund (Strategic) Reserves Internal Service Funds (ISF) Reserve is used to manage and account for specific program activity in a centralized cost center while acting as a strategic savings plan for long-term assets and liabilities. The revenue comes from internal charges to departmental operating budgets rather than external revenue sources. Setting aside resources in these funds lessens the burden placed on the budget when liabilities become payable. The net working capital of these funds represents a strategic savings plan to replace aging assets or prefund expected liabilities. We group our Internal Service Funds into the following four categories: Equipment, Insurance (Risk Management), Compensated Absences and Other Post-Employment Benefits (Retiree Insurance). The target balance and cash flow patterns are unique to each category and are described below. Equipment The main purpose of the Equipment ISF is to accumulate funds for the maintenance and regular replacement of vehicles and other major pieces of equipment. This fund receives operating money from each Department by way of charges determined by equipment usage and a replacement charge based on an annual assessment of the equipment’s age, condition, and anticipated future replacement date and cost. Any rate adjustments are included in the budget preparation process. The target funding level is determined by the Finance Director based on anticipated cash flow needs. If the target funding level is Water Infrastructure Reserves 2015 2016 Water Infrastructure Reserve 5,577,590 4,021,749 Historical Cost of Infrastructure 127,798,319 128,693,595 Accumulated Depreciation 46,114,705 47,810,395 Percentage of Depreciation Funded 6.8%5.0% Wastewater Infrastructure Reserves 2015 2016 Wastewater Infrastructure Reserve 1,158,326 1,748,731 Historical Cost of Infrastructure 45,815,073 45,815,073 Accumulated Depreciation 16,396,751 17,005,826 Percentage of Depreciation Funded 7%10% Annual Review of Reserve Policy F-2 March 16, 2017 Page 9 excessive or insufficient, rates are adjusted as part of the next budget cycle. Below is a table outlining the estimated Fiscal Year 2016 Funding Status. Insurance Reserve (Risk Management) The Insurance ISF is used to account for the activities of general liability and workers’ compensation claims. The City employs an actuary to estimate the liabilities associated with each program. The costs associated with each program are typically claims administration, legal defense, insurance premiums, self-insured retention, and the establishment of appropriate loss reserves including “incurred-but-not reported” (IBNR) claims. Both programs are funded by the operating budget of each department. Each department is charged a rate equal to its proportionate share of the total “revenue” required to fund each program at its target funding level. The City relies on the actuarial valuations to estimate the long-term liability and an appropriate funding level. Deviation from the actuary’s expected estimate can be significant. Therefore, the target funding level is typically greater than the actuary’s “Expected Level” but not more than a “Target Funding Level” to achieve 75 percent confidence level. Another way to think of a 75 percent level of confidence is that there is a 75 percent chance there will be sufficient resources to pay the full amount of existing claims without future contributions. The following table outlines the estimated Fiscal Year 2016 Funding Status of each program in the Insurance ISF. The table above demonstrates that the General Liability programs are 15 percent below the target funding level and Workers Compensation is three percent below the target funding level. Historically, the General Liability funding claims have been much more unpredictable and mature more rapidly than worker’s compensation claims. For this reason, the City should consider increasing the target confidence level on its general Equipment Replacement Funding Status 2015 2016 Reserve 15,072,287 14,697,055 Accumulated Depreciation 17,833,010 18,989,542 Percentage of Depreciation Funded 85%77% General Liability (Claims & Judgments) Funding Status 2015 2016 Cash Reserve 8,839,330 7,591,783 Actuarial Expected Level (50%-65% Confidence Level)8,478,383 8,203,470 Actuarial Target Funding Level (75% Confidence Level)9,195,383 8,931,470 Percentage of Actuarial Target Funded 96%85% Workers' Compensation Funding Status 2015 2016 Cash Reserve 16,291,919 16,119,333 Maximum (Actuarial Target Funding Level (75% Confidence Level))16,820,000 16,673,000 Percentage of Actuarial Target Funded 97%97% Annual Review of Reserve Policy F-2 March 16, 2017 Page 10 liability claims from 75 to 90 percent. This would increase our reserve target approximately $1 million. Compensated Absences The Compensated Absences ISF is used as a budget smoothing technique for cash-out payments to employees for flex leave, vacation leave, and sick leave upon separation from the City. Each department makes contributions to this fund based on a specified percentage of salary. The minimum target balance of this fund is three-year average of previous cash flows. The Finance Director recommends any funding adjustments to occur during the annual budget development process or during the mid-year budget adjustments. The maximum reserve balance is set at 50 percent of the projected liability. The table below illustrates that the projected balance is 88 percent of the maximum reserve level. Pension and OPEB Funding Policies Assets set-aside to prefund pension and retiree benefits are held in employee benefit trusts managed by CalPERS. Assets held in benefit trusts are not readily available to the City to pay claims and creditors. It is staff’s recommendation that the City remove Pension and OPEB from the current reserve policy and develop a separate funding policy for theses benefit plans Compensated Absences Funding Status 2015 2016 Cash Reserve 3,906,183 3,994,379 Long Term Liability 8,848,400 9,045,949 Minimum Target Funding Level (3 yr Avg of Cash Flows)1,951,871 2,030,924 Maximum Target Funding Level (50% of Liabilities)4,424,200 4,522,975 Percentage of Max Target Funded 88%88% Pension 2014 2015 Trust Assets - Market Value 567,303,448 572,699,003 Long Term Liability 819,870,443 848,372,949 Unfunded Liability 252,566,995 275,673,946 Percentage of Liability Funded 69%68% OPEB 2015 2016 Trust Assets - Market Value 14,818,836 16,131,814 Long Term Liability 42,638,555 42,737,245 Unfunded Liability 27,819,719 26,605,431 Percentage of Liability Funded 35%38% Annual Review of Reserve Policy F-2 March 16, 2017 Page 11 based on best practices identified by the Government Finance Officers’ Association (GFOA), the California Actuarial Advisory Panel (CAAP) and other resources. Proposed Changes to Policy F-2 In summary, staff is proposing to make various changes to Policy F-2. Only substantive changes are summarized below. 1. Change the title of “Cable Franchise” to “Public and Government (PEG) Revenues and move from the “Committed” to the “Restricted” fund balance classification. The City no longer maintains franchise agreements with cable companies. The Digital Infrastructure and Video Competition Act of 2006 (DIVCA) did away with local franchise agreements for cable TV and set up a statewide franchise under the California Public Utilities Commission (CPUC). PEG revenues are externally restricted by DIVCA, which limits PEG revenues to one percent of the franchise holder's gross revenues for entities that did not assess a PEG fee prior to December 31, 2006. Since PEG revenues are externally restricted to capital expenses associated with PEG access facilities, the fund classification is being changed to the “Restricted.” 2. Remove reference to Neighborhood Enhancement A and B fund reserves. The City Council established an Area Benefit District Reserve for the Balboa Village Area Benefit District in 2014. This action assigned 100 percent of all on-street and off-street parking fees and revenue generated with the Balboa Village District to the Balboa Village Area Benefit District Reserve and eliminated to requirement fund the Neighborhood Enhancement A and B fund reserves. 3. Expand the allowable uses for the Contingency Reserve to include advanced or accelerated strategic funding of the City’s Unfunded Actuarial Liability obligation in order to avoid higher long-term interest cost or other events necessitating the use of reserves to meet our pension obligation. No more that 40 percent of this reserve shall be allocated to pension obligation mitigation efforts. 4. The City should maintain an Infrastructure reserves for Water and Wastewater Enterprises equal to at least two years’ worth annual capital contributions available in reserve for emergency repairs or unanticipated delays in water rate implementation. Rates should be studied at least every five years and as major updates to the Water Master Plan occur. 5. Historically, the General Liability funding claims have been much more unpredictable and mature more rapidly than worker’s compensation claims. For this reason, staff proposes increasing the target confidence level on its general liability claims from 75 to 90 percent. Annual Review of Reserve Policy F-2 March 16, 2017 Page 12 6. Remove sections of the Policy relating to pensions and OPEB funding policy and create a separate pension and OPEB funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner. To provide the desired degree of assurance, a pension funding policy would need to incorporate the following principles and objectives: • Contribute no less than 100 percent of actuarially determined contribution (ADC) annually. • Target funding at 100 percent of Actuarial Accrued Liability. • Analyze schedule of amortization bases each and every year. • Amortize ALL gains/losses no longer than a 20-year, closed period. • Rate smoothing phase-in no longer than five years, zero if possible. • Dedicate a portion of surplus funds to accelerate payment on unfunded liabilities. • Establish a rate smoothing reserve or strategy to avoid phase-in periods and provide economic relief during recessionary cycles. Staff welcomes input and recommendations on Council Reserve Policy F-2. Finance staff will bring Committee recommendation, if any, to the City Council for consideration. /s/ Dan Matusiewicz _____________________________ Dan Matusiewicz Finance Director Attachments: A. Council Reserve Policy F-2 (redline) B. Funding Status of Key Reserves ATTACHMENT A Council Reserve Policy F-2 F-2 1 RESERVE POLICY PURPOSE To establish City Council policy for the administration of Reserves defined as fund balances in governmental funds and net working capital in proprietary funds. BACKGROUND Prudent financial management dictates that some portion of the funds available to the City be reserved for future use. As a general budget principle concerning the use of reserves, the City Council decides whether to appropriate funds from Reserve accounts. Even though a project or other expenditure qualifies as a proper use of Reserves, the Council may decide that it is more beneficial to use current year operating revenues or bond proceeds instead, thereby retaining the Reserve funds for future use. Reserve funds will not be spent for any function other than the specific purpose of the Reserve account from which they are drawn without specific direction in the annual budget; or by a separate City Council action. Information regarding Annual Budget Adoption and Administration is contained in City Council Policy F-3. GOVERNMENTAL FUNDS AND FUND BALANCE DEFINED Governmental Funds including the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds and Permanent Funds have a short-term or current flow of financial resources, measurement focus and basis of accounting and therefore, exclude long-term assets and long-term liabilities. The term Fund Balance, used to describe the resources that accumulate in these funds, is the difference between the fund assets and fund liabilities of these funds. Fund Balance is similar to the measure of net working capital that is used in private sector accounting. By definition, both Fund Balance and Net Working Capital exclude long-term assets and long-term liabilities. PROPRIETARY FUNDS AND NET WORKING CAPITAL DEFINED Proprietary Funds including Enterprise Funds and Internal Service Funds have a long- term or economic resources measurement focus and basis of accounting and therefore, include long-term assets and liabilities. This basis of accounting is very similar to that used in private sector. However, instead of Retained Earnings, the term Net Assets is used to describe the difference between fund assets and fund liabilities. Since Net F-2 2 Assets include both long-term assets and liabilities, the most comparable measure of proprietary fund financial resources to governmental Fund Balance is Net Working Capital, which is the difference between current assets and current liabilities. Net Working Capital, like Fund Balance, excludes long-term assets and long-term liabilities. GOVERNMENTAL FUND RESERVES (FUND BALANCE) For Governmental Funds, the Governmental Accounting Standards Board (“GASB”) Statement No. 54 defines five specific classifications of fund balance. The five classifications are intended to identify whether the specific components of fund balance are available for appropriation and are therefore “Spendable.” The classifications also are intended to identify the extent to which fund balance is constrained by special restrictions, if any. Applicable only to governmental funds, the five classifications of fund balance are as follows: CLASSIFICATIONS NATURE OF RESTRICTION Non-spendable Cannot be readily converted to cash Restricted Externally imposed restrictions Committed City Council imposed commitment Assigned City Manager assigned purpose/intent Unassigned Residual balance not otherwise restricted A. Non-spendable fund balance: That portion of fund balance that includes amounts that are either (a) not in a spendable form, or (b) legally or contractually required to be maintained intact. Examples of Non-spendable fund balance include: 1. Reserve for Inventories: The value of inventories purchased by the City but not yet issued to the operating Departments is reflected in this account. 