HomeMy WebLinkAboutFinance Committee Agenda - November 9, 2017CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA - Final
100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D
Thursday, November 9, 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
November 9, 2017
Page 2
Finance Committee Meeting
MINUTES OF OCTOBER 12, 2017A.
Recommended Action:
Approve and file.
DRAFT MINUTES 101217
V.CURRENT BUSINESS
OPEB VALUATION REVIEWA.
Summary:
Actuary, Marilyn Jones will provide a brief overview of our latest OPEB (Retiree
Insurance Plan) actuarial valuation.
Recommended Action:
Receive and file.
ATTACHMENT A
ATTACHMENT B
LONG-TERM FINANCIAL FORECASTB.
Summary:
The item is reserved for a review and discussion of budget decisions that need to be
considered in conjunction with the development of the budget and revision to the
Long-Term Financial Forecast. This discussion will include proposed revenue
estimate revisions, the funded status of worker’s compensation and general liability
reserves and other forecast scenarios.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
RESERVE STUDY STATUS UPDATEC.
Summary:
Staff will provide a brief oral update on the status of consulting engagement to
perform a risk-based analysis of General Fund reserves.
Recommended Action:
Receive and file.
November 9, 2017
Page 3
Finance Committee Meeting
WORK PLAN REVIEWD.
Summary:
Staff will review with the Committee the agenda topics scheduled for the remainder
of the Fiscal Year.
Recommended Action:
Receive and file.
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
BY SAM L. SAVAGE AND SHAYNE KAVANAGH
Probability ManageMent
in Financial Planning
Additional Materials Received
Finance Committee Meeting
November 9, 2017
February 2014| Government Finance Review 9
“Give me a number,” says the city manager anxiously. “I need
to know when the new hotel complex will be shovel ready!”
The director of planning, who has just explained that the
amount of time needed to obtain each of the required permits
is unpredictable, asks, “Would you settle for an average?” “If
that’s all you can give me,” she responds. “The developers
need to know when to schedule construction.” “Well,” says
the planner, “there are ten permits being processed in parallel,
and I estimate that each one will take six weeks on average, so
that’s my best guess — six weeks.”
This example exhibits three key concepts about
uncertainty that are important to public financial
managers:
1. Uncertainties are endemic to plan-
ning for the future, whether long
term or short term. Public finance
activities — estimating project
schedules, forecasting tax reven-
ues, and planning reserves to cover
natural disasters — are rife with
uncertainties.
2. Most people, including city manag-
ers, are uncomfortable with uncer-
tainty and prefer to picture the future
in terms of average outcomes.
3. This leads to the “flaw of averages,”
a set of systematic errors that arises
when uncertainties are represented by single numbers,
and it explains why so many projects are behind schedule,
beyond budget, and below projection.1 In short, the flaw of
averages states that plans based on average assumptions
are, on average, wrong.
Exhibit 1 illustrates how the city manager and planner have
just run afoul of this ubiquitous problem. The left-hand chart
shows all the permits coming in at their average of six weeks.
That looks good, right? However, the project can’t start until
all of the permits have been obtained. The right-hand chart
shows that even if some permits come in at less than six
weeks, it only takes one late permit to delay construction. All
ten permits are about as likely to come in at six weeks or less
as a flipped coin is likely to come up heads ten times in a row,
which means that the estimate the planner provided has only
one chance in a thousand of being achieved.
If any permit comes in later than six weeks, construction
will be delayed. In the figure on the right, the model, which
generates 1,000 sets of “time to issue” scenarios, displays the
values that appear on the 77th scenario, which results in a
start time of 8.8 weeks.
The discipline of probability management uses proven com-
puter simulation techniques, which have only recently become
available to a much wider audience, to eliminate errors caused
by using averages (see the “Probability Management” sidebar).2
This article outlines three simple example problems that apply
probability management. The models used are all available for
download from the “Models” page at ProbabilityManagement.
org. You can download them and try out probability man-
agement techniques for yourself while
reading this article.
1 THE PROJECT PLANNING
PROBLEM
The model is about to inform our
city manager and planner that a flaw
of averages in scheduling often leads
to a flaw of averages in finances.
Suppose the developer of the hotel
complex has negotiated a deal requir-
ing the city to forgive future tax rev-
enues at the rate of $100,000 per week
for any delay in construction beyond
seven weeks.
Given the average assumptions, each permit is obtained in
exactly six weeks, construction begins in exactly six weeks,
and there is no penalty. However, the model that represents
the case of the city manager and the planner (the Schedule.
xlsx file at ProbabilityManagement.org) calculates average
results over 1,000 scenarios, indicating that the expected time
to start construction is 7.8 weeks, which means the city will
likely face $86,000 in penalties (see Exhibit 2).
2 THE PROBLEM OF FORECASTING
UNCERTAIN TAX REVENUES
When forecasting future tax revenues, it is tempting to pick
a single number as an educated guess, and then back off a
bit just to be safe. What many people don’t realize is that
The discipline of probability
management uses proven
computer simulation
techniques, which have only
recently become available to
a much wider audience, to
eliminate errors caused by
using averages.
10 Government Finance Review | February 2014
most forecasting techniques provide an explicit measure
of the degree of uncertainty for the result. This measure of
uncertainty is usually discarded, leading straight back to the
flaw of averages.
Permission to Be Uncertain. “The problem with com-
mitting political suicide,” said Winston Churchill, “is that you
live to regret it.” If uncertainty is a problem for city managers,
as the above example demonstrated, it is fatal for politicians.
Probability management helps by representing uncertainties
as auditable, unambiguous data; it is much like recording
1,000 rolls of a die to provide a benchmark.
The City of Colorado Springs, Colorado, is a pioneer in
giving politicians permission to be uncertain. The first time
the city’s chief finance officer pre-
sented the uncertainty generated by a
sales tax forecast directly to the city’s
elected leaders, Colorado Springs was
attempting to build back its reserves
after responding to a large wildfire
and a severe economic downturn.
The city council decided on a revenue
forecast that had two-to-one odds of
being met or exceeded as the basis
for developing the budget, and as the city’s reserve position
has improved, there has been active discussion around the
exact odds to use — which is just as it should be. Single num-
bers mask all trace of uncertainty, but presenting stakehold-
ers with a common view of an uncertain future helps them
arrive at a risk attitude that is appropriate for economic and
fiscal conditions.
Useful Intelligence. Probability management allows
trained statisticians to share their expertise as useful data.
For example, the Surplus-Deficit.xlsx demonstration model
shown in Exhibit 3 is based on the data generated by the
Colorado Springs revenue forecast. This model allows the
user to experiment with different initial balances and monthly
expenditure levels and immediately
gauge the likelihood of deficits down
the road. The model contains 1,000
simulated revenue scenarios, each
of which generates a surplus/deficit
graph. Adjusting the percentiles (cells
A20 and A21) will display a confidence
interval (shown as grey lines on the
graph). Experimenting with the grey
cells in rows five and seven adjusts the
Exhibit 1: Average versus Reality
The figure on the right displays the values that appear on the 77th scenario, which results in a start time of 8.8 weeks.
When forecasting future tax
revenues, it is tempting to pick
a single number as an educated
guess, and then back off a bit
just to be safe.
Schedule Schedule
February 2014| Government Finance Review 11
Exhibit 2. Average Assumptions Do Not Result in Average Outcomes
Scroll through
Trials Here
Exhibit 3: Gauging the Likelihood of Future Deficits
Scroll through
Trials Here
Adjust
Confidence Interval Observe Surplus/Deficit Scenarios,
Distribution of Balances,
and Chances of Deficits
Adjust Initial Balance
and Monthly Expenditures
The model also allows users to specify targets for time-to-construction and penalty, whereupon the worksheet instantly processes
1,000 scenarios to calculate the chances of meeting these goals. For example, under current assumptions there is only a 1.9% chance
of being shovel ready in 6.5 weeks or less, and a 16.6% chance of incurring a penalty of $25,000 or less.
Schedule
Outcomes Given
Average Assumptions
Average
Outcomes
Penalty Calculations
12 Government Finance Review | February 2014
initial balance and total expenditure
by month, displaying the distribution
of balances in both January 2015 and
January 2016, as well as the chance of
running a deficit on those dates.
Other Uses of Probability Manage-
ment for Budgeting. The authors have
discussed a variant of this problem in
an earlier publication3 and another
model at Probabilitymanagement.org
called Shortfall.xlsx. This model allows
the user to see how variability in rev-
enue projections affects different prior-
ity “tiers” of spending, where fixed costs such as debt service
are the most important, operating costs such as police salaries
are second, and special projects such as library expansions
are the least important tier. Models like this one, which dis-
plays the chances of shortfall for each of these priorities, can
stimulate useful discussion about ways to structure spending
in the face of uncertain revenues.
3 THE PROBLEM OF
CALCULATING RESERVES
All municipalities must plan for a
rainy day, but in many locations, that
“rainy day” also includes fires, floods,
or other natural disasters. Through orga-
nizations including the U.S. Geological
Survey and the National Oceanic and
Atmospheric Administration, jurisdic-
tions can obtain distribution severity
estimates for different categories of
disaster. Allocating financial reserves
to cover these situations, however, is another question.
Combining Uncertainties — the Diversification Effect.
An uncertain quantity such as the level of funds required to
meet an emergency can be thought of as a shape, represent-
ing the relative likelihood of various outcomes. For example,
Exhibit 4 describes a requirement that could be as little as
$1 million or as much as $6 million, but will most likely fall
between $3 million and $4 million.
Now consider a municipality that must prepare for two
potential independent threats, wildfire and flood. For the
purposes of this discussion, each disaster will require $1 mil-
lion to $6 million, with equal likelihood over the planning
horizon. Exhibit 5 shows how these two uncertainties could
be expressed graphically. Next, we add these two shapes to
arrive at the shape of total required emergency funding.
The answer is shown in Exhibit 6. This example is equiva-
lent to adding the numbers on two dice. More combinations
result in numbers in the middle ($7 million) than at either
end ($2 million or $12 million). This is the well-known effect
The uncertainty in emergency
funds is pretty much up
to Mother Nature. The
acceptable risk of exceeding
the reserves on hand,
however, is in the eye of
the beholder.
