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HomeMy WebLinkAboutApproved Minutes - June 29, 2017Finance Committee Meeting Minutes June 29, 2017 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE JUNE 29, 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, Committee Member Joe Stapleton, Council Member Will O’Neill, and Committee Member Larry Tucker ABSENT: Mayor Kevin Muldoon STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz (via teleconference), Deputy Finance Director Steve Montano, Budget Manager Susan Giangrande, Accounting Manager Rakshana Virany, Municipal Operations Director George Murdoch, Deputy Public Works Director Mark Vukojevic and Administrative Specialist to the Finance Director Marlene Burns MEMBER OF THE PUBLIC: Jim Mosher OTHER ENTITIES: John Farnkopf and Geoffrey Michalczyk (HF&H Consultants, LLC) and Hillary Davis (Daily Pilot) III. PUBLIC COMMENTS None. IV. CONSENT CALENDAR A. MINUTES OF JUNE 1, 2017 Recommended Action: Approve and file. Chair Dixon indicated that amendments were submitted by Committee Member Tucker and Committee Member Gorczyca. Council Member O'Neill requested that a sentence on Page 2 of 5 regarding the 2008 reserves be struck and corrected. MOTION Committee Member Gorczyca moved and Committee Member Tucker seconded a motion to approve the corrected minutes of June 1, 2017. The motion carried 5-1-1, Committee Member Collopy abstaining and Mayor Muldoon absent. Finance Committee Meeting Minutes June 29, 2017 Page 2 of 8 V. CURRENT BUSINESS A. WASTEWATER RATE INCREASE Summary: The Municipal Operations Department retained the consulting services of HF&H Consultants, LLC (HF&H) to prepare a wastewater rate study. The purpose of this presentation is to review the results of the wastewater rate study, receive input, and seek the Committee’s direction to move the item to City Council for discussion and approval. Recommended Action: a) Review the results of the wastewater rate study; and b) Move the item to City Council for discussion and direction to proceed with setting a Proposition 218 Public Hearing for the adoption of the proposed wastewater rates. Municipal Operations Director Murdoch introduced John Farnkopf and Geoffrey Michalczyk HF&H Consultants. He explained that the tables in the staff report were amended. He explained the need to restudy and establish a basis of establishing new rates. He discussed difficulty in measuring wastewater and developing sewer rates. He presented a PowerPoint providing background on sewer rates, In response to Chair Dixon, Municipal Operations Director Murdoch stated that the Wastewater Master Plan recommended spending $1 million each year. He stated that $750,000 was spent this year. In response to Committee Member Gorczyca, Municipal Operations Director Murdoch explained the opportunity to replace sewer lines during alley replacements. Council Member O'Neill explained the Council’s approval of the 2010 Master Plan and structural deficit. He stated rates had only been raised once since 1996. Chair Dixon stated the Council transferred $3.5 million from the budget surplus into the wastewater fund. Municipal Operations Director Murdoch explained Proposition 218 and the need to restructure fees. He stated that there needed to be no majority opposition to the rate increase. He explained the need to restudy the fees, revenue requirements, difference between the Sewer Enterprise Fund and General Fund, and Council Policy F-2 regarding reserves. In response to Chair Dixon, Municipal Operations Director Murdoch suggested the plan be updated every five years. In response to Committee Member Collopy, Municipal Operations Director Murdoch stated that the reserve should be $1.8 million. City Manager Kiff stated that in comparison, there was $48 million in Undesignated Reserves available in the General Fund, which could be used in a catastrophic event. Council Member O'Neill stated the Sewer Fund should be treated as a separate entity, similar to Irvine Ranch Water District (IRWD). Municipal Operations Director Murdoch discussed the importance of rate stabilization. In response to Committee Member Collopy, Municipal Operations Director Murdoch stated that the reserve had decreased to $50, at one point. Municipal Operations Director Murdoch presented a pie chart on expenditures and revenue requirements. He discussed the proposed contribution for CIP. In response to Committee Member Collopy, Municipal Operations Director Murdoch stated salaries decreased due to reorganization and reduction. Finance Committee Meeting Minutes June 29, 2017 Page 3 of 8 Chair Member Dixon discussed the Finance Committee’s prior review of the cost of outsourcing versus in-house employees. Municipal Operations Director Murdoch explained the in-house staff and indicated that he was comfortable with staffing levels. In response to Committee Member Collopy, Municipal Operations Director Murdoch discussed comparisons between the City of Newport Beach and other cities and differences based on topography, maintenance of laterals and proximity to the Bay. Municipal Operations Director Murdoch discussed the $3.5 million General Fund contribution and impact of not increasing rates. John Farnkopfof HF&H, discussed the current rate structure. In response to Chair Dixon, Mr. Farnkopf stated that 97 percent of residential sewer customers received both sewer and water service. John Farnkopf recommended a graduated rate in proportion to the water meter, along with the monthly use charge. He stated the surcharges would be incorporated into the monthly service charges. He discussed efforts to correlate the fixed costs of operation and revenue from fixed charges and variable costs of the