2. Reserve for Long Term Receivables and Advances: This Reserve is used to identify and segregate that portion of the City’s financial assets which are not due to be received for an extended period, so are not available for appropriation during the budget year. 3. Reserve for Prepaid Assets: This reserve represents resources that have been paid to another entity in advance of the accounting period in which the resource is deducted from fund balance. A common example is an insurance premium, which is typically payable in advance of the coverage period. F-2 3 Although prepaid assets have yet to be deducted from fund balance, they are no longer available for appropriation. 4. Reserve for Permanent Endowment - Bay Dredging: The endowment specifies that the principal amount will not be depleted and represents the asset amounts to be held in the Bay Dredging Fund. 5. Reserve for Permanent Endowment - Ackerman Fund: The endowment specifies that the principal amount will not be depleted and represents the asset amount to be held in the Ackerman Fund. B. Restricted fund balance: The portion of fund balance that reflects constraints placed on the use of resources (other than non-spendable items) that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. Examples of restricted fund balance are: 1. Reserve for Debt Service: Funds are placed in this Reserve at the time debt is issued. The provisions governing the Reserve, if established, are in the Bond Indenture and the Reserve itself is typically controlled by the Trustee. 2. Affordable Housing: A principal provision of the Newport Beach Housing Element requires developers to provide housing units for lower income households, the number of which is to be negotiated for each development project. In lieu of constructing affordable housing, developers have paid into this reserve which is used at the City Council’s discretion to provide alternate methods for the delivery of affordable housing for lower income households. 3. Park In Lieu: Per NBMC 19.52 and California Government Code Section 664777 (The 1975 “Quimby Act”), a dedication of land or payment of fees for park or recreational purposes in conjunction with residential development is required. The fees collected can only be used for specific park or recreation purposes as outlined in NBMC 19.52.030 and 19.52.070. 4. Upper Newport Bay Restoration Reserve: This reserve is the repository for funds mandated by SB573, as well as special fees charged to permit holders as an alternative to meeting certain specified mitigation criteria. In addition to the mitigation fees, ten percent (10%) of Beacon Bay lease revenue is placed in this Reserve. Funds in the Reserve are restricted for Upper Newport Bay restoration projects. F-2 4 5. Permanent Endowment for Bay Dredging: The endowment also specifies that the interest earnings on the principal amount can only be used for dredging projects in the Newport Bay. 6. Permanent Endowment for Ackerman Fund: The endowment also specifies that the interest earnings on the principal amount can only be used for scholarships provided by the City and high-tech library equipment. 7. Oceanfront Encroachment Reserve: In the early 1990’s, it was discovered by survey that improvements to several ocean front parcels were encroaching onto the public beach. The encroachment was relatively minor. The negotiated solution was for the property owners to pay a permit fee each year to the City. Revenue thus generated may only be used for ocean front restoration projects and incidental costs of improvements and maintenance to enhance public access and use of ocean beaches as approved by the City Council. This Reserve is the repository for those funds. City Council Policy L- 12 contains additional background and details about the encroachment issue The external restriction on this balance is imposed by the Local Coastal Plan (LCP). Cable FranchisePublic Education and Government (PEG) Revenues: PEG revenues are externally are externally restricted by the California Digital Infrastructure and Video Competition Act of 2006 (DIVCA), which allows the City, by ordinance, to require holders of video franchises issued by the State consistent with DIVCA to pay the City 1% of the franchise holder's gross revenues to be used by the City for PEG purposes. The City codified the 1% PEG revenue requirement in Newport Beach Municipal Code section 5.43.030(B). PEG revenues can only be used for capital costs required to be incurred by the cable operator for public, educational, or governmental access facilities. Pursuant to the provisions of the Newport Beach Municipal Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in return for the use of the City’s streets and public ways for the purpose of installing, operating, maintaining, or reconstructing a cable system to provide cable service, fees are collected by the City from cable providers. Those fees are to be used by the City for support of Public, Education, and Government access programming only. 8. C. Committed fund balance: That portion of a fund balance that includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action by the government’s highest level of decision making authority, and remain binding unless removed in the same manner. The City considers a resolution to F-2 5 constitute a formal action for the purposes of establishing committed fund balance. The action to constrain resources must occur within the fiscal reporting period; however, the amount can be determined subsequently. City Council imposed Commitments are as follows: 1. Facilities Financial Planning (FFP) Fund: In conjunction with the City’s Facilities Financial Plan, a sinking fund has been established to amortize the cost of critical City facilities such as, but not limited to, the Civic Center, Police Department buildings, Fire Stations, Library Branches and other Facility Improvement Projects. The Facilities Financial Planning Program establishes a level charge to the General Fund that will perpetually replenish the cash flows necessary to finance the construction of critical City facilities. This plan will be updated annually as part of the budget process, or as conditions change. The City shall strive to maintain fund balance in the Facilities Financial Planning Reserve Fund at a level equal to or greater than the maximum annual debt service on existing obligations. The eligible uses of this reserve include the cash funding of public facility improvements or the servicing of related debt. See Council Policy F-28. 2. Off Street Parking: Per NBMC 12.44.025 the City Council may direct revenues into the off-street parking facilities fund for purposes of the acquisition, development and improvement of off street parking facilities, and for any expenditures necessary or convenient to accomplish such purposes. 3. In Lieu Parking: Per NBMC 12.44.125 the City requires commercial businesses to provide adequate off-street parking or where this is not possible, businesses are afforded the opportunity to pay an annual fee and use parking spaces in a municipal lot, providing such a lot is located within specified proximity to the business. These funds can only be used to provide additional parking. 4. Neighborhood Enhancement - A: Funds previously accumulated to Neighborhood Enhancement Area “A” pursuant to a prior version of NBMC 12.44.027 shall continue to be used only for the purpose of enhancing and supplementing services to the West Newport area. Both the nature of the supplemental services and the definition of the area served are set forth in NBMC 12.44.027. 5. Neighborhood Enhancement - B: Funds previously accumulated to Neighborhood Enhancement Area “B” pursuant to a prior version of NBMC F-2 6 12.44.027 shall continue to be used only for the purpose of enhancing and supplementing services in the Balboa Peninsula. Both the nature of the supplemental services and the definition of the area served are set forth in NBMC 12.44.027. 6.1.Cable Franchise: Pursuant to the provisions of the Newport Beach Municipal Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in return for the use of the City’s streets and public ways for the purpose of installing, operating, maintaining, or reconstructing a cable system to provide cable service, fees are collected by the City from cable providers. Those fees are to be used by the City for support of Public, Education, and Government access programming only. 7.4.Oil and Gas Reserve: The annual $40,000 which is being set aside from the oil and gas field production revenues is to be used to fund abandoned wells and facilities as they go out of service. 8.5.Capital Reappropriation: This reserve represents an administrative procedure that recognizes a portion of fund balance is not readily available to fund new endeavors because it has been reappropriated through the budget adoption process or amendment process. D. Assigned fund balance: That portion of a fund balance that includes amounts that are constrained by the City’s intent to be used for specific purposes but that are not restricted or committed. This policy hereby delegates the authority to the City Manager or designee to modify or create new assignments of fund balance. Constraints imposed on the use of assigned amounts may be changed by the City Manager or his designee. Appropriations of balances are subject to Council Policy F-3 concerning budget adoption and administration. E. Unassigned fund balance: 1. Contingency Reserve: The Contingency Reserve shall have a target balance of twenty five percent (25%) of General Fund “Operating Budget” as originally adopted. Operating Budget for this purpose shall include current expenditure appropriations and shall exclude Capital Improvement Projects and Transfers Out. Appropriation and/or access to these funds are generally reserved for emergency or unforeseen situations but may be accessed by Council by simple budget appropriation. Examples may include but are not limited to the following: a. A catastrophic loss of critical infrastructure. F-2 7 b. A State or Federally declared state of emergency. c. Any settlement arising from a claim or judgment. d. Deviation from budgeted revenue projections. e. Any action by another government that eliminates or shifts revenues from the City. f. Inability of the City to meet its debt service obligations in any given year. g. Other circumstances deemed necessary by City Council to meet the claims and obligations of the City. g.h. Advanced or accelerated strategic funding of the City’s Unfunded Actuarial Liability obligation in order to avoid higher long-term interest cost or other events necessitating the use of reserves to meet our pension obligation. No more that 40% of this reserve shall be allocated to pension obligation mitigation efforts. Should the Contingency Reserve be used, the City Manager shall present a plan to City Council to replenish the reserve within five years. 2. Residual Fund Balance: The residual portion of available fund balance that is not otherwise restricted, committed or assigned and is above and beyond the Contingency Reserve target reserve balance. PROPRIETARY FUND RESERVES (NET WORKING CAPITAL) In the case of Proprietary Funds (Enterprise and Internal Service Funds), Generally Accepted Accounting Principles (“GAAP”) does not permit the reporting of reserves on the face of City financial statements. However, this does not preclude the City from setting policies to accumulate financial resources for prudent financial management of its proprietary fund operations. Since proprietary funds may include both long-term capital assets and long-term liabilities, the most comparable measure of liquid financial resources that is similar to fund balance in proprietary funds is net working capital which is the difference between current assets and current liabilities. For all further references to reserves in Proprietary Funds, Net Working Capital is the intended meaning. F-2 8 A. Water Enterprise Fund 1. Stabilization and Contingency Reserve: This Reserve is used to provide sufficient funds to support seasonal variations in cash flows and in more extreme conditions, to maintain operations for a reasonable period of time so the City may reorganize in an orderly manner or effectuate a rate increase to offset sustained cost increases. The intent of the Reserve is to provide funds to offset cost increases that are projected to be short-lived, thereby partially eliminating the volatility in annual rate adjustments. It is not intended to offset ongoing, long-term pricing structure changes. The target level of this reserve is fifty percent (50%) of the annual operating budget. This reserve level is intended to provide a reorganization period of 6 months with zero income or 24 months at a twenty-five percent (25%) loss rate. The City Council must approve the use of these funds, based on City Manager recommendation. Funds collected in excess of the Stabilization reserve target would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the infrastructure system occur, the Stabilization and Contingency Reserve may be called upon to avoid disruption to water distribution. 