Exhibit 4: Uncertain Emergency
Fund Requirements
Re
l
a
t
i
v
e
L
i
k
e
l
i
h
o
o
d
o
f
N
e
e
d
i
n
g
th
a
t
L
e
v
e
l
Potential Level of Required Emergency Funds in Millions of Dollars
1 2 3 4 5 6
Exhibit 5: Graphic Representation of Two Independent Disasters
Potential Level of Required Emergency Funds in Millions of Dollars
1 2 3 4 5 6
Wildfire
1 2 3 4 5 6
Flood = ?
February 2014| Government Finance Review 13
of diversification, which must be taken into account in any
reserves calculation. When you roll one die, all results are
equally likely, but when you sum two
dice, the shape goes up in the middle.
Why does this matter?
Risk Is in the Eye of the Beholder.
The uncertainty in emergency funds is
pretty much up to Mother Nature.
The acceptable risk of exceeding the
reserves on hand, however, is in the
eye of the beholder. Can your munici-
pality live with one chance in four
of running out of cash? How about
one chance in 20? These are complex and important issues
for local governments to debate, but even starting the conver-
sation requires an explicit recognition
of uncertainty.
Suppose our imaginary municipality
can accept one chance in six that its
reserves will be exceeded. By consid-
ering each risk independently, the city
would set aside $5 million for wildfire
and another $5 million for flooding,
for total reserves of $10 million.
However, by using a single number
to represent each contingency, the
Exhibit 6: The Diversification Effect: The Sum of Two Dice
• • • •• •• • •• •• • • • • • • • • • • • • •• •• • •• •• • • • • • • • • •
• • • • •
• • • • •
• •
• • • • • • • • • •
• • • • • • • • • •• • • •• • • • • •
•
• • • •• • • •
• • • •
• • • • • •
• • • •• •• • •• •• • • •• •• • •• •
•
• • •• • • •
• •
• •
• • •• •• • •• •
• • •
• • •• • • •
• • • •
• • • •• •
• • • •• •
• • •
• • • •
• •
• • •• •
• • •
• • • •
• • •• • • •• •
• • • •• •
• • • •
• • •• •
• • •
• • •• •
• • • •
• • • •
• • • •• •
• • •• •• • •• •
• • • •• •
• • • •• • •• •
• • • •• •• • • •• •
• • •• •• • • •• •• • • •• •
Exhibit 7: Determining the Correct Reserve Level
Chance of
Exceeding $10 Million
3 out of 36 = 1 out of 9
• • • •
• • • •• •
• • •• •• • •• •
• • • •• •
• • • •• • •• •
• • • •• •• • • •• •
• • •• •• • • •• •• • • •• •
Two ways to get 11 One way to get 12
Chance of Exceeding $9 Million
6 out of 36 = 1 out of 6
• • •• • • •• •
• • • •• •
• • • •
• • •• •
• • •
• • •• •
• • • •
• • • •
• • • •• •
• • •• •• • •• •
• • • •• •
• • • •• • •• •
• • • •• •• • • •• •
• • •• •• • • •• •• • • •• •
Three ways to get 10
It is better to be approximately
right than precisely wrong.
As with horseshoes and hand
grenades, once you start
modeling uncertainty explicitly,
close counts.
14 Government Finance Review | February 2014
municipality has run afoul of another variant of the flaw
of averages.
Risks Don’t Add Up. With one chance in six of exceed-
ing the $5 million wildfire reserve and one chance in six of
exceeding the $5 million flood reserve, most people would
assume one chance in six of exceeding the total reserves
of $10 million — but not so fast. As shown in Exhibit 7,
there are only three chances out of 36 (or one in nine) that
the total required will be greater than $10 million. The muni-
cipality can actually meet its one-in-six risk limit with only
$9 million in reserves, allowing it to put that extra $1 million
to better use.
The City of San Clemente, California, provides an example
of accounting for real world contingencies. The city is begin-
ning to apply probability management to its emergency
reserves. As an early step, staff analyzed 100 years of storm
data and used it to develop a probabilistic description of
damage to the pier jutting out from the city’s famous beach.
The basic approach is demonstrated in Exhibit 8 (the
Reserves.xlsx file). This conceptual model demonstrates the
problem of estimating reserves for a given time horizon. Once
the uncertainties are described statistically, probability man-
agement makes it easy to add them up.
The model has six categories of disaster, along with a graph
of their distribution of damage over the given time horizon.
(Damage scenarios are stored as data in the library tab of
the workbook.) A column in the model displays the average
damage in millions of dollars for each category, with the total
across all categories at the bottom, and any one of 1,000 indi-
vidual scenarios can be selected with a slide bar. In Exhibit
8, the column of percentiles is set at 95 percent; that is, one
would expect the damage in any category to fall below the
number in the percentile column 95 percent of the time. Put
another way, there is only a 5 percent chance of exceeding
this number.
Suppose the city decided that its reserves should be main-
tained to cover 95 percent of all cases. Adding up the reserves
by category, we see that the city will be overfunded due to the
diversification effect, like the dice example. In fact, Exhibit 8
shows that adding the 95th percentiles of each category totals
$267 million, which is actually the 99.8th percentile of total
risk. Reducing the percentile at the top of the chart until the
percentile of the total is 95 percent shows that we only need
to be 82 percent confident for each risk category to achieve
a 95 percent confidence overall, resulting in total reserves of
$186 million, a reduction of $81 million. (See Exhibit 9.)
Independence and Restrictions. The overall benefit of
the diversification effect is affected by both the indepen-
dence of the contingencies being covered and the degree to
which funds may be moved between categories. That is, if a
flood is likely to cause a mud slide, or if money in one emer-
gency fund may not be used to cover a different emergency,
then the required reserves may need to be increased. While
such interrelationships are beyond the scope of the illustra-
tive models shown in this article, when present, they should
be accounted for in probabilistic terms.
Exhibit 9: Finding the Appropriate Reserve Level
Exhibit 8: Estimating Reserves
for a Given Time Horizon
Reserve Calculator
February 2014| Government Finance Review 15
COMMON QUESTIONS AND CONCERNS
ABOUT PROBABILITY MANAGEMENT
The first question is: Where do the data come from to provide
inputs into a probability management model? All forecasting
methods generate some estimate of uncertainty in their results.
For example, a record of comparisons between the forecast
and what actually occurred is a good basis for estimating future
accuracy. Historical data are also a rich source of informa-
tion on the degree of uncertainty that
a government’s finances are subject
to — recall San Clemente’s use of his-
torical data on pier repairs to estimate
the range of future likely damages.
One of the primary benefits of prob-
ability management is that decision
makers do not need to be statistical
experts themselves, but can use the
analysis of others as data in interactive
risk models.
Another common, related concern involves the level of
precision needed in the data to build a useful model; people
worry that imprecise data may lead to inaccurate modeling.
The good news is that it is better to be approximately right
than precisely wrong. As with horseshoes and hand grenades,
once you start modeling uncertainty explicitly, close counts.
For example, consider what you do before you climb on a
ladder — most people give it a good shake to find out if it is
stable. The distribution of forces when you shake a ladder,
however, is quite different from the
distribution of forces when you climb
on it. Will you stop shaking ladders
now that you have learned that you
have been using inaccurate data?
CONCLUSIONS
The basic principles of probabil-
ity management have been proven in
stand-alone risk management systems
Probability Management
ProbabilityManagement.org is a non-profit that promotes the communication and calculation of uncertainties.
The discipline of probability management was formalized in 2006.1 As described by Daniel Ralph, Professor, and Director of the Centre
for Risk Studies, at Cambridge University: “The discipline of probability management provides a transformation of proven risk modeling
techniques into simple business steps. Its open standard advances the field by representing uncertainties as unambiguous data, which
may be shared across platforms.”
This is accomplished by storing potential outcomes in data arrays called SIPs. For example, the SIP of a die would consist of a column
of integers randomly chosen between 1 and 6. Calculations using SIPs are referred to as SIPmath, which forms the basis of the three
models supplied with this article. SIPmath can be performed in almost any computer environment, including a commonly used spread-
sheet format with the native data table function. The technique is now being applied by several large corporations and has even been
used successfully in a pilot program to teach the concept of risk/return tradeoffs to middle
school students.2
The basic idea behind SIPmath is easy to explain; the hard part is getting anyone to under-
stand it. A worksheet on the Models page of ProbabilityManagement.org simulates calcula-
tions based on 10,000 rolls of a pair of dice. The model allows you to sum or multiply the
numbers on the two dice, or perform virtually any other calculation, and instantly observe
the shape of the potential outcomes.
Notes
1. Sam Savage, Stefan Scholtes, and Daniel Zweidler, “Probability Management,” OR/MS Today, February 2006,
Volume 33.
2. Investment contest at Horace Mann School in Beverly Hills; see http://youtu.be/vR0BFjFEvCM.
An uncertain quantity such
as the level of funds required
to meet an emergency can
be thought of as a shape,
representing the relative
likelihood of various outcomes.
16 Government Finance Review | February 2014
for decades. It is only recently, however, that they could be
applied in a native spreadsheet with no additional software.
And the transition from single numbers to probability man-
agement is not as great as the transition from calculators to
spreadsheets; however, it does typically require at least a
three-person team: a forecaster who has solid undergradu-
ate statistical training to estimate the uncertainties, a finan-
cial planner to build a plan around those uncertainties, and
a leader, such as a finance director, chief finance officer, or
chief executive officer, who can take the lead in engaging
other decision makers in probabilistic thinking. The results
should be a model that does not give the right answer so
much as spark the right questions about the chances of
meeting targets and what level of risk the government is
willing to take on. The GFOA is currently performing pilot
projects on using probability management with the City of
San Clemente and the City of Colorado Springs and will
report the results of these projects in future Government
Finance Review articles. y
Notes
1. Sam L. Savage, The Flaw of Averages: Why We Underestimate Risk in
the Face of Uncertainty, (Hoboken, N.J.: John Wiley & Sons, 2009).
2. Sam L. Savage, “Distribution Processing and the Arithmetic of
Uncertainty,” Analytics Magazine, November/December. (Available at
http://viewer.zmags.com/publication/90ffcc6b#/90ffcc6b/29.)