sewer system to correspond to variable revenue. He presented the proposed rate structure. In response to Committee Member Tucker, Municipal Operations Director Murdoch explained the logic of charging based on meter size. In response to Committee Member Gorczyca, Municipal Operations Director Murdoch stated public property was charged the same rate. Chair Dixon asked if the average homeowner would have a nine percent rate increase. Municipal Operations Director Murdoch stated the nine percent was the overall increase to the entire revenue stream. Mr. Farnkopf continued with the presentation explaining the fee structure for sewer only customers. Council Member O'Neill discussed the possibility of a sewer only rate for hotel and other commercial properties. Municipal Operations Director Murdoch stated the Airport area and converted properties would be problematic. In response to Chair Dixon, Municipal Operations Director Murdoch discussed the four-inch connections, including hotels. He discussed efforts to equalize rates. Council Member O'Neill stated the goal, based on Proposition 218, was to offset the cost based on Proposition 218. Municipal Operations Director Murdoch discussed the recent Court decision allowing assumptions based on averages. In response to Committee Member Tucker, Municipal Operations Director Murdoch stated Newport Coast did not receive water or sewer services. City Manager Kiff estimated 10-12 percent of residents did not receive water or sewer from the City. Municipal Operations Director Murdoch stated the Airport area was mixed. Committee Member Tucker explained that Newport Coast was formerly Irvine Coast and the City annexed the property. John Farnkopf continued the presentation explaining the proposed rate structure. He discussed anticipated revenue from sewer only customers. He presented sample monthly bills. Finance Committee Meeting Minutes June 29, 2017 Page 4 of 8 Committee Member Tucker stated a rate increase smoothed over time was more palatable. Council Member O'Neill discussed the point in time analysis and the effort to reach the reserve goal. City Manager Kiff explained the difference between large changes or smoothing over five years. Committee Member Tucker stated the Enterprise Fund should stand on its own and the $3.5 million should be repaid to the General Fund. Committee Member Collopy asked if the full value or future value should be returned to the General Fund. City Manager Kiff stated the City did not charge itself interest. Council Member O'Neill discussed the Finance Committee’s consideration of transferring money from the General Fund to the Enterprise Fund. He stated the Council voted to grant, not loan, the funds. Committee Member Tucker stated that it was important for the Enterprise Fund to stand on its own. Committee Member Stapleton asked if it was a moot point since it was a grant. City Manager Kiff asked if including the repayment would impact the Proposition 218 study. John Farnkopf explained that the rates had to be proportionally set. Council Member O'Neill stated that the Council would have to classify the $3.5 million as a loan. Committee Member Tucker stated the rate increase needed to be effectuated and repayment considered separately. He suggested repayment begin in five years with a 15-year amortization. Committee Member Gorczyca suggested creating a policy and implementing practices going forward. Committee Member Stapleton stated that the Council had approved the budget and had not classified the $3.5 million as a loan. Municipal Operations Director Murdoch stated he did not think repayment could be built into the rate. Chair Dixon suggested referring the matter to legal, for review. Municipal Operations Director Murdoch presented the proposed timeline including community outreach, study session, Proposition 218 notice, 45-day review, protest hearing, and ordinance amendment. In response to Chair Dixon, Municipal Operations Director Murdoch stated Proposition 218 allowed rate adjustments for five years. He suggested review of the master plan every three years along with a rate study. Municipal Operations Director Murdoch discussed the money lost in the drought. In response to Committee Member Gorczyca, Municipal Operations Director Murdoch stated the rate study could only go out five years. Committee Member Stapleton agreed with the proposed rates. Finance Committee Meeting Minutes June 29, 2017 Page 5 of 8 Jim Mosher discussed his prior comments regarding inequity to residential customers. He suggested the committee consider basing the sewer rate on the wintertime water usage. He discussed inequity of sewer only customers. He asked if the rate study would be posted and available to the public. He suggested comparison of rates between comparable agencies. He stated the Enterprise Fund could not give the money back to the General Fund. Municipal Operations Director Murdoch explained the beneficial use of winter data but limitation due to the billing system. He suggested separating indoor from outdoor usage. He stated the report would be posted. MOTION Committee Member Tucker moved and Committee Member Collopy seconded a motion to move the matter forward to the Council. The motion carried 6-1, Mayor Muldoon absent. B. UPDATE ON LONG-TERM FINANCIAL FORECAST Summary: Staff will review with the Committee an updated 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 item explaining key assumptions of the model, base scenario and a recession scenario. In response to Committee Member Collopy, Deputy Finance Director Montano explained the meaning of a three percent annual salary savings. Deputy Finance Director Montano discussed the impact of the recession on sales tax