2. Infrastructure Replacement Funding Policy: This funding policy is intended to be a temporary repository for cash flows associated with the funding of infrastructure replacement projects provided by the Water Master Plan. The contribution rate is intended to level-amortize the cost of infrastructure replacement projects over a long period. The annual funding rate of the Water Master Plan is targeted at an amount that, when combined with prior or future year contributions, is sufficient to provide for the eventual replacement of assets as scheduled in the plan. This contribution policy is based on the funding requirements of the most current Water Master Plan. The City should maintain a capital reserve equal to at least two years’ worth annual capital contributions available in reserve for emergency repairs or unanticipated delays in water rate implementation. Water rates should be studied at least every 5 years and as major updates to the Water Master Plan occur. 2. There are no minimum or maximum balances contemplated by this funding policy. However, the contributions level should be reviewed periodically or as major updates to the Water Master Plan occur. Annual funding is contingent on many factors and may ultimately involve a combined strategy of cash funding and debt issuance with the intent to normalize the burden on Water customer rates. F-2 9 3. Wastewater Enterprise Fund 4. Stabilization and Contingency Reserve: This Reserve is used to provide sufficient funds to support seasonal variations in cash flows and in more extreme conditions, to maintain operations for a reasonable period of time so the City may reorganize in an orderly manner or effectuate a rate increase to offset sustained cost increases. The intent of the Reserve is to provide funds to offset cost increases that are projected to be short-lived, thereby partially eliminating the volatility in annual rate adjustments. It is not intended to offset ongoing, long-term pricing structure changes. The target level of this reserve is fifty percent (50%) of the annual operating budget. This reserve level is intended to provide a reorganization period of 6 months with zero income or 24 months at a twenty-five percent (25%) loss rate. The City Council must approve use of these funds, based on City Manager recommendation. Funds collected in excess of the Stabilization reserve target would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the infrastructure system occur, the Stabilization and Contingency Reserve may be called upon to avoid disruption to wastewater service. 5. Infrastructure Replacement Funding Policy: This funding policy is intended to be a temporary repository for cash flows associated with the funding of infrastructure replacement projects provided by the Wastewater Master Plan. The contribution rate is intended to level-amortize the cost of infrastructure replacement projects over a long period of time. The annual funding rate of the Wastewater Master Plan is targeted at an amount that, when combined with prior or future year contributions, is sufficient to provide for the eventual replacement of assets as scheduled in the plan. This contribution policy should be updated periodically based on the most current Wastewater Master Plan. The City should maintain a capital reserve equal to at least two years’ worth annual capital contributions available in reserve for emergency repairs or unanticipated delays in wastewater rate implementation. There are no minimum or maximum balances contemplated by this funding policy. However, the contributions levelWastewater rates should be studied should be reviewed periodically at least every 5 years and or as major updates to the Wastewater Master Plan occur. Annual funding is contingent on many factors and may ultimately involve a combined strategy of cash funding and debt issuance with the intent to normalize the burden on Wastewater customer rates. 5. B. Internal Service Funds F-2 10 Background. Internal Service Funds are used to centrally manage and account for specific program activity in a centralized cost center. Their revenue generally comes from internal charges to departmental operating budgets rather than external revenue sources. They have several functions. --They work well in normalizing departmental budgeting for programs that have life-cycles greater than one year; thereby facilitating level budgeting for expenditures that will, by their nature, be erratic from year to year. This also facilitates easier identification of long term trends. --They act as a strategic savings plan for long-term assets and liabilities. --From an analytical standpoint, they enable appropriate distribution of city-wide costs to individual departments, thereby more readily establishing true costs of various operations. Since departmental charges to the internal service fund duplicate the ultimate expenditure from the internal service fund, they are eliminated when consolidating entity-wide totals. The measurement criteria, cash flow patterns, funding horizon and acceptable funding levels are unique to each program being funded. Policy regarding target balance and/or contribution policy, gain/loss amortization assumption, source data, and governance for each of the City’s Internal Service Funds is set forth as follows: 1. For all Internal Service Funds: The Finance Director may transfer part or all of any unencumbered fund balance between the Internal Service Funds provided that the withdrawal of funds from the transferred fund would not cause insufficient reserve levels or insufficient resources to carry out its intended purpose. This action is appropriate when the decline in cash balance in any fund is precipitated by an off-trend non-recurring event. The Finance Director will make such recommendations as part of the annual budget adoption or through separate Council action. 2. Equipment Maintenance Fund and Equipment Replacement Fund: The Equipment Maintenance and Replacement Funds receive operating money from the Departments to provide equipment maintenance and to fund the regular replacement of major pieces of equipment at their economic obsolescence. Equipment includes but is not limited to vehicles, information technology (IT) F-2 11 software and infrastructure, parking infrastructure, and certain safety and recreation equipment (mostly vehicles) at their economic obsolescence. a. Equipment MaintenanceOperations Funds: The Equipment and IT Operations Maintenance Funds acts solely as a cost allocation center (vs. a pre-funding center) and is are funded on a pay-as-you-go basis by internal departmental maintenance charges by vehicle type andbased on usage requirementservice consumption. Because of this limited function, the target year-end balance is zero. Contribution rates (departmental charges) are set to include the direct costs associated with maintaining the City vehicle fleetservicing department needs, including fleet maintenance employee salary and benefits, operating expenses and maintenance related capital outlays. Administrative overhead and maintenance facility improvements and replacement costs are to be provided outside of this cost unit.Governance is achieved through annual management adjustment of contribution rates on the basis of maintenance cost by vehicle and distribution of costs based on fleet use by departmentservice utilization. b. Equipment Replacement Fund: Operating Departments are charged annual amounts sufficient to accumulate funds for the replacement of vehicles, communications equipment, parking equipment and other equipment replacement determined appropriate by the Finance Director. The City Manager recommends annual rate adjustments as part of the budget preparation process. These adjustments are based on pricing, future replacement schedules and other variables. The age and needs of the equipment inventory vary from year to year. Therefore, the year-end fund balance will should fluctuate in direct correlation to accumulated depreciation. In general, it will increase in the years preceding the scheduled replacement of relatively large percentage of the equipment, on a dollar value basisand decline in years where equipment is purchased. However, rising equipment costs, dissimilar future needs, replacing equipment faster than their expected life or maintaining equipment longer than their expected life all contribute to variation from the projected schedule. Target funding levels shall be determined by the Finance Director after considering the age, expected life and cash flow anticipated by the replacement equipment being funded. If departmental replacement charges for equipment prove to be excessive or insufficient with regard to this target funding level, new rates established during the next budget cycle will be F-2 12 adjusted with a view toward bringing the balance back to the target level over a three-year period. 3. Insurance Reserve Funds: The Insurance Reserve funds account for the activities of general liability and workers’ compensation claims. Background. The City employs an actuary to estimate the liabilities associated with the general liability and workers compensation activities. The costs typically associated with these programs include: claims administration, legal defense, insurance premiums, self-insured retention and the establishment of appropriate loss reserves including “incurred-but-not reported” (IBNR) claims. In a prescribed measurement methodology, the Actuary estimates the liabilities in conformity with Generally Accepted Accounting Principles (GAAP). The Actuary refers to this measurement level in his their report as the “Expected Level.” However, because actuarial estimates are subject to significant uncertainties, actuaries typically recommend that a target funding level be set at an amount in excess of expected liability as a margin to cover contingenciesadverse deviation from expected results. A typical target funding level would be set to obtain a specified confidence level (the percent chance that resources set-aside will be sufficient to cover existing claims). Full funding of the Actuary’s “Target Funding Level” establishes a seventy-five percent (75%) confidence there will be sufficient resources (including projected interest) to pay the full amount of existing claims without future contributions. Funding at the “Expected Level” produces a confidence level of only fifty percent to sixty-five percent (50%-65%). Therefore, the target funding of insurance reserves should exceed the “Expected Level” to account for adverse estimate deviation. Policy & Practice. The City should target funding of its risk management obligations at not less than the Expected Level, described above; and not more than an amount sufficient to establish a seventy-five percent (75%) Confidence Level. Actuarial losses should be recovered over a rolling 3-year basis while actuarial gains should be amortized over a rolling 5-year basis. As part of the operating budget, each department will be charged a rate equal to its proportionate share of the total “revenue” required to fund the Insurance Reserve Fund at this level. F-2 13 To lessen the impact of short-term annual rate change fluctuation, City management may implement one-time fund transfers (rather than department rate increases) when funding shortfalls appear to be due to unusually sharp and non-recurring factors. Excess reserves in other areas may be transferred to the internal service fund in these instances but such transfers should not exceed the funding necessary to reach a seventy-five (75%) confidence level intervalfor worker’s compensation claims and eighty-five (85%) for general liability claims. 4. Compensated Absences Fund: Background. The primary purpose of flex leave, vacation leave and sick leave is to provide compensated time off as appropriate and approved. However, under certain circumstances, typically at separation from service, some employees have the option of receiving cash-out payments for some accumulated leave balances. The Compensated Absences Fund is utilized primarily as a budget smoothing technique for any such leave bank liquidations. The primary purpose of the Compensated Absences Fund is to maintain a balance sufficient to facilitate this smoothing. Policy and Practice. The contribution rate will be set to cover estimated annual cash flows based on a three-year trailing average. The minimum cash reserve should not fall below that three-year average. The maximum cash reserve should not exceed fifty percent (50%) of the long term liability. The target cash reserve shall be the median difference between the minimum and maximum figures. Each department will make contributions to the Compensated Absences Fund through its operating budget as a specified percentage of salary. The Finance Director will review and recommend adjustments to the percentage of salary required during the annual budget development process. This percentage will be set so as to maintain the reserve within the parameters established above. 