3. Sam L. Savage and Shayne Kavanagh, “The Sequestetron,” Analytics
Magazine, November/December 2013. (Available at http://viewer.
zmags.com/publication/24bf7927#/24bf7927/52.)
SAM L. SAVAGE is executive director of ProbabilityManagement.
org; author of The Flaw of Averages: Why We Underestimate Risk in
the Face of Uncertainty; consulting professor at Stanford University;
and a fellow of the Judge Business School at the University of
Cambridge. He can be reached at savage@stanford.edu. SHAYNE
KAVANAGH is senior manager of research at the Government
Finance Officers Association in Chicago. He can be reached at
skavanagh@gfoa.org.
The authors would like to thank the following for their contributions
to this article: Kara Skinner, CFO of Colorado Springs, Colorado,
along with Charae Moore, budget manager, and William Wallace,
Colorado Springs Fire Department fiscal and planning (retired); and
T. Pall Gudgeirsson, city manager of San Clemente, California, along
with Bill Humphreys, marine safety chief.
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Government Finance Officers Association
GFOA Consulting
Sales Tax Update
In Brief
Top 25 producers In AlphAbetIcAl Order
www.hdlcompanies.com | 888.861.0220
Q22017
Newport
Beach
Newport Beach’s receipts fromApril through June were 12.2% be-low the second sales period in 2016. Excluding reporting aberrations, ac-tual sales were down 2.4%.A onetime accounting adjustmentthat temporarily inflated last year’s allocation and exaggerated the drop from the county use tax pool was primarily responsible for the current decrease.Recent corrections of incorrectlyallocated payments negatively im-pacted results from the business and industry sector and transporta-tion/rentals. The City experienced a decline in sales from department stores.The losses were partially offset bya strong sales quarter for new motor vehicle dealers and service stations. Recent additions helped boost rev-enues from fine dining and casual dining restaurants. Net of aberrations, taxable salesfor all of Orange County grew 4.1% over the comparable time period; the Southern California region was up 3.4%.
Newport Beach
Third Quarter Receipts for Second Quarter Sales (April - June 2017)
Published by HdL Companies in Fall 2017
Apple
Bandera
Bloomingdales
Chevron
Daimler Trust
Ferrari of Newport Beach
Financial Services Vehicle Trust
Fletcher Jones Mercedes Benz
Glidewell Dental Lab
Island Hotel Newport Beach
Javier’s
Land Rover Newport Beach
Macys
McLaren Newport Beach
Neiman Marcus
Newport Lexus
Nordstrom
Pavilions
Phillips Auto Brokerage
Porsche of Newport Beach
Resort At Pelican Hill
Sterling BMW
Sun Country Marine
Tesla Motors
Toyota Lease Trust
$0
$400,000
$800,000
$1,200,000
$1,600,000
$2,000,000
$2,400,000
$2,800,000
SALES TAX BY MAJOR BUSINESS GROUP
2nd Quarter 2016
2nd Quarter 2017
AutosandTransportation
RestaurantsandHotels
GeneralConsumerGoods
Countyand StatePools
BusinessandIndustry
Fuel andServiceStations
FoodandDrugs
BuildingandConstruction
$0 $(4,416,033)
$34,774,108 $35,107,056
17,229 17,944
4,037,074 4,666,242
$30,719,805 $30,422,870
2016-172015-16
Point-of-Sale
County Pool
State Pool
Gross Receipts
Less Triple Flip*
REVENUE COMPARISON
Four Quarters – Fiscal Year To Date
*Reimbursed from county compensation fund
Item No. 0.1
Additional Materials Received
Finance Committee Meeting
November 9, 2017
NO
T
E
S
Sales Tax UpdateQ2 2017 Newport Beach
$0
$2,000
$4,000
$6,000
$8,000
SALES PER CAPITA
Newport Beach
Q214 Q217Q215Q216
County California
30%
Autos/Trans.24%
Restaurants
21%
Cons.Goods
11%
Pools
9%
Others5%
Bus./Ind.
Newport Beach This QuarterREVENUE BY BUSINESS GROUP
Q2 '17*
Newport Beach
NEWPORT BEACH TOP 15 BUSINESS TYPES
Business Type Change Change Change
County HdL State*In thousands of dollars
2.4%15.5%23.7% 543.2 Auto Lease
6.0%4.6%10.2% 194.6 Boats/Motorcycles
2.9%1.5%2.2% 779.4 Casual Dining
-8.0%-2.3%-4.4% 535.1 Department Stores
0.7%4.0%7.7% 201.7 Family Apparel
11.9%14.9%22.9% 458.7 Fine Dining
0.1%2.1%1.9% 222.2 Grocery Stores
-0.7%0.4%-2.1% 230.5 Home Furnishings
-10.1%3.3%6.1% 364.4 Hotels-Liquor
17.8%7.3%11.4% 157.6 Medical/Biotech
3.8%3.9%9.9% 1,713.5 New Motor Vehicle Dealers
13.8%6.0%5.8% 166.1 Quick-Service Restaurants
9.1%8.6%5.8% 362.1 Service Stations
-4.9%1.6%5.9% 142.7 Specialty Stores
-5.1%-3.8%-4.6% 223.6 Women's Apparel
6.4%33.4%-3.5%
-49.6%
-12.2%
7,498.6
908.2
8,406.8
Total All Accounts
County & State Pool Allocation
Gross Receipts
-30.3%-9.9%
21.5%4.1%
California Overall
Local government’s one-cent share of
statewide sales and use tax from trans-
actions occurring April through June
was 3.2% higher than the same quarter
of 2016 after payment aberrations are
factored out.
The largest percentage increases were
from the countywide allocation pools,
building supplies and rising fuel prices.
Auto sales and restaurants continued to
post solid gains. Except for value priced
apparel and dollar stores, most categories
of general consumer goods were down or
flat with the growth in online shopping
shifting tax receipts to in-state distri-
bution centers or to the countywide
allocation pools.
Receipts from business and industrial
transactions were lower than last year’s
comparable quarter because of declines
in new alternative energy projects. Ag-
ricultural and new technology related
purchases exhibited healthy gains as
did sales of warehouse and construction
equipment. Most other categories were
down from 2016.
Where does the Money Go?
E-commerce, technology and changing
consumer preferences have retailers un-
dergoing a dizzying transformation as
they compete for customers through
online websites, mobile apps, home de-
livery, social media, pop-up/flex stores
and pick-up lockers as well as traditional
brick and mortar businesses.
The changes in how goods are invento-
ried, sold and delivered has created some
confusion in allocating local sales and
use tax. However, it still involves three
basic principles:
• Location where the sale is negotiated
• L oc at ion of good s at t ime of sa le
• Ownership of goods being sold
Place of sale continues to be Califor-
nia’s primary rule for allocating local
sales tax. If the inventory is owned by
the seller and is located in-state, the tax
goes to the location that participates in
the sale, either by receiving the order or
shipping the goods. If the order is taken
outside the state but the seller owns the
inventory and delivers the goods from
inside California, the tax is allocated to
the jurisdiction where the warehouse is
located. Otherwise, the tax is shared
by all agencies in the county where the
goods are shipped on a pro-rata basis
through the county allocation pools.
Ownership of the goods being sold is
also a factor. In order for an agency to
receive a direct allocation of local tax
for goods shipped from a California
fulfillment center, the location must be
the retailer’s place of business and not
owned or operated by a separate legal
entity. If the retailer has no place of busi-
ness in California, the only opportunity
for local tax is an indirect allocation
through the countywide pools
For jurisdictions with transactions tax
overrides, that tax goes to the place of
purchase rather than the place of the
seller. For example, the sales tax on the
purchase of an automobile goes to the
seller’s location. However, the transac-
tions tax, if any, goes to the jurisdiction
where the buyer’s vehicle is registered.
Finance Committee Meeting Minutes October 12, 2017
Page 1 of 11
CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 12, 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 William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and
Committee Member Larry Tucker
ABSENT: None.
STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director, Finance Steve
Montano, Budget Manager Susan Giangrande, Accounting Manager Rukshana Virany, Purchasing Agent Anthony Nguyen, Fire Chief Chip
Duncan, Public Works/Finance Administrative Manager Jamie Copeland, and Administrative Specialist to the Finance Director Marlene Burns
OUTSIDE ENTITIES: John Bartel, Bartel Associates, LLC, Mia Corral, Chandler Asset
Management, Jayson Schmitt, Chandler Asset Management, and Mark Young KNN Public Finance, LLC
MEMBERS OF THE
PUBLIC: Mr. Jim Mosher and Ms. Joy Brenner
III. PUBLIC COMMENTS
Chair Dixon opened public comments.
Jim Mosher commented on the City’s debt policy and noted it will also be on the City Council’s
Study Session agenda to consider possible solutions to the City’s debt. He stated wisely acquiring debt and spending are two different matters and inquired regarding the audit of the Civic Center
project. He spoke about spending money for salaries and contracts, noting the “Voice of OC” publication has been reporting about various municipal contracts, and referenced the City of
Laguna Niguel, whose contracts are being reviewed by their version of the Finance Committee. The review found no funds were missing, pursuant to a report from their Interim City Manager. He
mentioned it is common for contracts to come back to the Newport Beach City Council for amendments to account for money that had already been spent in relation to the contract and
expressed curiosity of the amendments are a “red flag.” He inquired as to the reason for the numerous instances where contracts are returning to Council for amendments.
Chair Dixon closed public comments.
IV. CONSENT CALENDAR
A. MINUTES OF SEPTEMBER 14, 2017
Recommended Action:
Finance Committee Meeting Minutes October 12, 2017
Page 2 of 11
Approve and file.
MOTION: Committee Member Gorczyca moved and Council Member O'Neill seconded, to
approve the September 14, 2017, Finance Committee Minutes, as amended. The motion carried, (5 – 0, 2 abstentions Muldoon, Collopy).
V. CURRENT BUSINESS A. INVESTMENT PERFORMANCE REVIEW Summary: Staff and/or investment advisor will provide a brief economic update; review the performance
of the City's investment portfolio and potential strategies moving forward. Recommended Action:
Receive and file.
Finance Director Matusiewicz introduced Jayson Schmitt from Chandler Asset Management, who provided an economic update for the period ending September 30, 2017. He further noted the City’s
two current economic advisors alternate each year in providing the investment report to the Finance Committee.