and real estate. Committee Member Collopy stated the recession information should correlate to reserve discussions. Deputy Finance Director Montano stated the impact on the General Fund was significantly reduced when there is a reduction in the key expenditure areas described. Chair Dixon stated the model was a good tool for financial analysis. C. SCOPE OF WORK FOR RISK BASED ANALYSIS OF GENERAL FUND RESERVE REQUIREMENTS Summary: The City is seeking consultant services to assist staff analyze risks through an analytical framework intended to determine a custom reserve level appropriate for the City of Newport Beach. The Consultant will provide a thorough examination of the City’s primary and secondary risk factors that generally influence the amount of reserves the City should hold. The Consultant will also provide recommendations on new, or changes to existing, financial policies, risk management methods, and ideas to support the General Fund Reserve strategy over the long-term. Recommended Action: a) Review and comment on staff’s proposed Scope of Work for Risk Based Analysis of General Fund Reserve Requirements; and b) Direct staff to issue a Request for Proposal for consulting services to appropriately size City reserve levels considering insurance coverage and other risk transfer options based on a thoughtful risk-based analysis of events that may create financial exposure to the City. Finance Committee Meeting Minutes June 29, 2017 Page 6 of 8 Deputy Finance Director Montano presented the staff report outlining the intent to hire a consultant to assist in reviewing the primary and secondary risk factors, policies and risk management methods to determine the appropriate General Fund reserve. In response to Committee Member Collopy, Finance Director/Treasurer Matusiewicz stated a cost estimate would be determined once the scope of work was established. Committee Member Collopy stated he struggled with the need to hire consultants. Deputy Finance Director Montano estimated the consultant would cost less than $20,000. Committee Member Collopy asked if indemnification would be included in the review. Deputy Finance Director Montano stated insurance needs would be included in the analysis. Committee Member Gorczyca discussed the benefit of a third-party review. She stated the goal was to consider reserves along with insurance, cash, and other kinds of mitigations. In response to Committee Member Stapleton, Deputy Finance Director Montano stated the reserve had been 15 percent until 2014, when it was increased to 25 percent. Committee Member Gorczyca stated a 1994 GFOA reference with a smaller population was used. She stated many cities’ reserves were higher than the City of Newport Beach. She suggested peer review be included in the consultant’s work. She reminded the Committee of the need to be mindful of the City’s AAA rating. Committee Member Tucker questioned where the accumulated money would go. He asked if more reserves should be spent on capital improvements or paying down the debt. Committee Member Collopy concurred but stated it was necessary to determine adequate reserves first. Committee Member Tucker stated the City had a responsibility to ensure adequate reserves for a catastrophic event. Committee Member Gorczyca anticipated the study would not be too expensive. She stated the consultants could assist with FEMA reimbursements. Committee Member Tucker agreed with a consultant if the price was right. Deputy Finance Director Montano anticipated the consultant to cost less than $20,000. Jim Mosher stated the consultant was reviewing seven different funds. Committee Member Gorczyca suggested some funds be reviewed later. Chair Dixon suggested reviewing the General Fund. Finance Director/Treasurer Matusiewicz explained the problem with looking at the General Fund in a vacuum. The Committee decided to focus the study on the General Fund, with a cap of $25,000. Committee Member Collopy questioned what the AAA rating was saving the City in borrowing costs. Finance Director/Treasurer Matusiewicz explained that maintaining good credit allows access to capital markets at lower interest rates than lower-rated agencies. Finance Committee Meeting Minutes June 29, 2017 Page 7 of 8 D. TREASURY REPORT Summary: The Finance Committee requested that staff provide the monthly Treasury Report for periodic review. As of May 31, 2017, the City’s entire investment portfolio totaled over $269 million. The report can be accessed at www.newportbeachca.gov/treasury. Recommended Action: Receive and file. Committee Member Collopy stated he would ask his questions offline. E. 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. Recommended Action: Review and comment on discussion as necessary. Chair Dixon stated the Committee would consider the pension discussion in September. In response to Committee Member Tucker, Deputy Finance Director Montano stated the pension liability was paid bi-weekly. He stated it was not prepaid due to market volatility. Committee Member Tucker asked if there was a benefit with paying upfront. F. 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: Review and comment. Chair Dixon reviewed the Committee Work Plan. Finance Director/Treasurer Matusiewicz suggested the General Fund Reserve discussion come back in October. Committee Member Gorczyca suggested inviting the new CalPERS CEO to walk through the City’s portfolio. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON- DISCUSSION ITEM) None. VII. ADJOURNMENT The Finance Committee adjourned at 5:36 p.m. to the next regular meeting. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on June 22, 2017, at 5:54 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.