5. Post Retirement Funding Policies: a. Pension Funding: F-2 14 (i) California Public Employees Retirement System (CalPERS): The City’s principal Defined Benefit Pension program is provided through contract with CalPERS. The City’s contributions to the plan include an actuarially determined employer contribution that fluctuates each year based on an annual actuarial plan valuation. This variable rate employer contribution includes the normal cost of providing the contracted benefits plus or minus an amortization of plan changes and net actuarial gains and losses since the last valuation period. It is the City’s policy to make contributions to the plan equaling at least one hundred percent (100%) of the actuarially required contribution (annual pension cost). Because the City pays the entire actuarially required contribution each year, by definition, its net pension obligation at the end of each year is $0. Any unfunded actuarial liability (UAL) is amortized and paid in accordance with the actuary’s funding recommendations. The City will strive to maintain its UAL within a range that is considered acceptable to actuarial standards. The City Council shall consider increasing the annual CalPERS contribution should the UAL status fall below acceptable actuarial standards. (ii) Laborer’s International Union of North America (LIUNA): The City provides funds to support a supplemental pension plan for some employee associations through contract with LIUNA. This is funded at a fixed percentage of total compensation on a pay-as-you-go basis. The City is not contractually required to guarantee the level of the ultimate LIUNA benefit to retirees, nor does it do so. Therefore the City’s liability for this program is full funded each year. b. Other Post Employment Benefits (OPEB Funding): Background. The City’s OPEB funding obligations consists of two retiree medical plans. New Plan. Effective January 2006, the City and its employee associations agreed to major changes to the Post Employment Healthcare Plan. New employees and all current employees participate in a program that requires certain defined employee and employer contributions while the employee is in active service. However, once the contributions have been made to the employee’s account, the City has transferred a substantial portion of the funding risk to the employee. F-2 15 Old Plan. Eligible employees who retired prior to the “New Plan” and certain active employees were eligible to continue to receive post-retirement medical benefits (a defined benefit plan). The cost was divided among the City, current employees and retirees. In the past, this program was largely funded on a pay-as-you-go basis, so there was a significant unfunded liability. Recognizing this problem, the City began contributing to this obligation in 2001. In 2008, these assets were placed in a pre-funding trust. The City’s intention is to amortize the remaining unfunded liability within 20 years. Policy & Practice. New Plan. Consistent with agreements between the City and Employee Associations, the new defined contribution plan will be one hundred percent (100%) funded, on an ongoing basis, as part of the annual budget process. Funds to cover this expenditure will be contained within the salary section of each department’s annual operating budget. Old Plan. The City’s policy is to pre fund the explicit (cash subsidy) portion of the Actuarial Accrued Liability (AAL) of the remnants of the old plan over a 20-year amortization period, or less. This amount will be based on the Annual Required Contribution (ARC) determined by a biennial actuarial review; subject to review and analysis by the City. The City will strive to maintain a funded status that will be within a range that is considered acceptable to actuarial standards. The City Council shall consider increasing the annual OPEB contribution should the funded status fall below acceptable actuarial standards. Adopted - January 24, 1994 Amended - April 10, 1995 Amended - April 27, 1998 Amended - March 14, 2000 Amended – May 8, 2001 Amended – April 23, 2002 Amended – April 13, 2004 Amended – September 15, 2008 Amended – November 12, 2008 Amended – May 24, 2011 Amended – September 27, 2011 Amended – May 14, 2013 Amended – June 10, 2014 Amended – May 12, 2015 ATTACHMENT B Funding Status of Key Reserves General Fund Contingency Reserve 2015 2016 Contingency Reserve Cash Balance 41,314,870 45,763,058 Target Reserve Level (25% of General Fund Operating Budget)41,169,310 45,763,058 Percentage of Target Funded 100%100% Facilities Financial Planning (FFP) Reserve 2015 2016 Unrestricted Fund Balance 10,387,218 13,680,787 Maximum Annual Debt Service 8,194,455 8,175,115 Percentage of Target Funded 127%167% Facilities Maintenance Reserve 2015 2016 Unrestricted Fund Balance 10,387,218 13,680,787 Maximum Annual Debt Service 8,194,455 8,175,115 Percentage of Target Funded 127%167% Bonded Debt Management (F-6)2015 2016Debt Service as % of General Fund Revenues 4.4%4.1%Target Debt Service % of General Fund Revenues < 8%< 8% Water Stabilization and Contingecy Reserve 2015 2016Stabilization and Contingency Reserve 10,326,042 11,426,314 Target Funding Level (50% Operating Budget)10,243,775 10,688,762 Percentage of Target Funded 101%107% Water Infrastructure Reserves 2015 2016 Water Infrastructure Reserve 5,577,590 4,021,749 Historical Cost of Infrastructure 127,798,319 128,693,595 Accumulated Depreciation 46,114,705 47,810,395 Percentage of Depreciation Funded 6.8%5.0% Wastewater Stabilization and Contingency Reserve 2015 2016 Stabilization and Contingency Reserve 1,593,406 826,246 Target Funding Level (50% Operating Budget)1,724,716 1,914,083 Percentage of Target Funded 92%43% Wastewater Infrastructure Reserves 2015 2016 Wastewater Infrastructure Reserve 1,158,326 1,748,731 Historical Cost of Infrastructure 45,815,073 45,815,073 Accumulated Depreciation 16,396,751 17,005,826 Percentage of Depreciation Funded 7%10% Equipment Replacement Funding Status 2015 2016Reserve15,072,287 14,697,055 Accumulated Depreciation 17,833,010 18,989,542 Percentage of Depreciation Funded 85%77% General Liability (Claims & Judgments) Funding Status 2015 2016 Cash Reserve 8,839,330 7,591,783 Actuarial Target Funding Level (75% Confidence Level)9,195,383 8,931,470 Percentage of Actuarial Target Funded 96%85% Workers' Compensation Funding Status 2015 2016Cash Reserve 16,291,919 16,119,333 Maximum (Actuarial Target Funding Level (75% Confidence Level))16,820,000 16,673,000 Percentage of Actuarial Target Funded 97%97% Compensated Absences Funding Status 2015 2016 Cash Reserve 3,906,183 3,994,379 Long Term Liability 8,848,400 9,045,949 Minimum Target Funding Level (3 yr Avg of Cash Flows)1,951,871 2,030,924 Maximum Target Funding Level (50% of Liabilities)4,424,200 4,522,975 Percentage of Max Target Funded 88%88% Pension 2014 2015Trust Assets 567,303,448 572,699,003 Long Term Liability 819,870,443 848,372,949 Unfunded Liability 252,566,995 275,673,946 Percentage of Liability Funded 69%68% OPEB 2015 2016Trust Assets 14,818,836 16,131,814 Long Term Liability 42,638,555 42,737,245 Unfunded Liability 27,819,719 26,605,431 Percentage of Liability Funded 35%38% Funding Status of Key Reserves CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5E March 16, 2017 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Finance Department Dan Matusiewicz, Finance Director (949) 644-3123, danm@newportbeachca.gov SUBJECT: REVIEW OF OTHER FINANCIAL POLICIES INCLUDING COUNCIL POLICY F-3 SUMMARY: The City Council Policy F-3 sets the standards for the preparation, adoption, and administration of the City’s annual budget. Staff is proposing two changes to the Policy that would require long-range financial planning in the preparation of the annual budget and the use of “multi-year” funds for CIP programming. Staff is also proposing the addition of a new pension and OPEB funding policy for which the elements are briefly outlined in this staff report. With the Committee’s comments and approval, staff can bring back a fully developed pension and OPEB policy proposal for consideration. RECOMMENDED ACTIONS: 1.) Review the draft changes to the Budget Adoption and Administration Policy F-3, suggest further changes as needed and recommend for submission to the City Council for final approval. 2.) Consider the elements of the proposed pension and OPEB funding policy and provide comment. DISCUSSION: The City Council Policy F-3 sets the standards for the preparation, adoption, and administration of the City’s annual budget. Staff is proposing two changes to the policy that would require long-range financial planning in the preparation of the annual budget and the use of “multi-year” funds for CIP programming. Review of Other Financial Policies Including Council Policy F-3 March 16, 2017 Page 2 Long-Term Financial Planning Recognizing the importance of long-term financial planning, staff is proposing to add the following section to Policy F-3: 1. Long-Term Financial Planning The City’s annual budget process involves determining the fiscal means to achieve the community’s highest priority needs. Strategic planning begins with determining the City’s fiscal capacity based upon long-term financial forecasts of recurring available revenues and expenditure projections. Each year, the Finance Department shall develop a Long-Term Financial Plan (LTFP) that forecasts operating expenditures and revenue for the General Fund over a ten to twenty-year period. The LTFP will be updated prior to the start of the annual budget process. The LTFP will identify issues that may challenge the continued financial health of the City, and the plan will identify possible solutions to those challenges. Revenue and expenditure decisions shall be made primarily from a long-term perspective where structural balance of the General Fund is a clear goal. The Finance Department is in the process of developing a Long-Term Fiscal Forecast Model. The model will be used to inform the development of the Fiscal Year 2017-2018 budget. In subsequent years, the model will be programmed and shared with the Finance Committee in advance of the budget development process. Multi-Year Funds The new integrated finance system has the functionality to track capital projects and grants more efficiently through the use of multi-year funds. Multi-year funds are funds that cross multiple fiscal years and are not budgeted on an annual basis. Capital improvement projects are generally large, complex and overlap multiple fiscal years. The assets they create will likely be required for decades of public use and they generally take multiple years to complete. Previously, incomplete projects had to be formally reappropriated by the City Council during the budget process or by separate Council action. This policy revision eliminates the formal reappropriation requirement by allowing capital project appropriations to remain across fiscal years until the project has been completed. Remaining appropriations for completed projects shall be closed and returned to fund balance for Council appropriation. Other Policies for Consideration Staff recommends that the City formally adopt a pension and OPEB funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner. To provide the desired degree of assurance, a pension funding policy would need to incorporate the following principles and objectives: • Contribute no less than 100 percent of actuarially determined contribution (ADC) annually. • Target funding at 100 percent of Actuarial Accrued Liability. • Analyze schedule of amortization bases each and every year. • Amortize ALL gains/losses no longer than a 20-year, closed period. • Rate smoothing phase-in no longer than five years, zero if possible. Review of Other Financial Policies Including Council Policy F-3 March 16, 2017 Page 3 • Dedicate a portion of surplus funds to accelerate payment on unfunded liabilities. • Establish a rate smoothing reserve or strategy to avoid phase-in periods and provide economic relief during recessionary cycles. We hope that you find the proposed financial policy revisions and proposals to be thoughtful and prudent tools for the governance of the City’s financial resources. Staff looks forward to discussing the elements of a pension and OPEB funding policy with the Committee in-depth. With the Committee’s comments and approval, staff can bring back a fully developed pension and OPEB policy proposal for consideration. Prepared and Submitted by: /s/ Steve Montano _____________________________ Steve Montano Deputy Finance Director Attachments: A Budget Adoption and Administration Policy F-3 (redline) B GFOA Core Elements of Pension Funding Policy ATTACHMENT A Budget Adoption and Administration Policy F-3 (redline) F-3 1 BUDGET ADOPTION AND ADMINISTRATION PURPOSE To establish the policy for the preparation, adoption, and administration of the City's Annual Budget. POLICY A. Budget Development. The City shall prepare and adopt an annual budget by June 30, of each year, as required by Section 1104 of the City Charter. The budget shall incorporate a results-based budgeting approach that allows the public and the City Council to prioritize City expenditures strategically aligned with core community values. City Council directs and controls the planned use of reserves through budget appropriation process. Appropriations for operating expenditures shall be balanced in relation to current revenue sources and will not over-rely on one- time revenue sources or reserves. This is not intended to limit the periodic use of financial resources that were accumulated over time for a specific project or purpose. The budget may be developed with one or more contingency plans to protect against volatile or unexpected events. When significant uncertainty exists concerning revenue volatility or threatening/pending obligations, the City Council and City Manager reserve the right to impose any special fiscal control measures, including a personnel hiring freeze, and other spending controls, whenever circumstances warrant. The City Council may authorize the use of Contingency reserves only during emergency situations as set forth by Council Policy F-3. 