Committee Member Gorczyca observed that Chandler has provided the economic update the past
three times.
Mr. Schmitt displayed a PowerPoint Presentation and provided additional documentation related to the investment report. Highlights included the Federal Open Market Committee’s notification that it
will be raising interest rates, the economy continues to grow, and the Federal Reserve has taken away some monetary accommodation. The Federal Reserve has started to reduce their balance
sheet; in October they will not be reinvesting principal and interest payments, and will increase up to about $50 billion. They will reduce their balance sheet to around 2.5 to 2 trillion dollars. The
unemployment rate is at 4.2 percent and wages rose to 2.9 percent.
He further reviewed the unemployment rate and noted an increasing labor participation rate. The last report was very healthy and indicative that the Federal Reserve will likely increase rates. The
CPI has started to increase and the Federal Reserve will begin looking at personal consumption expenditures. At the time of the report, they were worried about deflation.
Mr. Schmitt presented further slides related to the economic update which included Nonfarm
Payroll, Unemployment Rate, Consumer Price Index, Personal Consumption Expenditures, Retails Sales YOY % Change, Consumer Confidence, Leading Economic Indicators (LEI), Chicago Fed
National Activity Index (CFNAI), Housing Starts S & P/CaseShiller 20 City Composite Home Price Index, Institute of Supply Management Purchasing Manager Index, and Capacity Utilization, and
Gross Domestic Product.
He detailed the current financial market and investment landscape, noting on October 13, 2017, there will be three vacancies on the Federal Reserve Board, the balance sheet reduction begins
October 2017, and Board Chair Yellen’s four-year term will end on February 3, 2018. These changes will likely reshape the direction of interest rates and Federal Reserve policies visible
December 2017 through March 2018.
Collopy inquired as to how the Federal Reserve makes decisions.
Mr. Schmitt responded that Chair Yellen has traditionally been the voice of the Committee and the meetings are not recorded. They follow a more free flowing discussion model where they review a
theme they are already testing, including the correction of interest rates. The Chair typically has a larger influence; however, the other Committee members are also influential in final decision-
making. The Chair is typically the voice to the public and the votes are public. Occasionally,
Finance Committee Meeting Minutes October 12, 2017
Page 3 of 11
Committee members will speak out regarding dissenting positions. Mr. Schmitt further noted that
dissenting positions are rare, and the most dissenting positions he has seen on any particular issue is three.
Committee Member Gorczyca inquired as to how the Committee members are appointed.
Mr. Schmitt provided a general overview of the appointment process including Presidential
appointments, the non-Presidential appointments of district bank presidents, and concluded the system has served well over the long history of the Federal Reserve.
He resumed the review of the current financial market and investment landscape noting that interest
rates have moved off their extreme historical lows mitigating some of the risks related to rising rates on bond portfolios. He reviewed the low yields over the last 10 years including the 2-Year US
Treasury note that was at 0.16 percent as reported on September 19, 2011, and the 5-Year US Treasury note that was at 0.54 percent, as reported on July 24, 2012. He explained keeping a
shorter-term strategy with the City’s portfolio, which can be stretched for higher potential earnings from any rate increases.
Mr. Schmitt reviewed the current Federal Open Markets Committee 2017 members and alternate
members and their responsibilities. He also reviewed the Federal Reserve’s balance sheet and noted the balance sheets are big.
Finance Director Matusiewicz commented that a bounce back in interest rates is an opportunity to
regain investment earnings, which have been slumping for the past decade.
Council Member O’Neill stated the earnings could offset the potential reduction in property taxes as a result of any increase in interest rates.
Mr. Schmitt reviewed various bond yields including the US Treasury Note yields and then shifted
toward the City’s portfolio review. He highlighted the components of the total portfolio, including the liquidity portfolio and the reserve portfolio, each which have separate characteristics. The liquidity
portion of the portfolio is composed of LAIF and money market funds, matching maturities to known expenditures. These are ultra-short-term investments. The reserve portion of the portfolio is
targeted to a higher duration to enhance the potential to increase earnings. He noted the opportunities are better than they were three to five years ago.
Finance Director Matusiewicz stated the City’s investment goal of the ultra-short-term portfolio is to
be 30 basis points or more above the LAIF rate.
Committee Member Gorczyca stated the State LAIF is notoriously inexpensive.
Collopy inquired as to how many bonds are held to maturity.
Mr. Schmitt responded that less than 5 percent of the City’s bonds are not held to maturity, further noting that all securities are subject to price differentials over that period of time. The benchmarks
are a good metric by which to measure the investment manager to ensure they are doing a good job relative to a like set of securities.
Chair Dixon opened public comments. Noting there were no individuals who elected to speak, Chair
Dixon closed public comments.
This item was received and filed by the Finance Committee.
B. INVESTMENT ADVISOR CONTRACT DISCUSSION Summary:
Finance Committee Meeting Minutes October 12, 2017
Page 4 of 11
Committee Member Gorczyca requests that the Finance Committee reconsider its
recommendation to award investment advisor contract, solely, to Chandler Asset Management. Recommended Action:
Receive and file.
Committee Member Gorczyca expressed her desire to reconsider this item, which resulted from reflection after the last meeting. She began by stating that she had received no documentation
regarding the actions that took place in August, in particular referencing the lack of documentation relating to the various numbers in the terms of each bidders final fee proposal.
Finance Director Matusiewicz stated that the original request for proposals required bidders to
provide rates for managing a portfolio of up to $400 million dollars and prospective bidders were aware of the possibility they may wind up managing the entire fund. Bidders were asked specifically
asked to describe the advantages and disadvantages of the City having one versus two investment advisors and bidders. As part of the secondary interview, the bidders were asked whether they
would come down in price (once the top three bidders were determined) and were provided with several questions in advance of the interview. Those questions included inquiring about the City
having one versus two advisors. Mr. Matusiewicz expressed confusion as to the assertions made by Committee Member Gorczyca.
Purchasing Agent Anthony Nguyen displayed a PowerPoint Presentation and additional
documentation related to the procurement process overview of Request for Proposal 16-55, Investment Advisory Services. He explained his presentation was provided to evaluate whether the
City was unclear in its RFP documents as to advising potential bidders that the City may retain one or multiple investment advisors and whether the bid proposers understand the City was looking into
retaining one or possibly multiple investment advisors.
Mr. Nguyen provided the history of the process including the utilization of a consultant (Portfolio Services for Government, LLC); the procurement was conducted as a Request for Proposal (RFP),
using a Qualifications-Based Selection (QBS) process, and the process phases included proposal analysis, cost analysis, and interview analysis. Six firms submitted proposals in response to the
procurement, three of which advanced to the interview stage. Chandler Asset Management and PFM Asset Management, LLC, were identified as the most-qualified proposers.
He further stated the process questions, which included whether the City was unclear regarding
the potential of retaining one or possible multiple investment advisors and did the proposers understand the City was looking into retaining one or possibly multiple investment advisors. Mr.
Nguyen acknowledged the model of utilizing two advisors is less common for most municipalities; however, the procurement documents included language that the City reserved the right to return
to that model at its discretion. The RFP questionnaire contained questions regarding the benefits or disadvantages of retaining one versus multiple investment advisors, called for proposers to
submit discretionary fee schedules based on assets under management up to $400 million, and the panel interviews involved a discussion on the merits of a one versus two-investment advisor
model. He displayed slides that reflected the actual questionnaire items along with the actual responses from proposers. He concluded with his confidence that all six proposers were aware of
the City’s intent.
Committee Member Gorczyca commented on the RFP structure and the questions related to how fees would be structured, including categories and amounts.
Mr. Nguyen stated that the City has not yet technically awarded this contract and pursuant to policy,
he is prohibited from discussing particular details of the proposals. He did mention that the City may revisit making the fee structure public further along in the process as to roughly how the basis
points were tiered.
Finance Committee Meeting Minutes October 12, 2017
Page 5 of 11
Discussion ensued among the Committee and staff relative to interpreting the slide entitled
“Proposer Awareness – Cost Phase.”
Mr. Nguyen acknowledged the procurement documents stated that one proposer could ultimately wind up managing a portfolio up to $400 million dollars. Mr. Nguyen stated that at least two, and
possibly three, of the proposers could have successfully served as the City’s investment advisor, and the process was not meant to demonize any particular company. The results were that there
was one excellent proposer, and two great proposers.
Chair Dixon confirmed the technical scores were very close.
Finance Director Matusiewicz further explained the estimated savings of $30,000 per year was derived from a base assumption of $200 million of assets under management. The difference in
pricing between the two top proposers was approximately $20,000. There was also an additional cost savings of $10,000 per year obtained by utilizing just one advisor explaining that more assets
would pierce the lowest tier pricing.
Committee Member Gorczyca stated that PFM’s performance was stronger. She referenced various models utilized by various agencies including the use of in-house advisors. The models
and agencies mentioned included UACC (City of Irvine), FTN (City of Anaheim), and in-house advisors (Santa Ana, Irvine Ranch Water District). Multiple advisors are typically utilized when there
are portfolios of over $100 million (OCTA, CALOptima, Riverside Transportation Authority, Moreno Valley). She requested if staff could ask for a written fee proposal as an addendum to the
procurement process. She also requested if the City elects to move forward with only one advisor, if the City could prequalify an alternate so the City would not be scrambling in the event the initial
advisor did not meet the City’s standards for performance. Ms. Gorczyca also stated that the City could go back out to procurement again at a higher portfolio management number, such as over
$180 million and could see different proposers interested than those who were interested at the $85-90 million portfolio range. In conclusion, she did not expect the Committee to change its views
on selection of the advisor; however, she would like the City to consider prequalifying PFM as an alternative as a proactive approach.
Council Member O’Neill stated the City Council may want to consider prequalification.
Purchasing Agent Nguyen affirmed that after the award of the RFP the information is valid for
eighteen months.
Finance Director Matusiewicz acknowledged that PFM is already qualified to serve as investment advisor.
Collopy inquired whether this would turn the process into an IFB (Invitation for Bid).
Mr. Nguyen stated the City is not utilizing an IFB in this procurement for an investment advisor
because it is a professional service and the City Council can move forward with any of the top three proposers as a result of the RFP process.