1. Long-Term Financial Planning The City’s annual budget process involves determining the fiscal means to achieve the community’s highest priority needs. Strategic planning begins with determining the City’s fiscal capacity based upon long-term financial forecasts of recurring available revenues and expenditure projections. Each year, the Finance Department shall develop a Long-Term Financial Plan (LTFP) that forecasts operating expenditures and revenue for the General Fund over a ten to twenty- F-3 2 year period. The LTFP will be updated prior to the start of the annual budget process. The LTFP will identify issues that may challenge the continued financial health of the City, and the plan will identify possible solutions to those challenges. Revenue and expenditure decisions shall be made primarily from a long-term perspective where structural balance of the General Fund is a clear goal. B. Organization of the Annual Budget. The Annual Budget is published in three volumes, the Performance Plan, the Budget Detail and the Capital Improvement Program (CIP). The Performance Plan provides an overview of each department’s mission, departmental programs, core functions, goals, work plan, budget and performance measures. It also provides summary information regarding the Capital Improvement Program, as well as summary information for budgeted and historical overall City revenues, expenditures, and fund balances. The Budget Detail provides historical trends of summary level information and contains line by line detail regarding operating expenditures for the prior year, current year and budget year. Operating expenditures are categorized into four classifications within the Operating Budget. These are Salaries and Benefits, Maintenance and Operations, Capital Outlay and Other Financing Uses. The CIP document provides a summary of current and future planned projects, basic descriptions of each project, the funding source and the scope of work to be performed. CIPs are generally major facility or infrastructure improvement projects managed by the Public Works Department. C. Budget Process. During December of each year, the Finance Department shall prepare updated revenue estimates and fund balance projections for the current year and prepare preliminary revenue projections for the next fiscal year. In January of each year, the Finance Department shall prepare a budget calendar and issue budget instructions to each department for use in preparation of the next year's City budget. Included in these instructions will be budget guidelines and F-3 3 appropriation targets for each department. These guidelines will be developed by the Finance Director and approved by the City Manager. After further refinements of revenue estimates and the completion of Department proposed expenditure appropriation requests, the Finance Departments will summarize department requests for review by the City Manager. After the City Manager has reviewed and amended the Department Head requests, the Finance Department shall prepare the City Manager’s proposed budget for the next fiscal year and shall submit it to the City Council. The City Council shall hold as many budget study sessions as it deems necessary. All proposed Council changes to the City Manager's proposed budget shall be itemized on a budget checklist of revisions. The City Council shall hold a budget hearing and adopt the proposed budget with any checklist revisions on or before June 30 by formal budget resolution. When adopted, the proposed budget along with the finalized checklist, become the final budget. F-3 4 D. Administration of the Annual Budget. During the budget year, Department Heads and their designated representatives may authorize only those expenditures that are based on appropriations previously approved by City Council action, and only from accounts under their organizational responsibility. Any unexpended appropriations, except valid encumbrances, expire at fiscal year end unless specifically reappropriated by the City Council for expenditure during the new fiscal year. Department Heads are responsible for not authorizing expenditures above budget appropriations in any given expenditure classification within their purview, without additional appropriation or transfer as specified below. Appropriations may be transferred, amended or reduced subject to the following limitations: 1. New Appropriations. During the Budget Year, the City Council may appropriate additional funds for special purposes by a City Council Budget Amendment. The City Manager has authority to approve requests for budget increases not to exceed $10,000 in any Budget Activity or Capital Project. (This must be specifically included in each year's Budget Resolution to remain valid.) 2. Grants & Donations. The City Manager may accept grants or donations of up to $30,000 on behalf of the City. However, if a new or additional appropriation is required, the City Manager’s authority to create new appropriations is limited to $10,000 as stated above. The City Council will be formally notified of such actions on a quarterly basis by way of the City Manager newsletter to the City Council. (This provision must be specifically included in each year's Budget Resolution to remain valid.) Additionally, grant appropriations approved by City Council may be carried forward to the following fiscal year(s) as long as the grant terms remain valid, the expenditures are consistent with the previous Council authorization, and the funds would otherwise need to be returned to the granting or donor agency. Also, see Council Policy F-25 for specific grant acceptance and administration procedures. Grant agreements and restricted donations in excess of $30,000 must be specifically approved by the City Council. Occasionally, the terms and conditions of a grant are approved by City Council in a year prior to when the program activity will take place and therefore, the funds are not F-3 5 appropriated to carry out the grant at that time. In such cases, the City Manager may appropriate the funds when they are received, provided the expenditures clearly meet the amount, terms, nature and intent of the grant or donation previously approved by City Council. 3. Assessment District Appropriation. Assessment district projects are typically funded by property owner contributions and bond financing secured by property assessments. City staff will initially seek appropriation to advance City resources for the assessment engineering and the design work related to a proposed assessment district. Since the City’s advance is at risk until a district is formed at a public hearing, the appropriation related to advanced resources shall be subject to the normal budget policies. However, once the district has been formed at a public hearing, the City Council will adopt a “project-length” budget for the district and City staff will be allowed to roll the appropriations forward into future fiscal years without rebudgeting the project through the formal CIP process. This will be accomplished through the use of Muli-Year Funds (see #7 below for definition of Multi-Year Funds). When assessment bonds are issued to finance the improvements, the bond issuance costs are estimated at the maximum amount that would be required to complete the improvements because it is not known how many property owners will opt to pay the assessment in full during the cash collection period. Finance staff will also have the authority to reduce Council appropriations (related to bond issuance costs) after bonds are resized and sold. 4. Transfers within Departments. During the fiscal year, actual expenditures may exceed budget appropriations for specific expenditure line items within departmental budgets. If a total departmental budget, within a specific Classification, is not exceeded, the Finance Director has the authority to transfer funds within that Classification and Department, to make the most efficient use of funds appropriated by the City Council (Salaries and Benefits, Maintenance and Operations, Capital Outlay and Other Financing Uses are the City’s four Classifications within the operating budget). 5. Transfers between Departments. Further, funds may be realigned between one Department and another, within the same Classification, with City Manager approval. For example, if a Fire Department function F-3 6 and the employee who accomplishes it are replaced by a slightly different function assigned to the Police Department, the City Manager may authorize the transfer of appropriate funds to support this function. 6. Transfers between Expenditure Categories. Any reprogramming of funds among the three Classifications (Salaries and Benefits, Maintenance and Operations, and Capital Outlay and Other Financing Sources) within a given fund requires the City Manager’s approval. Any budget revision that changes the total amount budgeted for any fund (other than the minor provisions contained in paragraphs C.1. and C.7.b.) must be approved by the City Council. 7. Transfers between Capital Improvement Projects (CIP) Appropriations and Transfers. Multi-Year Funds are funds that cross multiple fiscal years and are not budgeted on an annual basis. The City programs its Capital Improvement Program using Multi-Year Funds. Capital improvement projects are generally large, expensive, and complexcomplex and overlap multiple fiscal years. The assets they create will likely be required for decades of public use and they generally take multiple years to complete. Once the project appropriation is adopted All appropriations in Multi-Year Funds, the projects appropriation currently underway and shall remaining until the project has been completed. Uunexpended funds for incomplete projects at June 30 every year will automatically be reappropriated to the next fiscal year. Remaining appropriations for completed projects shall be closed and returned to fund balance for Council appropriation. Upon project completion, projects will be closed and any remaining funds will be returned to fund balance. Budget Transfers between Capital Improvement Projects shall be subject to the following parameters: a. Excess Project Appropriations or savings may be transferred to a “Project Savings Account,” within the same fund. Funds may be reappropriated to a new or existing project with the approval of City Council. Any appropriation balance remaining in the Project Savings account will lapse at Fiscal Year End. F-3 7 b. Excess Project Appropriations may also be transferred from one CIP project to another, provided that the projects utilize the same funding source and are for substantially the same project purpose and physical location. Project appropriation transfers of this nature require the approval of the City Manager. All proposed budget amendments and transfers will be submitted to the Finance Director for review and processing prior to City Manager or Council authorization. All unexpended and unencumbered appropriations will be canceled on June 30 of each fiscal year. Incomplete projects may be reappropriated by the City Council during the budget process or by separate Council action. E. Management Authorization & Responsibilities. . Once the final Budget has been approved by the City Council, specific City Council approval to make expenditures consistent with the Budget will not be required except as provided by other Council Policies and Administrative Procedures. It is the responsibility of the City Manager and management to administer the City’s budget within the framework of policy and appropriation as approved by the City Council. 1. The Finance Director is responsible for checking purchase requests against availability of funds and authorization as per the approved Budget. 2. Unless otherwise directed, routine filling of vacancies in staff positions authorized within the Budget, will not require further City Council approval. However, new positions, not addressed by the adopted budget, do require City Council approval. 3. At fiscal year end, the Finance Director is authorized to record accruals and transfers between funds and accounts in order to close projects or the books of accounts of the City of Newport Beach in accordance with generally accepted governmental accounting principles as established by the Government Accounting Standards Board, Government Finance Officers Association, and other appropriate accounting pronouncements. Any net shortage within a Fund will be recorded as a decrease in Fund Balance. Any net excess will be recorded as an increase to one or more appropriate Reserve Accounts as recommended by the Finance Director and approved by the City Manager or as is otherwise dictated by Council F-3 8 Reserve Policy (F-2). The net change in fund balances will be reported to City Council through various documents including Quarterly Financial Reports, the Comprehensive Annual Financial Report (CAFR), Budget Documents and other financial presentations. Funds that exceeded appropriations during the year or ended the year with a deficit fund balance are reported annually in the CAFR notes to the financial statements. (Information regarding the policy parameters and administration of City Reserves is contained in City Council Policy F-2.) Adopted - January 24, 1994 Amended - February 27, 1995 Corrected - February 26, 1996 Amended - May 13, 1996 Amended - May 26, 1998 Amended - August 8, 2000 Amended – May 8, 2001 Amended – April 23, 2002 Amended – April 8, 2003 Amended – April 13, 2004 Amended – September 13, 2005 Amended - October 10, 2006 Amended – August 11, 2009 Amended – September 27, 2011 Formerly F-10, F-11, F-12, and F-21 ATTACHMENT B GFOA Core Elements of Pension Funding Policy The American Academy of Actuaries is a 17,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and pro- fessionalism standards for actuaries in the United States. ©2012 The American Academy of Actuaries. All Rights Reserved. 1850 M Street NW, Suite 300, Washington, DC 20036 Tel 202 223 8196, Fax 202 872 1948 www.actuary.org Mary Downs, Executive Director Mark Cohen, Director of Communications Craig Hanna, Director of Public Policy Don Fuerst, Senior Pension Fellow David Goldfarb, Pension Policy Analyst The 80% Pension Funding Standard Myth An 80% funded ratio1 often has been cited in recent years as a basis for whether a pension plan is financially or “actuarially” sound. Left unchallenged, this misinformation can gain undue credibility with the observer, who may accept and in turn rely on it as fact, thereby establishing a mythic standard. This issue brief de- bunks that myth and clarifies how actuaries view funding levels for pension plans and how the funded ratio relates to the general idea of “soundness” or the “health” of a pension plan or system. The Pension Practice Council of the American Academy of Actuaries finds that while the funded ratio may be a useful measure, under- standing a pension plan’s funding progress should not be reduced to a single measure or benchmark at a single point in time. Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time2. What a Funded Ratio Is and Is Not The funded ratio of a pension plan equals a value of assets in the plan divided by a measure of the pension obligation. Confusion sometimes can result when the term “funded ratio” is used without a clear under- standing of how the pension obligation is measured or whether some MARCH 2009 American Academy of Actuaries JULY 2012 Key Points n Frequent unchallenged references to 80% funding as a healthy level threaten to create a mythic standard. n No single level of funding should be identified as a defining line between a “healthy” and an “unhealthy” pension plan. n Funded ratios are a point-in-time measurement. The movement or trend of the funded ratio is as important as the absolute level. n Most plans should have the objective of accumulating assets equal to 100% of a relevant pension obligation. n The financial health of a pension plan depends on many factors in addition to funded status—par- ticularly the size of any shortfall compared with the resources of the plan sponsor. 1Please see Appendix: Development and Sample Usage of the “80% Standard.” 2Only in unusual situations would a goal other than a 100% funded ratio be targeted. These might include nonqualified pension plans, legislated funding targets or special concerns that a plan sponsor has with setting aside assets equal to the full value of the pension obligation. Social insurance programs, particularly pay-as-you-go programs like Social Security, also do not have a goal of 100% advance funding. 2 ISSUE BRIEF JULY 2012 Members of the Pension Practice Council include: Noel Abkemeier, MAAA, FSA; Stephen Alpert, MAAA, FSA, FCA, MSPA, EA; Michael Bain, MAAA, ASA, EA; Janet Barr, MAAA, ASA, EA; Eli Greenblum, MAAA, FSA, EA – vice chairperson; William Hallmark, MAAA, ASA, EA; Kenneth Hohman, MAAA, FSA, FCA, EA; Evan Inglis, MAAA, FSA, EA; Ellen Kleinstuber, MAAA, FSA, EA; Eric Klieber, MAAA, FSA, EA; John Moore, MAAA, FSA, FCA, EA – chairperson; Nadine Orloff, MAAA, FSA, FCA, EA; Andrew Peterson, MAAA, FSA, EA; Jeffrey Petertil, MAAA, ASA, FCA; Michael Pollack, MAAA, FSA, EA; David Sandberg, MAAA, FSA, CERA; Tamara Shelton, MAAA, FSA, EA; John Steele, MAAA, FSA, EA; Thomas Terry, MAAA, FSA, EA; James Verlautz, MAAA, FSA, EA form of asset smoothing is being used. Actuar- ies use different methods to measure a pension obligation for different purposes. For example, the measurement of the obligation used to de- termine a contribution strategy is often different from the measurement used for financial report- ing or estimating settlement costs. The context for a funded ratio is important; but a detailed discussion of the various reasons for or methods used to measure different types of pension obli- gations is outside the scope of this brief. Actuarial funding methods generally are de- signed with a target of 100% funding—not 80%. If the funded ratio is less than 100%, contribu- tion patterns are structured with the objective of attaining a funded ratio of 100% over a reason- able period of time. While it is unclear when widespread use began, an 80% benchmark has appeared in re- search reports, legislative initiatives, and in the media as a dividing line between healthy and un- healthy plans. A 2007 Government Accountabil- ity Office (GAO) report on government pension plans identified 80% as a de facto standard, cit- ing experts without attribution. Subsequent uses of the 80% level often cite the 2007 GAO report. The Pension Protection Act of 2006 (PPA) limits benefit improvements, lump sum pay- ments, and use of the funding balances based on an 80% ratio of assets to the PPA funding target. Also under PPA, multiemployer plans use 80% as a level below which stricter funding rules become effective. As a final note, credit rat- ing agencies use various funded ratios, including 80%, as a general indicator of a public pension plan’s financial health. Identifying specific levels of funding as “too low” as PPA does is useful for some purposes (e.g., implementing benefit restrictions); but it does not follow that achieving or maintaining a funded ratio at some particular level should be considered healthy or adequate. A plan with a funded ratio above 80% (or any specific level) might not be sustainable if the obligation is ex- cessive relative to the financial resources of the sponsor, if the plan investments involve excessive risk, or if the sponsor fails to make the planned contributions. Just as being more than 80% funded does not assure a plan is adequately funded, a plan with a funded ratio below 80% should not necessar- ily be characterized as unhealthy without further examination. A plan’s actuarial funding method should have a built-in mechanism for moving the plan to the target of 100% funding. Provided the plan sponsor has the financial means and the commitment to make the necessary contribu- tions, a particular funded ratio does not neces- sarily represent a significant problem. In addition, the funded ratio is a measure of a plan’s status at one time. A plan that is responsi- bly funded easily can have its funded status vary significantly from one year to the next solely be- cause of external events. Funded ratios should be looked at over several years to determine trends and should be viewed in light of the economic situation at each time. Higher funded ratios are to be expected following periods of strong eco- nomic growth and investment returns such as at the end of the 1990s. Lower funded ratios are to be expected after recessions or years of poor investment returns such as the economic down- turn that began in 2008. Whether a particular shortfall affects the financial health of the plan depends on many other factors—particularly the size of the shortfall compared to the resourc- es of the plan sponsor. The funded ratio is most meaningful when viewed together with other relevant informa- tion. Other factors that might be considered in assessing the fiscal soundness of a pension plan include: n Size of the pension obligation relative to the financial size (as measured by revenue, assets, or payroll) of the plan sponsor. n Financial health (as measured by level of debt, cash flow, profit or budget surplus) of the plan sponsor. n Funding or contribution policy and ISSUE JULY MAY 2012 3 whether contributions actually are made according to the plan’s policy. n Investment strategy, including the level of investment volatility risk and the possible effect on contribution levels. Each of these factors should be examined over several years and in light of the economic environment. Plan sponsors experience a variety of circum- stances that could lead to funded levels that are less than 100% at any point. Volatile investment returns and interest rates, tight budgets, and benefit increases are some of the most important reasons why pension plans may be underfunded. The consequences of becoming underfunded in- clude larger future contribution requirements, less security for participant/member benefits, and the potential that the current cost of pension benefits may need to be paid by future stake- holders (e.g., shareholders or taxpayers). All of these risks can be managed through appropriate benefit, funding, and investment policies. Summary A funded ratio of 80% should not be used as a criterion for identifying a plan as being either in good financial health or poor financial health. No single level of funding should be identified as a defining line between a “healthy” and an “un- healthy” pension plan. All plans should have the objective of accumulating assets equal to 100% of a relevant pension obligation, unless reasons for a different target have been clearly identified and the consequences of that target are well un- derstood. APPENDIX: DEVELOPMENT AND SAMPLE USAGE OF THE “80% STANDARD” This appendix provides an overview of where use of the 80% funded “standard” has been ob- served, from academic to general media reports. Note that this is a small sample and by no means an exhaustive list and is provided for illustrative purposes only. References in academic and other research-based reports U.S. Government Accountability Office, State and Local Government Retiree Benefits— Current Status of Benefit Structures, Protections, and Fis- cal Outlook for Funding Future Costs, September 2007, http://www.gao.gov/assets/270/267150.pdf n “A funded ratio of 80% or more is within the range that many public sector experts, union officials, and advocates view as a healthy pension system.” Pew Research Report, The Trillion Dollar Gap— Underfunded state retirement systems and the roads to reform, February 2010, http://www.pew- states.org/uploadedFiles/PCS_Assets/2010/Trillion_Dol- lar_Gap_Underfunded_State_Retirement_Systems_ and_the_Roads_to_Reform.pdf n “Many experts in the field, including the U.S. Government Accountability Office, suggest that a healthy system is one that is at least 80% funded.” Stanford Institute for Economic Policy Research, More Pension Math: Funded Status, Benefits, and Spending Trends for California’s Largest Indepen- dent Public Employee Pension Systems, Feb. 21, 2012, http://www.cacs.org/images/dynamic/articleAt- tachments/7.pdf n “None of the systems is at or above 80% funded, which is the conventional mini- mum funded ratio.” n “A plan is typically considered well-funded if its funded ratio is greater than 80%…” Legislative references Description of New Jersey pension legislation passed in 2011, http://blogs.app.com/capitolquickies/ files/2011/06/S-2937-Summary-revised.pdf n “In addition, these changes allow all pen- sion systems to reach an 80% funding ratio, which is the ERISA and Govern- ment Accountability Office standard for a healthy pension system.” General media references Connecticut Gov. Dan Malloy quoted in January 2012 online report, http://connecticut.onpolitix.com/ news/97016/gov.-talks-about-employee-pension-fund n “We need to be fiscally strong, we need to repair the damage that has been done by successive administrations in this state,” [Connecticut Governor] Malloy said. “It is no honor to have the worst funded pen- sion program in the country.” 4 ISSUE BRIEF JULY 2012 Malloy continued on to say, “What I actu- ally aspire to is getting to an 80% funding as rapidly as we can and the fact that we can do that and save the taxpayers $6 bil- lion is pretty important.” Bloomberg, “Texas Teacher Pension Needs 21% Return to Keep 80% Funded Ratio,” April 19, 2011, http://www.bloomberg.com/news/2011-04-19/ texas-teacher-pension-needs-21-return-to-keep-80-fund- ed-ratio.html n “The Teacher Retirement System of Texas needs an annual return of 21% in the year ending Aug. 31 to maintain an 80% funded ratio, the level actuaries con- sider adequate to cover liabilities, said its deputy director.” Gerri Willis, “Pension Bust,” Fox Business, March 16, 2012, http://www.foxbusiness.com/on-air/ willis-report/blog/2012/03/16/pension-bust n Typically a pension plan is considered healthy if it meets an 80% funded bench- mark. Credit rating agencies Standard & Poor’s, “U.S. State Ratings Method- ology,” Global Credit Portal, Jan. 3, 2011, http:// www.standardandpoors.com/prot/ratings/articles/en/us/ ?articleType=HTML&assetID=1245320477069 Pension Funded Ratio Strong 90% or above Above Average 80% to 90% Below Average 60% to 80% Weak 60% or below Fitch Ratings, “Enhancing the Analysis of U.S. State and Local Government Pension Obliga- tions,” Feb.17, 2011, http://www.ncpers.org/ Files/2011_enhancing_the_analysis_of_state_ local_government_pension_obligations.pdf n “Fitch generally considers a funded ratio of 70% or above to be adequate and less than 60% to be weak, while noting that the funded ratio is one of many factors considered in Fitch’s analysis of pension obligations.” Online commentary on “80% Standard” Girard Miller, “Pension Puffery—Here are 12 half-truths that deserve to be debunked in 2012,” Jan. 5, 2012, http://www.governing.com/columns/pub- lic-money/col-Pension-Puffery.html n “Half-truth #4: “Experts consider 80% to be a healthy funding level for a public pension fund.” This urban legend has now invaded the popular press, so it’s about time somebody set the record straight. No panel of experts ever made such a pro- nouncement. No reputable and objective expert that I can find has ever been quot- ed as saying this. What we have here is a classic myth. People refer to one report or another to substantiate their claim that some presumed experts actually made this assertion (including a GAO report and a Pew Center report that both cite unidenti- fied experts), but nobody actually names these alleged “sources.” Like UFOs, these “experts” are always unidentified. That’s because they don’t actually exist. They can’t exist, because the pension math and 80 years of data from capital markets his- tory just don’t support these unsubstanti- ated claims.” Keith Brainard and Paul Zorn, “What is the source of the 80-percent threshold as a healthy or minimum funding level for public pension plans?” January 2012, http://www.wikipension.com/ images/0/0a/80_percent_funding_threshold.pdf n “Recently, some have challenged the idea that an 80% funding level is a healthy level for public pension plans and have asked about the origins of such statements. Based on our research, the use of 80% as a healthy or minimum public pension funding level seems to have its genesis in corporate plans, for which it was a statu- tory threshold. This standard was also applied to private sector multiemployer plans.” CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Newport Coast Conference Room, Bay 2E Thursday, June 1, 2017 - 3:00 PM Finance Committee Members: Diane Dixon, Chair / Council Member Kevin Muldoon, Mayor Will O'Neill, Council Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, Committee Member Larry Tucker, Committee Member Staff Members: Dave Kiff, City Manager Carol Jacobs, Assistant 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 June 1, 2017 Page 2 Finance Committee Meeting MINUTES OF MAY 11, 2017A. Recommended Action: Approve and file. DRAFT MINUTES 060117 V.CURRENT BUSINESS REVIEW OF FISCAL YEAR 2017-2018 PROPOSED BUDGETA. Summary: The Committee shall continue its discussion of the Fiscal Year 2017-2018 budget and forward any recommendations to City Council. Recommended Action: Review, comment on, and offer suggestions about City Manager proposed Fiscal Year 2017-2018 Operating and Capital Budget. PENSION DISCUSSIONB. Summary: Agenda item reserved for any discussion regarding the status of the City's pension liability and/or the proposed budgetary pension funding approach. Recommended Action: Review and comment on discussion as necessary. REVIEW OF FINANCE COMMITTEE WORK PLANC. Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Review and comment. 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 May 11, 2017 Page 1 of 7 CITY OF NEWPORT BEACH FINANCE COMMITTEE MAY 11, 2017 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Council Member Diane Dixon (Chair), Committee Member William Collopy, Committee Member Patti Gorczyca, Council Member Will O’Neill, and Committee Member Larry Tucker ABSENT (EXCUSED): Mayor Kevin Muldoon and Committee Member Joe Stapleton STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Deputy City Manager Rob Houston, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Budget Manager Susan Giangrande, Purchasing Agent Anthony Nguyen, Public Works/Finance Administrative Manager Jaime Copeland, Interim Fire Chief Chip Duncan, Accounting Manager Rukshana Virany, Budget Analyst, Shannon Espinoza, Fire Administrative Manager Angela Velazquez, Public Works Director Dave Webb, Budget Analyst Tam Ho, Budget Analyst Katherine Warnke-Carpenter, and Administrative Specialist Teri Craig III. PUBLIC COMMENTS None. IV. CONSENT CALENDAR A. MINUTES OF APRIL 27, 2017 Recommended Action: Approve and file. Discussion ensued regarding accuracy of minutes and whether they should be verbatim or action type minutes. Chair Dixon stated the burden was on each member to ensure their comments were accurately reflected. MOTION Committee Member Gorczyca moved and Committee Member Tucker seconded a motion to approve the corrected minutes of April 27, 2017. The motion carried 4-1-2, Council Member O'Neill abstaining and Committee Member Stapleton and Mayor Muldoon absent. V. CURRENT BUSINESS A. REVIEW OF FISCAL YEAR 2017-2018 PROPOSED BUDGET Summary: Staff will provide an overview of the Proposed Fiscal Year 2017-2018 Operating Budget and/or CIP. Recommended Action: Finance Committee Meeting Minutes May 11, 2017 Page 2 of 7 Review and comment on City Manager recommendations and Finance Committee’s desired next steps. City Manager Kiff presented highlights of the revenues in various categories. In response to Council Member O'Neill, City Manager Kiff stated the parking lot at Corona del Mar was owned by State Beaches. In response to Chair Dixon, Budget Manager Giangrande explained a revenue title referring to mobile home space rentals, Account 551052. Council Member O'Neill requested clarification on property transfer tax. Finance Director/Treasurer Matusiewicz clarified the revenue source was a documentary excise tax, not a true property tax and indicated it would be moved into other taxes. City Manager Kiff discussed Page R1 and the year over year comparison. Council Member O'Neill asked how the Transient Occupancy Tax (TOT) was projected. Finance Director/Treasurer Matusiewicz stated the impact on revenue was a developing topic that was being watched. Council Member O'Neill suggested the anticipated TOT revenue was overly optimistic. Finance Director/Treasurer Matusiewicz agreed but stated that revenue estimates, in their entirety, were generally conservative. Chair Dixon discussed a recent meeting at which hotel trends were discussed. Finance Director/Treasurer Matusiewicz stated he attended the Board meetings at which he would receive information from hotel general managers. He stated staff would be watching TOT closely and a midyear budget adjustment could be made if necessary. Deputy Finance Director Montano discussed his review of tax receipts in preparation of the budget. City Manager City Manager Kiff stated staff continually reviewed the numbers. Committee Member Collopy asked if it would be prudent to take a $2-4 million discount on revenues. City Manager Kiff stated that was not unreasonable but could be doubling up with the 25 percent contingency reserve. Committee Member Collopy suggested a revenue reserve. City Manager Kiff discussed means of reducing costs if the revenues were not as anticipated. Committee Member Tucker stated the City was in a good position and was not in need of reducing payroll. Committee Member Collopy suggested the cost reserve be managed more tightly. Council Member O'Neill discussed the impact on the unfunded pension liability if the City were to place funds in a revenue reserve. He asked how fee based classes doubled. Budget Manager Giangrande stated part of the $900,000 was from Marina Park. Budget Analyst Ho stated a portion was reallocated to other divisions and included boating. In response to Chair Dixon, Council Member O'Neill explained that a revenue reserve could be established or the pension payment reduced. Finance Director/Treasurer Matusiewicz acknowledged the travel ban’s potential effect on tourism, as well as the e-commerce impact on brick and mortar retail sales tax. Committee Member Collopy stated he mentioned the possibility of a revenue reserve to start the discussion, which had occurred. He discussed the recognized risk to revenue. Finance Director/Treasurer Matusiewicz stated the work plan included a future sensitivity analysis on the revenues, as part of sizing reserve policies. Finance Committee Meeting Minutes May 11, 2017 Page 3 of 7 Committee Member Gorczyca discussed the inclusion in the work plan of a global review of reserves to identify exposures, necessary protection levels and use of insurance. City Manager Kiff discussed the Tideland Fund, including mooring fees. In response to Committee Member Collopy, City Manager Kiff explained the use of money and property. Committee Member Collopy stated the caption was unclear. City Manager Kiff reviewed special taxes and fund sources. Committee Member Tucker asked for more information on the $5.4 million under Federal Highway Bridge Program, R-8. Public Works/Finance Administrative Manager Copeland discussed the $8 million grant for the bridge and estimated $5.4 million reimbursement. City Manager Kiff discussed revenue under R-10 including Newport Uptown and past developer fees. He explained the expenditure sections. Committee Member Collopy asked about the 10 percent increase on Police Patrol and Fire Operations. Budget Manager Giangrande explained the effect of increasing pension costs on police and fire department budgets In response to Committee Member Collopy, City Manager Kiff stated pension expenditures were included in salaries and benefits category of expenditures. Finance Director/Treasurer Matusiewicz stated the pension expenditures included the cost of the current period, amortization of unfunded liability and a net reduction for employee contributions. He explained the UAL and GASB Board opinion categorizing all pension expenditures a current expense, which he disagreed with. Committee Member Collopy suggested it not be included in the department budgets. Chair Dixon discussed transperancy.gov and the appearance of high salaries due to inclusion of unfunded liability. Committee Member Collopy expressed concern with inclusion of the unfunded liability in salaries & benefits. Committee Member Gorczyca discussed the bearing on operating reserve and total pension cost. In response to Chair Dixon, City Manager Kiff stated the amounts were broken down in the detail section. Committee Member Gorczyca stated the employee contribution was not visible. Finance Director/Treasurer Matusiewicz recounted a prior discussion a Governmental Accounting Standards Board member regarding the appropriateness of the Pension UAL’s classification as an expenditure of the current operating period. Committee Member Tucker stated the figures distorted the per capita salaries. Chair Dixon recommended requesting the process be changed. City Manager Kiff stated the transmittal letter explained the actual numbers. Finance Director/Treasurer Matusiewicz stated he would continue to lobby for a change to the current accounting standards. Council Member O'Neill discussed the transmittal letter and public facing information. In response to Council Member O'Neill, Budget Manager Giangrande explained D85, Traffic Division Benefits, including the cafeteria allowance, normal employee and employer pension Finance Committee Meeting Minutes May 11, 2017 Page 4 of 7 costs, required unfunded liability payment to PERs, and newly created discretionary UAL object codes. In response to Committee Member Collopy, Budget Manager Giangrande stated the UAL was prorated across departments. In response to Committee Member Collopy, Deputy Finance Director Montano stated a report could be generated to isolate the UAL. Committee Member Gorczyca stated some isolate a debt category for long term financial planning. Deputy Finance Director Montano stated the City had that. City Manager Kiff discussed the positions, salary, benefits, and specialty pay. He reviewed overtime pay and contracts. He summarized internal services including MOD and IT employees. Council Member O'Neill discussed a recent $500,000 Police expense and prior savings for that expense. City Manager Kiff discussed the debt service, CDBG and COP for the Civic Center. In response to Chair Dixon, Budget Manager Giangrande explained retiree medical, dental and vision costs. City Manager Kiff explained the process of preparing the budget and supplemental budget requests. In response to Chair Dixon, Finance Director/Treasurer Matusiewicz explained the Park in Lieu Funds generated from new development. City Manager Kiff reviewed the fund balance tabs including reserves, non-spendable, restricted, committed and $47.5 million for emergency use to be decided by the Council. Committee Member Collopy stated he did not have an issue with a 25 percent reserve. City Manager Kiff discussed the possibility of a 115 Trust. Committee Member Gorczyca stated it was necessary to determine the reserve protection needs. In response to Council Member O'Neill, Finance Director/Treasurer Matusiewicz discussed the estimated year end fund balance. He explained the Uptown Newport Development Agreement and anticipated payments. He explained the $17 million transferred out for various capital project expenditures. In response to Committee Member Gorczyca, Finance Director/Treasurer Matusiewicz discussed payment of debt service. Finance Director/Treasurer Matusiewicz stated ending fund balances were usually understated due to conservative budgeting. In response to Committee Member Gorczyca, Budget Manager Giangrande discussed the City Attorney’s outside counsel budget. Finance Director/Treasurer Matusiewicz explained the claims and judgement internal service fund with a premium charged to each department. He differentiated the former expenditures from legal advisory services. Finance Committee Meeting Minutes May 11, 2017 Page 5 of 7 Committee Member Collopy clarified that specific judgements were not allocated to the offending department. He discussed the $6 million settlement. Committee Member Tucker discussed property and sales tax. Finance Director/Treasurer Matusiewicz reported on the recent sales tax figures in which general consumer goods were trending downward. Deputy Finance Director Montano reviewed the sales tax summary and general consumer goods as the second largest category. Finance Director/Treasurer Matusiewicz explained the pool allocation of sales tax. In response to Committee Member Gorczyca, Deputy Finance Director Montano stated the cluster of high end auto dealers helped establish Newport Beach as the 4th highest in the County. Committee Member Tucker stated the City’s exposure to retail decline was not as high. He discussed TOT and property tax. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz discussed the potential of double counting costs with respect to internal service funds. There were no public comments. City Manager Kiff discussed the next steps at the joint City Council/Finance Committee meeting. Council Member O'Neill anticipated the Finance Committee would make its recommendation to the Council at the next Finance Committee meeting. B. PENSION DISCUSSION Summary: Agenda item reserved for any discussion regarding the status of the City's pension liability and/or the proposed budgetary pension funding approach, including a discussion of the potential use of a Section 115 prefunding trust specific to the City’s pension liability management. Recommended Action: Discuss and comment. Finance Director/Treasurer Matusiewicz provided an update on various payment levels for the City to amortize its unfunded liability. In response to Chair Dixon, Finance Director/Treasurer Matusiewicz explained that staff proposed a level payment of $33.8 million, slightly smaller than desired, in order to present a balanced budget. Chair Dixon requested a chart depicting the impact of employer pension liability on the General Fund since 2008. Committee Member Collopy asked how much of what the City spent was on pension liability. Council Member O'Neill discussed budget figures and pension costs. Chair Dixon wanted the public to understand that pension costs were taking an increasingly larger share of discretionary general fund dollars. Council Member O'Neill discussed the information he provided on unfunded pension liability and General Fund revenue when explaining the budget to the public. Chair Dixon suggested a pie chart to tell the story. Finance Committee Meeting Minutes May 11, 2017 Page 6 of 7 Committee Member Gorczyca suggested a graphic to display the rate of increase of revenue and pension liability. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz discussed the payment on the UAL. In response to Chair Dixon, Finance Director/Treasurer Matusiewicz explained the substantial annual losses created if PERS earned only 4 percent on $900 million. Committee Member Tucker thanked staff for presenting the information. There were no public comments. C. UPDATE ON LONG-TERM FINANCIAL FORECAST Summary: Staff will review with the Committee the updates of the high-level long-term financial forecast including future assumptions and other key elements of the City’s finances. Recommended Action: Review and comment. Deputy Finance Director Montano presented the 20-year Fiscal Forecast for years 2018-2037. Finance Director/Treasurer Matusiewicz stated other benefits had been dialed back to 3 percent despite a much higher historical annual growth rate. Deputy Finance Director Montano discussed the known or likely events and need to continually update the model. Finance Director/Treasurer Matusiewicz discussed the use of level payments to the unfunded pension liability. In response to Committee Member Collopy, Finance Director/Treasurer Matusiewicz stated the chart depicted a level payment. Committee Member Gorczyca requested information from the 20 year projections prepared by John Bartel for other agencies. She discussed the potential for new liabilities over the next 5-10 years and stated the assumptions were too optimistic. Deputy Finance Director Montano reviewed the substantial financial commitments and projected surpluses. In response to Chair Dixon, Deputy Finance Director Montano explained the $6 million allocation to the Harbor capital plan for 2018. Committee Member Tucker discussed residential opportunities and money needs. Chair Dixon asked about the surplus in past years. Deputy Finance Director Montano stated he budgeted 3 percent of salaries. There were no public comments. D. REVIEW OF FINANCE COMMITTEE WORK PLAN Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Finance Committee Meeting Minutes May 11, 2017 Page 7 of 7 Review and comment. Finance Director/Treasurer Matusiewicz presented the work plan. Chair Dixon stated the Committee would review the budget and make its recommendation to the Council at its next Finance Committee meeting. Committee Member Collopy asked if the 115 Fund would be discussed at the May 23 Council meeting. City Manager Kiff stated Council Member Peotter was comfortable with the Finance Committee discussion the 115 Fund. In response to Chair Dixon, Finance Director/Treasurer Matusiewicz stated the Reserve Policy was scheduled for discussion in October. Committee Member Gorczyca suggested the possibility of a consultant to work on the Reserve Policy. Chair Dixon requested consideration of the scope of work for the Reserve Policy in June. Finance Director/Treasurer Matusiewicz expressed concern that Reserve Policy discussion may impact on the timely payment of contributions to the unfunded liability. Council Member O'Neill explained that the Reserve Policy discussion would impact next year’s budget. City Manager Kiff stated staff did not think the Committee needed to reconsider the Harbor Master Plan. He stated he would establish a separate working group to review the CIP. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) Committee Member Tucker suggested the Council appoint the Finance Committee members on a fiscal year basis. Committee Member Collopy suggested a dredging strategy. City Manager Kiff explained that Mayor Pro Tem Duffield was working on it. Committee Member Gorczyca discussed the trend to combine water and wastewater and suggested consideration. VII. ADJOURNMENT The Finance Committee adjourned at 5:28 p.m. to a joint meeting with the City Council on May 23, 2017. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on May 4, 2017, at 5:23 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: ___________________________________ _____________________ Diane Dixon, Chair Date Finance Committee March 16, 2017, Finance Committee Agenda Comments These comments on an item 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 FEBRUARY 16, 2017 Changes to the draft minutes passages shown in italics are suggested in strikeout underline format. Page 1, paragraph 2 from end: “Joy Brennan Brenner asked how the public could connect with the Finance Committee to ensure the Corona del Mar Library project continued.” Page 2, paragraph 3 from end: “Mr. Schmitt discussed the City’s portfolio objectives including safety of principle principal, liquidity, and rate of return.” Page 3, paragraph 3 from end: “Finance Director Matusiewicz stated a published benchmark would be selected for performance measurement.” Page 4, paragraph 9, sentence 2: “Finance Director Matusiewicz stated the City could not opt out of funds that the County was temporarily holding on the City’s behalf but could choose not to invest idle discretionary fund funds in the City’s possession.” [?] Page 5, paragraph 5, sentence 2: : “Mr. Bartel presented three categories of clients: 1) those that can afford it; 2) those that had difficulty affording it and were trying to mitigate it; and 3) those that could not afford it and could not mitigate it.” Page 5, paragraph 6: “In response to Chair Dixon, Mr. Bartel explained supplemental pension trust trusts providing more flexibility than CalPERS.” [?] Page 5, paragraph 7, sentence 2: “He asked if the amortization assumed for the sudden shortfall depicted.” [?] Page 5, paragraph 8: “Finance Director Matusiewicz discussed Slide 14 outlining the current amortization schedule and various alternative payment options.” Page 6, paragraph 3: “Finance Director Matusiewicz explained that the proposed payment options on the unfunded liability ranged from $25-$41 million depending how budget resources are ultimately prioritized.” Page 6, paragraph 5: “Mayor Muldoon discussed the need for the State to make changes and the City to remain healthier than the critical mass.” [I cite this without suggesting any change, simply as an example of one of the many sentences in the draft minutes I find frustratingly opaque. They identify the speakers and their topics, but despite the use of frequently unfamiliar jargon, convey almost no substantive intelligence as to what the speakers actually said about those topics.] Page 6, paragraph 10: “Finance Director Matusiewicz stated legislation would not likely have a material impact on the unfunded liability.” Item No. 4A1 Draft Minutes of February 16, 2017 Correspondence March 16, 2017 March 16, 2016, Finance Committee Item IV.A comments - Jim Mosher Page 2 of 2 Page 6, last paragraph: “City Manager Kiff explained the Facilities Financing Program (FFP) and the Council’s suggestions at its February 14, 2017, meeting.” [It might be noted the Finance Committee spent some time some years ago at a meeting in the then-new Council Conference Room trying to land on stable and definitive names for the various components of the FFP. My recollection is that the results of that discussion are reflected in the present Council Policy F-28, which refers to a “Facilities Financial Planning Program” revolving around a “Facilities Financial Planning Reserve” fund managed and illustrated through a “Facilities Financial Planning Tool.” I’m not sure there’s still something that fits the shorter acronym of FFP, but in all the others the second “F” stands for “Financial” rather than “Financing”. Does the name of the policy need to be changed?] Page 7, paragraph 2: “Mary Lou Hergel asked about the funds set aside for new construction on the Corona del Mar Library and Fire Station.” Page 8, paragraph 2: “Deputy Finance Director Montano presented a prototype for a long range financial forecasting tool, including revenue growth, maintenance and operations, salary and benefits, revenue categories, General Fund transfers, and expenditures.” [or “spreadsheet”?] Page 8, paragraph 5: “Committee Member Tucker asked about the assumptions utilized.” Page 9, Item VII, paragraph 1: “The Finance Committee adjourned at 6:06 p.m. to the Finance Committee meeting scheduled on March 16, 2017.” Finance Committee Meeting Minutes February 16, 2017 input on how to reduce the General Fund contribution and move to a Facilities plus Harbor Plan. He stated the staff would propose options. He presented current allocations and surplus. Chair Dixon stated she wanted to determine how to pay facilities, harbor, pension, enterprise funds and debt. She stated $8.5 million was currently contributed to the FFP. City Manager Kiff explained the process of determining the amount for the FFP. Mary Lou Hergel asked about the funds set aside for new construction on the Library and Fire Station. City Manager Kiff explained that the budget was a plan for an expenditure. He stated $7 million was set aside for the Library/Fire Station project. He recommended shelving the project while determining mechanisms to handle the pension issue. He stated it was necessary to balance community needs with debt obligations. Chair Dixon suggested retaining the project on the plan with the funding year set at 2022. City Manager Kiff stated the project was not funded until the construction contract was let Chair Dixon explained the West Newport Community Center was on the list as a targeted project but was not funded. Finance Director Matusiewicz explained that money was accumulated and saved for building replacement but stated it was up to Council to determine the ultimate prioritization. Chair Dixon stated developer fees had paid for City facilities for 30 years. She stated she supported modest development due to the investment in the community by the developer. Ms. Hergel stated she did not realize that construction of the Fire Station and Library were dependent on developer fees. Ms. Hergel asked if the project would have started if the bids had come in as expected. City Manager Kiff stated he would have still recommended a stop due to CalPERS. Ms. Hergel suggested minor repairs in the meantime. Chair Dixon requested information on the necessary modest improvements. City Manager Kiff stated the Council set aside funds for facility maintenance. c CV1/ Committee MemberViUlteesuggested the Library / Fire Station project be retained in the Capital Improvement Program (CIP) and proceed within 3-5 years. Ms. Hergel discussed the possibility of fundraising for the project. City Manager Kiff stated staff would return with recommend d funding levels on all obli Z5s. thfet41 Committee Member Tucker stated iletermikag—tba. funds e spent, within the Committee's purview. -(r-Tra•gwerap-t- Ile_ City Manager Kiff suggested the Finance Committee comment and provide theme ideas. Mayor Muldoon suggested actual projects be determined by the Council. Jim Mosher questioned whether the CIP contained current commitments. City Manager Kiff stated the commitment was firm when the contract was let. C. REVIEW INITIAL DRAFT OF LONG-TERM FINANCIAL FORECAST Summary: Page 7 of 9 Item No. 4A2 Draft Minutes of February 16, 2017 Correspondence March 16, 2017 SUBMITTED BY COMMITTE MEMBER TUCKER Item No. 5C1 Pension Discussion Staff Presentation March 16, 2017 Item No. 5D1 Annual Review of Reserve Policy F-2 Staff Presentation March 16, 2017 Item No. 5E1 Review of Other Financial Policies Additional Materials Received March 16, 2017 FISCAL TRANSPARENCY SOFTWARE CITY OF NEWPORT BEACH FINANCE COMMITTEE MARCH 16, 2017 Item No. 5F1 Demonstration of New Fiscal Transparency Software Staff Presentation March 16, 2017 Socrata Public Financial Data Cloud HIERARCHY OF EXPENSE BUDGETARY DETAIL Fund Department Division Program (if any) Expense Category Expense Group Expense (line item detail) FUND DEPARTMENT DIVISION PROGRAM LINE ITEM DETAIL SALARIES AND BENEFITS REGULAR SALARIES HEALTH/DENTAL/VISION OTHER BENEFITS OTHER PAYS OVERTIME PAYS PENSION EMPLOYEE CONTRIBUTION PENSION NORMAL COST PENSION UAL PERSONNEL INTERNAL SERVICE PREMIUMS RETIREE HEALTH PROGRAM SPECIALTY SALARIES MAINTENANCE AND OPERATIONS GENERAL EXPENSES GRANT OPERATING EXPENSES INSURANCE, CLAIMS, JUDGMENTS AND LEGAL DEFENSE MAINTENANCE & REPAIR O&M INTERNAL SERVICE PREMIUMS PROFESSIONAL & CONTRACT SERVICES SUPPLIES & MATERIALS TRAVEL & TRAINING UTILITIES TRANSFERS OUT TRANSFER OUT CIP FUND TRANSFER OUT FFP TRANSFER OUT NBR ENHANCEMENT TRANSFER OUT FACILITIES MAINT TRANSFER OUT 800 MHZ RADIO EXPENSE GROUP EXPENSE CATEGORY EXPENSE LINE ITEM Highest Level of Detail ADVERT & PUB RELATIONS CERT & MEMBERSHIP CITY SCHOLARSHIP TRUST HARDWARE MAINTENANCE HARDWARE/MONITOR/PRINTER NETWORK EQUIPMENT PC REPLACEMENT POSTAGE FREIGHT EXPERSS NOC PUBLICATIONS & DUES NOC SERVICE CHARGE ADMINISTRATIVE SOFTWARE LICENSE RENEWAL UNIFORM EXPENSE LINE ITEMS IN THE GENERAL EXPENSE GROUP