C. DEBT POLICY
Summary: Staff and a municipal advisor from KNN will present a brief history of debt issued by the City
and discuss proposed changes to current Debt Policy F-6. Most proposed changes are required per Senate Bill No. 1029 (SB 1029), but the Committee may also wish to address any
issues concerning the City’s debt policy. Note that SB 1029 changes require approval by City Council before any new debt can be issued including pending assessment district financings.
Recommended Action: Review, comment and provide further staff direction, if appropriate.
Finance Committee Meeting Minutes October 12, 2017
Page 6 of 11
Council Member O’Neill reported the City Council discussed the City’s Debt Policy on Tuesday and
requested this discussion due to the issues that developed during the recent COP process. Rating agencies knocked agencies for not having a comprehensive Debt Policy in place. He distributed a
copy of the redlined version of the Debt Policy for discussion purposes.
Chair Dixon introduced Mark Young, municipal advisor from KNN Public Finance, LLC.
A PowerPoint Presentation was displayed. Council Member O’Neill outlined several matters related to potential modifications to the City’s Debt Policy including modifications that will be
required by SB 1029 (provisions that must be included in the Debt Policy prior to the issuance of any new debt, including pending assessment district financings). He further mentioned that he
would like to see the Debt Policy include the terms under which the authorized individuals can sign, a prescriptive policy, process and restrictions, and allow for more public input into debt
issuance terms. Mr. O’Neill noted that the circumstances post-COP issuance were largely a question of transparency into the process by which the terms were signed.
Discussion ensued among the Committee and staff related to the timing of negotiations and terms
when issuing bonds. Restrictions due to the California Brown Act may prohibit an impromptu meeting of the policy makers to be called and whether there is a vehicle, perhaps through the Debt
Policy resolution, that could provide parameters of how decisions related to debt issuance will be made.
Council Member O’Neill expressed a desire for a resolution that would express the policy and
“force” the City Council to take an affirmative action and choose the opposite action if they so desired. This would ensure transparency into the decision-making process as the City Council
would have to explicitly choose an alternate to the resolution requirements.
Discussion ensued regarding structuring policy to ensure transparency, which could be at the expense of flexibility in decision-making that could impact costs when negotiating and making final
bond purchases. The transparency provision may hurt the City’s ability to go out on the market to obtain the best prices and deal.
Discussion ensued among Committee Members and staff regarding policy restrictions to not allow
“make-whole” call provisions or “lock-out” periods greater than ten years without explicit authorization in the authorizing bond resolution.
Chair Dixon inquired as to how to other agencies handle “fill or kill” orders.
Mr. Young stated there is variability in how various agencies handle “fill or kill” orders. The prior
Council’s resolution was structured to be broad on purpose to include a tax-exempt piece for refunding. The resolution needed to be very broad to accommodate the decisions of elected
officials and authorized staff.
Committee Member Gorczyca inquired as to what month the resolution was authorized.
Mr. Young responded it was November 10, 2010. In 2010, “BABS” were authorized for two years (2009, 2010) because they were attractive investments. At that time there was a rush to market,
between October and December, where it became a “buyers” market. Major issuers who issue more debt and utilize a more sophisticated approach were incorporating PAR calls.
Committee Member Gorczyca noted that the State had large offerings around the same time.
Mr. Young confirmed that it was a buyer’s market and savvy local investors, such as PIMCO, made
sure to have bonds in their portfolios for the 30-year terms; the “make whole or call” provisions got them to write a $70 million dollar check. In hindsight, the City did not have another option except to
Finance Committee Meeting Minutes October 12, 2017
Page 7 of 11
delay the process or potentially use reserves to get started. Cities are not supposed to be making
interest rate bets.
Discussion ensued among the Committee and staff about having a policy in place that would prevent situations such as that which happened with the Civic Center debt financing and the
structure of such a policy. Inquiries were made regarding having a default policy that requires more participation before decisions are made and whether a “make-whole call” provision needs to be
included.
It was stated that there are timing limitations to lock in interest rates, where even a two-hour delay may have negative impacts on the City’s ability to obtain the best rates.
Committee Member Tucker commented he was convinced that the Civic Center debt issuance
circumstance is exactly what would have happened even if all the information was known and the process completely transparent. He stated the resolutions should be as broad as possible to give
as many opportunities as possible and all the decision-makers should have the information.
Discussion ensued among the Committee and staff regarding having a “callable” provision within the resolution. Comments were also made regarding the ability for the City Council to meet in a
timely way to maximize pricing.
Council Member O’Neill reiterated his desire to structure the resolution where the City Council must act affirmatively to waive any callable feature outlined as the default policy. This would set a
situation where the City Council has to be very clear and transparent about the action they are taking at the time. He also spoke about including cost parameters within the body of the resolution.
Mr. Young verified the City Council authorized the issuance of the POS, which cannot “hit the street”
until it has been officially authorized. The City Council has fiduciary responsibility in their capacity as elected officials, and that responsibility is not on the staff. He discussed the timing required for
the POS to be on the market for review especially to appeal to entities like PIMCO, who receive multiple offerings every day, every hour. He described a scenario, which could be outlined in the
resolution, whereby the City Council could have oversight/approval of the pricing process via a two-meeting cycle. The first meeting would entail getting the resolution approved, authorizing the POS,
and to set the pricing day. He further described the after-authorization process including the underwriters’ responsibilities. Any offer would come back to the City Council to be ratified. He did
note that after a verbal award, it would still take the attorneys and staff three to four hours to memorialize the appropriate documents.
Discussion ensued regarding “clean-up” language in the resolution, the provision of process
language, and the possibility of a charter amendment.
Committee Member Gorczyca provided historical perspective regarding the timing of the Civic Center debt issuance circumstance, noting there were other bad deals done that had call
provisions, where some had as much as 12-15 percent net present value savings. She stated the market was very crowded at that time, it was not perfect market timing, and would prefer resolution
language that would provide stricter guidance on market timing for any future debt financing opportunities going forward.
City Manager Kiff mentioned they wanted to go to sooner than later fearing a significant downturn
in the labor and materials market.
Council Member O’Neill suggested the formation of a Finance Committee subcommittee to bring back clean up language and inquired whether any of the other members had suggestions. He
suggested himself, Committee Member Tucker, and Committee Member Gorczyca as the temporary subcommittee membership.
Finance Committee Meeting Minutes October 12, 2017
Page 8 of 11
Discussion ensued regarding various elements that could be considered in the resolution language
including consideration of the utilization reserve funds (page no. 5), various means of lease financings and the impacts on the General Fund, an internal debt service fund, the various “call”
provisions, and the process for COP’s.
Mr. Young stated that the revised debt policy will need to comply with SB 1029, and suggested that it be drafted and approved as soon as possible.
Discussion ensued regarding flexibility requirements when “make-whole” decisions are being
considered. Comments were made regarding how the City Council would be notified regarding each option at each point in time during the offering process and ensuring the offering was as
marketable as possible.
Mr. Young confirmed that in a typical tax exempt transaction, the normal structure with bonds held over ten years, is to have an option to prepay after ten years. He cited an example of the City of
Long Beach making a loan to the Aquarium, who had the option to prepay the loan at any time. That type of situation would have an additional cost. Bonds that are callable have a higher yield
than those that are non-callable.
Mr. Young described various short-term financing solutions, such as a short-term commercial paper program, to finance certain opportunities. With pure variable rate debt, the City is in a better position
to keep terms short and not use derivatives. He would prefer that staff come to the City Council and explain the derivative process and to have the City Council adopt a derivative policy.
Discussion ensued among the Committee and staff regarding variable rate loans, the City acting
as guarantor in certain situations, included property as assets, and cities’ “moral” obligations to make right any negative impacts of assessment district financing.
Mr. Young cautioned that city-wide use of a “Mello-Roos” type financing could impact debt ratios
and the City should not consider any actions or policies that would negatively impact the image and rating of the City.
Chair Dixon opened public comments.
Jim Mosher expressed concerns with the authorization resolutions not being mentioned (page no.
6 of the policy) and referenced Resolution No. 2010-126 and City Charter Section 421. He expressed concern on whether the Mayor/Clerk had to sign off on certain aspects of the debt
financing. He referenced “backstop” provisions and commented that under the City’s form of government, certain officials had ministerial responsibilities to authorize certain actions via signing
off.
Chair Dixon closed public comments.
MOTION: Committee Member O’Neill moved, and Committee Member Stapleton seconded, to form an ad-hoc subcommittee to review the existing debt policy and bring recommendations back
to the Finance Committee for consideration. The subcommittee would be comprised of Committee Member Tucker, Committee Member Gorczyca and Council Member O’Neill. The motion carried,
unanimously.
Discussion ensued among the Committee regarding the role of public participation in the debt policy and debt financing process, the potential for a charter amendment or ordinance change, whether
this is the appropriate role for the Finance Committee, and the requirements and ramifications of voter approval and participation, or lack thereof. Comments were made regarding the Finance
Committee’s role versus the City Council’s role in debt financing decisions, how particular improvements are financed, balance sheet risks, the debt issuance transparency needs, the size
Finance Committee Meeting Minutes October 12, 2017
Page 9 of 11
and scope of the type of projects that will be financed, and what issues should be analyzed by the
Finance Committee.
There was consensus among the Committee members that residents are not likely going to want or need to “sign off” or have voter approval elections on smaller projects and financing. They are
mostly concerned with large-scale financing and projects.
Council Member O’Neill suggested the elimination of option no. 2, making the point that people are informed about the amounts being financed and obligated, inquired as to what the threshold amount
should be, and requested that staff return in the next one or two meetings with an analysis of the pros and cons of options one and three.
Mr. Young stated it would be relatively unique to place a self-imposed restriction on the ability to
utilize lease financing. As an advisor, he would recommend that if there would be a debt restriction it would limit the City’s ability to act in the event of an unforeseen event, such as the Santa Rosa
fires.
Discussion ensued among the Committee and staff regarding the goal of ensuring the public is thoroughly aware of large debt financing prospects and allowing for public participation, emergency
situations which require immediate financing, not restricting the options available to future City Councils, and to put forth realistic recommendations for the City Council’s consideration.
Comments were made regarding which options should be analyzed by staff and brought back to the Finance Committee for consideration.
Chair Dixon opened public comments.
Jim Mosher stated that his intuition tells him that the public would appreciate analyzing all three
options, especially option no. 2, as they are concerned about discretionary projects and the amount of money that is being committed for future obligations. He believed the public should have a
mandatory voice, rather than relying on their elected representatives in this matter.
Chair Dixon closed public comments.
D. BUDGET AMENDMENTS Summary:
Receive and file a staff report on the budget amendments for the prior quarter. Recommended Action:
Receive and file.
Chair Dixon introduced this item.
Finance Director Matusiewicz presented a brief review of the quarterly budget amendments and the one item worthy of discussion was actually a budget transfer rather than a new allocation.
Council Member O’Neill stated when the City purchased the Fire Station property without using
current General Fund money.
Chair Dixon opened public comments.
Jim Mosher expressed his support of City staff notifying the public when there are amendments to the budget. He did express concern about the City Council reviewing a tree contract on Tuesday
and was puzzled how the amount considered ($400,000) was not described as a budget amendment. He stated the online budget seems to be running over and that the amount for this
contract was already expended. He inquired how work above and beyond the scope of the contract would not be considered a budget amendment.
Finance Committee Meeting Minutes October 12, 2017
Page 10 of 11
Chair Dixon requested staff to provide a response to Mr. Mosher on this matter.
Chair Dixon closed public comments.
The subcommittee will return to the Finance Committee within the next one or two meetings with
recommendations related to the debt policy and staff will begin analysis of all three options. E. PENSION DISCUSSION Summary:
Agenda item reserved for discussion regarding the status of the City's pension liability, payment strategies, CalPERS policy updates and or advocacy efforts. Recommended Action: Discussion if applicable. John Bartel, Bartel Associates, displayed a PowerPoint Presentation. He provided information
related to the history of CalPERS and the institution of retirement plans and formulas, noting that the members of the CalPERS board who are elected by CalPERS members are usually the more
vocal. He provided details as to the historical types of investments that CalPERS has allowed for retirement funds. He also stated that pension reform has been instituted at various points in time
and also eliminated.
Discussion ensued among the Committee members and Mr. Bartel relative to the 3% @ 50 and other retirement formulas. Retroactivity was also discussed, including noting there was some
dispute about how the retroactivity provision was to be interpreted. He further commented that every retirement formula is a result of negotiations between bargaining units and the respective
agency.
Mr. Bartel stated the City instituted the 3% @ 50 formula in 2000.
Committee Member Gorczyca inquired whether an actuarial of the costs was completed prior to instituting retroactivity with the formula.
Mr. Bartel affirmed it is mandatory to do an actuarial analysis and at the time it was determined the
increase in liability would be covered by the excess in assets. In January 2017, there was a report on the cost of divestment and the analysis came back with over thirty years of impact to the system
at approximately 7.9 billion dollars. The primary causes included divesting from tobacco and gun stocks, and not investing in South Africa. There has been a recent decision to divest of some coal
stocks, but that impact was not included in the last report.
Mr. Bartel reported that typically divestment requirements are set by legislative action.
Chair Dixon commented on the high turnover of investment staff at CalPERS and inquired as to how CalPERS investments compare with the S & P index. Mr. Bartel responded that CalPERS falls
a bit below what the market does.
Mr. Bartel reported the City has three options to address the unfunded pension liability including making payments, setting up an internal service fund, or set up a supplemental pension trust via
Section 115. He stated that if the City wants flexibility, a Section 115 trust is a good option, but there is a cost for the flexibility in that there will be a lower return on investment. The cost relative
to the higher return in CalPERS investing is that you do not have as much flexibility with the funds. He outlined the process involved in setting up the Section 115 trust, noting that more than 100
agencies in California have set up a trust, half of which are municipalities.
Mr. Bartel further stated that the City should not expect to do better than CalPERS did and would not recommend setting up a trust with that expectation.
Finance Committee Meeting Minutes October 12, 2017
Page 11 of 11
Mr. Young stated he does not like Section 115 trusts. CalPERS is slowly getting more flexibility and
would prefer the City utilize an internal pension stabilization fund.
Discussion ensued among the Committee and staff regarding studying the utilization of pension stabilization funds, the use of reserves, and studying Section 115 trusts.
Chair Dixon opened public comments.
Mr. Mosher requested an update on the Finance Committee’s work plan for the next six months.
Chair Dixon closed public comments.
Chair Dixon noted the time and requested that all remaining agenda items that were not discussed
at this meeting be carried over to the next regular meeting. F. LONG-TERM FINANCIAL FORECAST Summary:
Review of potential forecast scenarios that may be considered in the development of the FY 2018-2019 budget and beyond. Staff will provide a brief revenue update, review pension
funding scenarios including less aggressive payment plans and other financial updates that are relevant to the current and future budgets. Recommended Action: Receive and file.
G. REVIEW OF FINANCE COMMITTEE WORKPLAN Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the
calendar year. Recommended Action:
Receive and file. 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
The Finance Committee adjourned at 5:54 p.m. to the next regular meeting of the Finance Committee on Thursday, November 9, 2017, at 3:00 p.m.
Filed with these minutes are copies of all materials distributed at the meeting.
The agenda for the Regular Meeting was posted on October 9, 2017, at 2:27 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
PROPOSED CHANGES BY COMMITTEE MEMBER GORCZYCA Item No. 4A1
Draft Minutes of October 12, 2017
Correspondence
November 9, 2017
Approve and file.
Finance Committee Meeting Minutes October 12, 2017
MOTION: Committee Member Gorczyca moved and Council Member O'Neill seconded, to approve the September 14, 2017, Finance Committee Minutes, as amended. The motion carried, (5 -0, 2 abstentions Muldoon, Collopy).
V.CURRENT BUSINESS
A.INVESTMENT PERFORMANCE REVIEWSummary:Staff and/or investment advisor will provide a brief economic update; review the performanceof the City's investment portfolio and potential strategies moving forward.Recommended Action:Receive and file.
Finance Director Matusiewicz introduced Jayson Schmitt from Chandler Asset Management, who
provided an economic update for the period ending September 30, 2017t:urther noted the City's
two current economic advisors alternate each year in providing the invest ent report to the Finance
Committee.
-0 ;¼J //
Committee Member Gorczyca observed that Chandler has provided the economic update the past three times.
Mr. Schmitt displayed a PowerPoint Presentation and provided additional documentation related to the investment report. Highlights included the Federal Open Market Committee's notification that it will be raising interest rates, the economy continues to grow, and the Federal Reserve has taken away some monetary accommodation. The Federal Reserve has started to reduce their balance sheet; in October they will not be reinvesting principal and interest payments, and will increase up to about $50 billion. They will reduce their balance sheet to around 2.5 to 2 trillion dollars. The unemployment rate is at 4.2 percent and wages rose to 2.9 percent.
He further reviewed the unemployment rate and noted an increasing labor participation rate. The last report was very healthy and indicative that the Federal Reserve will likely increase rates. The
CPI has started to increase and the Federal Reserve will begin looking at personal consumption
expenditures. At the time of the report, they were worried about deflation.
Mr. Schmitt presented further slides related to the economic update which included Nonfarm
Payroll, Unemployment Rate, Consumer Price Index, Personal Consumption Expenditures, Retails
Sales YOY % Change, Consumer Confidence, Leading Economic Indicators (LEI), Chicago Fed
National Activity Index (CFNAI), Housing Starts S & P/CaseShiller 20 City Composite Home Price
Index, Institute of Supply Management Purchasing Manager Index, and Capacity Utilization, and Gross Domestic Product.
He detailed the current financial market and investment landscape, noting on October 13, 2017, there will be three vacancies on the Federal Reserve Board, the balance sheet reduction begins October 2017, and Board Chair Yellen's four-year term will end on February 3, 2018. These changes will likely reshape the direction of interest rates and Federal Reserve policies visible December 2017 through March 2018.
Collopy inquired as to how the Federal Reserve makes decisions.
Mr. Schmitt responded that Chair Yellen has traditionally been the voice of the Committee and the meetings are not recorded. They follow a more free flowing discussion model where they review a theme they are already testing, including the correction of interest rates. The Chair typically has a larger influence; however, the other Committee members are also influential in final decision
making. The Chair is typically the voice to the public and the votes are public. Occasionally,
Page 2 of 11
PROPOSED CHANGES BY COUNCIL MEMBER O'NEILL Item No. 4A2
Draft Minutes of October 12, 2017
CorrespondenceNovember 9, 2017
ATTACHMENT A
ACTUARIAL VALUATION REPORT NEWPORT BEACH 2017
October 31, 2017
PRIVATE
Ms. Susan Giangrande
Budget Manager
City of Newport Beach
One Civic Center Drive
Newport Beach, CA 92660
Re: OPEB Actuarial Valuation
Dear Ms. Giangrande:
We are presenting our report of the June 30, 2017 actuarial valuation conducted on behalf
of the City of Newport Beach (the “City”) for its retiree health program.
The purpose of the valuation is to measure the City’s liability for other postemployment
benefits (OPEB) and to determine an actuarially determined contribution (ADC). The ADC is
a target or recommended contribution to a defined benefit OPEB plan for the reporting
period, determined in accordance with parameters set by the City and in conformity with
Actuarial Standards of Practice. The valuation results will also serve as the basis for
complying with GASB 75 for the fiscal year ending June 30, 2018.
The Nyhart Company is an employee owned actuarial, benefits and compensation
consulting firm specializing in group health and retiree health and qualified pension plan
valuations. We have set forth the results of our study in this report.
We have enjoyed working on this assignment and are available to answer any questions.
Sincerely,
NYHART
Marilyn K Jones, ASA, MAAA, EA, FCA
Consulting Actuary
MKJ:rl
Enclosure
City of Newport Beach
OPEB Actuarial Valuation
Retiree Health Program
As of June 30, 2017
C:\Retmed\NEWBCH\2017\Final\Actuarial Valuation Report Newport Beach 2017.docx
City of Newport Beach
OPEB Actuarial Valuation
Retiree Health Program
As of June 30, 2017
Table of Contents
Page
Section I. Executive Summary ..................................................................................................................... 1
Section II. Financial Results ........................................................................................................................... 4
Section III. Projected Cash Flows ................................................................................................................... 9
Section IV. Benefit Plan Provisions ................................................................................................................ 11
Section V. Valuation Data .............................................................................................................................. 14
Section VI. Actuarial Assumptions and Methods ........................................................................................ 16
Section VII. Actuarial Certification .................................................................................................................. 22
Section VIII. Definitions ..................................................................................................................................... 24
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SECTION I. EXECUTIVE SUMMARY
Background
The City of Newport Beach (the “City”) selected Nyhart to perform an updated actuarial valuation of its retiree
health program. The purpose of the valuation is to measure the City’s liability for OPEB benefits and to
determine recommended actuarially determined contributions (ADCs) for the fiscal periods ending June 30,
2019 and June 30, 2020. The ADC is a target or recommended contribution to a defined benefit OPEB plan for
the applicable period, determined in accordance with parameters set by the City and in conformity with
Actuarial Standards of Practice. The valuation results will also serve as the basis for complying with GASB 75
for the fiscal year ending June 30, 2018.
Effective January 1, 2006, the City implemented a Retiree Health Savings program (RHS Plan) for all new full-
time employees and for full-time employees whose age plus years of service as of January 1, 2006 was less
than 46 for public safety employees and 50 for all other employees. A Hybrid Plan was provided for full-time
active employees whose age plus years of service as of January 1, 2006 was 46 or more for public safety
employees and 50 or more for all other employees (unless opting into the RHS Plan). Employees in the Hybrid
Plan continue to be eligible to receive the City’s fixed dollar contribution under the prior defined benefit plan
at retirement but the contribution is paid into the employee’s RHS account. Employees already retired and
eligible for a City contribution at January 1, 2006 also continue to receive the City’s fixed dollar contribution
under the prior defined benefit plan but instead of being applied towards medical coverage, the fixed dollar
contribution amount less the PEMHCA minimum required employer contribution for those continuing
coverage through PEMHCA is made to an RHS account established for the retiree. Part-time employees
retiring from the City can elect to continue medical coverage through PEMHCA and receive a City contribution
equal to the PEMHCA minimum required employer contribution.
As of the valuation date there are 539 retirees receiving the City’s flat dollar contribution plus 32 retirees
receiving the PEMHCA minimum required contribution. There are also 88 active employees under the Hybrid
Plan eligible to receive the City’s flat dollar contribution in the future if retiring from the City. In addition, there
are 103 part-time employees who may become eligible to continue coverage through PEMHCA at retirement.
The remaining 591 employees participate in the RHS Plan. The City may be responsible for the PEMHCA
minimum required contribution if these employees retire from the City and continue coverage under
PEMHCA.
The City participates in the CalPERS Health Program for its retiree medical coverage. In general, the premium
rates charged to participating employers are the same for each medical plan within each region (or
“community”) and are the same for both active and retired employees covered under the same medical plan.
An implied rate subsidy can exist when the non-Medicare rates for retirees are the same as for active
employees. Since non-Medicare eligible retirees are typically much older than active employees, their actual
medical costs are typically higher than for active employees. Both GASB accounting standards and actuarial
standards of practices (ASOPs) require that implied rate subsidies be considered in the valuation of medical
costs. This valuation includes an estimate of the liability for the implicit rate subsidy.
Section IV of the report provides a full description of the plan provisions that were included in the valuation
and the current premium costs for coverage.
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Results of the Retiree Health Valuation
We have determined the amount of the present value of the projected City contributions (actuarial liability)
for OPEB benefits, as of June 30, 2017, the valuation date, is $48,730,869 (including $39,762,062 for the City’s
explicit contribution and $8,968,807 for the implicit rate subsidy). This value is based on an assumed discount
rate of 6.5%. The amount represents the present value of all benefits projected to be paid by the City for
current and future retirees. If the City were to have this amount in a fund earning interest at the rate of 6.5%
per year, and all other actuarial assumptions were met, the fund would have enough to pay the City’s
required contribution for retiree health benefits. This includes benefits for the current retirees as well as the
current active employees expected to retire in the future. The valuation does not consider employees not yet
hired as of the valuation date.
If the amount of the actuarial liability is apportioned into past service, current service and future service
components; the past service component (actuarial accrued liability now referred to as Total OPEB Liability) is
$44,614,266 (including $37,407,353 for the City’s explicit contribution and $7,206,913 for the implicit rate
subsidy), the current service component (normal cost or current year accrual) is $509,433 (including $322,560
for the City’s explicit contribution and $186,873 for the implicit rate subsidy) and the future service
component (not yet accrued liability) is $3,607,170 (including $2,032,149 for the City’s explicit contribution and
$1,575,021 for the implicit rate subsidy).
Changes from Prior Valuation
The valuation reflects updated premium, plan and census information. In addition, there were several
assumption and method changes including updates to the healthcare costs and trends and a lowering of the
discount rate to 6.5% for CERBT investment strategy 1. A reconciliation of the approximate change in the
liabilities from the prior valuation is provided below:
Present Value of City Contributions (Actuarial Liability) at June 30, 2015 @7.0% $47,414,000
Decrease due to passage of time ( 552,000)
Decrease due to more favorable experience ( 1,209,000)
Increase due to new entrants 422,000
Increase due to updates to the initial healthcare trend 82,000
Increase due to lowering the discount rate to 6.5% 2,575,000
Present Value of City Contribution (Actuarial Liability) at June 30, 2017 @6.5% $48,731,000
Portion attributable to current year accrual or normal cost ( 509,000)
Portion of liability not yet accrued or future normal cost accruals ( 3,607,000)
Total (Accrued) OPEB Liability at June 30, 2017 @6.5% $44,614,000
Actuarial Value of Plan Assets (Funded Portion) ( 19,218,000)
Net (Unfunded Accrued) OPEB Liability at June 30, 2017 @6.5% $25,396,000
$19,218,534
$25,395,732
$3,607,170 $509,433
Total Actuarial Liability = $48,731,869
Total (Accrued) OPEB Liability -
Funded Total (Accrued) OPEB Liability -
Unfunded Liability for Future Years'
Accruals Current Year Accrual (Normal
Cost)
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Plan Assets
The City pre-funds the OPEB benefits through the California Employers’ Retiree Benefit Trust (CERBT) through
the CERBT under investment strategy 1. The market value of assets as of June 30, 2017 is $19,078,995. For
funding purposes, the City has selected an asset smoothing method to determine the actuarial value of
assets. The smoothing method recognized any asset gains or losses over 5 years recognizing 20% per year.
The actuarial value of assets at June 30, 2017 is $19,218,534. The Net (unfunded) OPEB Liability at June 30,
2017 is $25,395,732. The Plan’s funded ratio (actuarial value of assets over Total OPEB Liability) is 43%.
Actuarially Determined Contribution (ADC)
The recommended actuarially determined contribution (ADC) is determined based on the normal cost
(current accrual for benefits being earned) plus an amortization of the net (unfunded accrued) OPEB liability
over 10 years (on a level-dollar basis). The recommended ADC is equal to $3,834,916 (or 5.15% of payroll) for
the fiscal year ending June 30, 2019 and includes $2,618,419 for the City’s explicit contribution and $1,216,497
for the implicit rate subsidy. The projected ADC for the fiscal year ending June 30, 2020 is $3,852,251.
The estimated City direct contribution amount for retiree health benefits for the 2017-18 fiscal year is
$3,443,987 (including $632,353 for the implicit rate subsidy). This amount includes payments for employees
expected to retire during the 2017-18 fiscal year.
Actuarial Basis
The actuarial valuation is based on the assumptions and methods outlined in Section VII of the report. To the
extent that a single or a combination of assumptions is not met, the future liability may fluctuate significantly
from its current measurement. As an example, the healthcare cost increase anticipates that the rate of
increase in medical cost will be at moderate levels and decline over several years. Increases higher than
assumed would bring larger liabilities and expensing requirements. Another key assumption used in the
valuation is the discount (interest) rate which is based on the expected rate of return of plan assets.
Sensitivity for a 1% increase and decrease in the healthcare trend rates and for a 1% increase and decrease in
the discount rate is provided in Section II-J.
Scheduled to take effect in 2020, the "Cadillac Tax" is a 40% non-deductible excise tax on employer-sponsored
health coverage that provides high-cost benefits. For insured plans, the insurance company is responsible for
payment of the excise tax. For self-funded plans, the employer is responsible for payment of the excise tax.
The valuation excludes any additional liability for the Cadillac Tax as based on current provisions the amount
would be de minimis.
The valuation is based on the census, plan and rate information provided by the City. To the extent that the
data provided lacks clarity in interpretation or is missing relevant information, this can result in liabilities
different than those presented in the report. Often missing or unclear information is not identified until
future valuations.
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SECTION II. FINANCIAL RESULTS
A. Valuation Results
The table below presents the employer liabilities associated with the City’s retiree health benefits. The
actuarial liability is the present value of all City contributions projected to be paid under the program. The
total OPEB liability (TOL), previously referred to as the actuarially accrued liability, reflects the amount
attributable to the past service of current employees and retirees. The normal cost reflects the accrual
attributable for the current period and includes interest.
Miscellaneous Safety Total
1. Actuarial Liability or Present Value of Benefits
Actives $ 8,486,108 $ 5,730,143 $14,216,251
Retirees 17,228,140 17,286,478 34,514,618
Total $25,714,248 $23,016,621 $48,730,869
Explicit Contribution $21,368,646 $18,393,416 $39,762,062
Implicit Contribution $ 4,345,602 $ 4,623,205 $ 8,968,807
2. Total OPEB Liability (TOL)
Actives $ 6,475,454 $ 3,624,194 $10,099,648
Retirees 17,228,140 17,286,478 34,514,618
Total $23,703,594 $20,910,672 $44,614,266
Explicit Contribution $20,113,303 $17,294,050 $37,407,353
Implicit Contribution $ 3,590,291 $ 3,616,622 $ 7,206,913
3. Normal Cost $ 286,455 $ 222,978 $ 509,433
Explicit Contribution $ 192,763 $ 129,797 $ 322,560
Implicit Contribution $ 93,692 $ 93,181 $ 186,873
No. of Active Employees 782
Average Age 42.8
Average Past Service 12.7
No. of Retired Employees 571
Average Age 67.8
Average Retirement Age 54.6
*Counts exclude 103 retirees waiving coverage and not receiving any City contribution
B. Reconciliation of Market Value of Plan Assets
The reconciliation of Plan Assets for the last two fiscal years is presented below:
Fiscal Year Ending
6/30/2016 6/30/2017
1. Beginning Market Value of Assets $14,818,836 $16,131,814
2. Contribution 3,845,895 3,925,087
3. Fund Earnings (gross) 228,906 1,881,482
4. Benefit Payments ( 2,748,781) ( 2,843,721)
5. Investment Expenses ( 5,508) ( 6,617)
6. Administrative Expenses ( 7,534) ( 9,050)
7. Ending Market Value of Assets $16,131,814 $19,078,995
8. Estimated Return on Assets 1.45% 11.25%
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C. Development of Actuarial Value of Assets
The actuarial value of assets is based on the expected market value appreciation. The actual market
appreciation or depreciation, both realized and unrealized, is phased in over five years as the expected
growth is phased out. The table below presents the development of the actuarial value of assets.
6/30/2014 6/30/2015 6/30/2016 6/30/2017
1 Market value of assets $19,078,995
2 Actual rate of return 18.09% ( 0.29%) 1.45% 11.25%
3 Expected rate of return 7.25% 7.25% 7.00% 7.00%
4 Actual fund earnings $2,118,149 ( 43,051) $ 223,398 $1,874,865 4,173,361
5 Expected fund earnings 849,095 1,079,197 1,075,261 1,166,527 4,170,088
6 Gain(loss) [(4) - (5)] 1,269,054 (1,122,248) ($ 851,863) $ 708,338
7 Percent of gain/(loss) recognized
6/30/2017 80% 60% 40% 20%
8 Recognized gain/(loss)
[(6) x (7)] $1,015,243 ($ 673,354) ($ 340,745) $ 141,668
$ 142,812
9. Blended value of assets at 6/30/2017 [(1) - (4) + (5) + (8)] $19,218,534
10.Percent increase/(decrease) of (9) over (1) 0.73%
11.Actuarial value of assets, not more than 120% nor less than 80% of market value $19,218,534
D. Development of Actuarial Value of Assets
The actuarial value of assets is based on the market value of assets plus any contribution receivable or
benefits payable. The actuarial value of assets at June 30, 2017 is $19,218,534.
E. Net (Unfunded Accrued) OPEB Liability (NOL) at June 30, 2017
The table below presents the development of the net OPEB liability previously referred to as the
unfunded actuarial accrued liability. The net OPEB liability is the excess of the TOL over the actuarial value
of plan assets.
Explicit Implicit Total
1. Total (Accrued) OPEB Liability $37,407,353 $7,206,914 $44,614,267
2. Actuarial Value of Assets ( 19,218,534) ( 0) ( 19,218,534)
3. Net (Unfunded Accrued) OPEB Liability (NOL) $18,188,819 $7,206,914 $25,395,733
F. Projected Actuarial Value of Assets @June 30, 2018
The table below presents the development of the expected actuarial value of assets at June 30, 2016 for
purposes of developing the annual required contribution.
1. Actuarial Value of Assets at June 30, 2017 $19,218,534
2. Expected Fund Earnings @6.5% 1,268,667
3. Expected City Contributions* 4,042,840
4. Expected Benefit Payments & Expenses* ( 3,443,987)
5. Projected Actuarial Value of Assets at June 30, 2018 $21,086,054
* Based on projected City contributions equal to $4,042,840 and reimbursements for direct payments for benefits
and implicit rate subsidies equal to $3,443,987.
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G. Development of Net OPEB Liability (NOL) at June 30, 2018
The table below presents the development of the net OPEB liability previously referred to as the
unfunded actuarial accrued liability. The net OPEB liability is the excess of the TOL over the actuarial value
of plan assets.
Explicit Implicit Total
1. Total (Accrued) OPEB Liability $37,279,345 $7,221,478 $44,500,823
2. Actuarial Value of Assets ( 21,086,054) ( 0) ( 21,086,054)
3. Net (Unfunded Accrued) OPEB Liability (NOL) $16,193,291 $7,221,478 $23,414,769
H. Amortization of NOL
The amortization of the NOL component of the actuarially determined contribution (ADC) is being
amortized over a period of 10 years on a level-dollar basis. Under the level-dollar method, the
amortization payment is scheduled to remain constant in future years.
1. NOL $16,193,291 $ 7,221,478 $23,414,769
2. Amortization Factor 7.18883 7.18883 7.18883
3. Amortization of NOL $ 2,252,563 $ 1,004,541 $ 3,257,104
I. Actuarially Determined Contribution (ADC)
The table below presents the development of the actuarially determined contribution (ADC) for the fiscal
year ending June 30, 2019 and for the fiscal years ending June 30, 2020.
Explicit Implicit Total
FY2018/2019
1. Normal Cost $ 365,856 $ 211,956 $ 577,812
2. Amortization of NOL 2,252,563 1,004,541 3,257,104
3. Actuarially Determined Contribution (ADC) $ 2,618,419 $ 1,216,497 $ 3,834,916
4. Estimated Payroll $74,485,000 $74,485,000 $74,485,000
5. ADC as % of Payroll 3.52% 1.63% 5.15%
FY2019/2020
1. Normal Cost $ 376,832 $ 218,315 $ 595,147
2. Amortization of NOL 2,252,563 1,004,541 3,257,104
3. Actuarially Determined Contribution (ADC) $ 2,629,395 $ 1,222,856 $ 3,852,251
4. Estimated Payroll $76,719,000 $76,719,000 $76,719,000
5. ADC as % of Payroll 3.43% 1.59% 5.02%
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J. Sensitivity Analysis:
The impact of a 1% decrease and increase in the discount (interest) rate and the impact of a 1% increase
and decrease in future healthcare trend rates on the City’s actuarial liability, TOL, NOL and the ADC is
provided below:
1% Decrease in Discount Rate
Dollar
($) Increase/
(Decrease)
Percentage
(%) Increase/
(Decrease)
- Actuarial Liability $6,025,497 12%
- TOL $4,582,874 10%
- NOL $4,582,874 18%
- ADC $ 586,690 15%
1% Increase in Discount Rate
- Actuarial Liability ($4,907,431) (10%)
- TOL ($3,877,497) ( 9%)
- NOL ($3,877,497) (15%)
- ADC ($ 511,489) (13%)
1% Increase in Future Healthcare Trend Rates
- Actuarial Liability $ 3,070,186 6%
- TOL $ 2,054,410 5%
- NOL $ 2,054,410 8%
- ADC $ 895,488 23%
1% Decrease in Future Healthcare Trend Rates
- Actuarial Liability ($2,174,216) ( 4%)
- TOL ($1,421,030) ( 3%)
- NOL ($1,421,030) ( 6%)
- ADC ($ 297,612) ( 8%)
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K. Alternative Results: Alternative Discount Rate
The table below shows the impact on the liability and annual required contributions using a higher
discount rate of 7.0%.
As of June 30, 2017
Explicit
Contribution
Implicit Rate
Subsidy
Total
1. Actuarial Liability (AL)
Actives $ 8,270,622 $ 4,760,340 $13,030,962
Retirees 29,382,189 3,742,970 33,125,159
Total AL $37,652,811 $ 8,503,310 $46,156,121
2. Actuarial Accrued Liability (AAL)
Actives $ 6,255,403 $ 3,216,304 $ 9,471,707
Retirees 29,382,189 3,742,970 33,125,159
Total AAL $35,637,592 $ 6,959,274 $42,596,866
3. Actuarial Value of Assets ( 19,218,534) ( 0) ( 19,218,534)
4. Unfunded AAL (UAAL) $16,419,058 $ 6,959,274 $23,378,332
Projected to June 30, 2018
1. Actuarial Accrued Liability (AAL) $35,528,105 $ 6,973,639 $42,501,744
2. Actuarial Value of Assets ( 21,086,054) ( 0) ( 21,086,054)
3. Unfunded AAL (UAAL) $14,442,051 $ 6,973,639 $21,415,690
4. Amortization Factor 7.02358 7.02358 7.02358
5. Amortization of UAAL $ 2,056,223 $ 992,889 $ 3,049,113
2018/2019 Recommended ADC
1. Normal Cost at End of Year $ 327,337 $ 194,420 $ 521,757
2. Amortization of UAAL at End of Year 2,056,223 992,889 3,049,113
3. Recommended ADC $ 2,383,560 $ 1,187,309 $ 3,570,870
4. Expected Payroll $74,485,000 $74,485,000 $74,485,000
5. City ARC as % of Payroll 3.20% 1.59% 4.79%
2019/2020 Annual Required Contribution
1. Normal Cost at End of Year $ 337,157 $ 200,253 $ 537,410
2. Amortization of UAAL at End of Year 2,056,223 992,889 3,049,112
3. Recommended ADC $ 2,393,380 $ 1,193,142 $ 3,586,522
4. Expected Payroll $74,556,000 $74,556,000 $74,556,000
5. City ARC as % of Payroll 3.12% 1.56% 4.67%
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SECTION III. PROJECTED CASH FLOWS
The valuation process includes the projection of the expected benefits (including the explicit City contribution
and the implicit rate subsidy) to be paid by the City under its retiree health benefits program. This expected
cash flow takes into account the likelihood of each employee reaching age for eligibility to retire and receive
health benefits. The projection is performed by applying the turnover assumption to each active employee for
the period between the valuation date and the expected retirement date. Once the employees reach their
retirement date, a certain percent are assumed to enter the retiree group each year. Employees already over
the latest assumed retirement age as of the valuation date are assumed to retire immediately. The per capita
cost as of the valuation date is projected to increase at the applicable healthcare trend rates both before and
after the employee's assumed retirement. The projected per capita costs are multiplied by the number of
expected future retirees in a given future year to arrive at the cash flow for that year. Also, a certain number
of retirees will leave the group each year due to expected deaths or reaching a limit age and this group will
cease to be included in the cash flow from that point forward. Because this is a closed-group valuation, the
number of retirees dying each year will eventually exceed the number of new retirees, and the size of the
cash flow will begin to decrease and eventually go to zero.
The expected cash flows for selected future years are provided in the table on the following page. These cash
flows do not reflect the employee contributions that will be paid by Hybrid Plan active employees in future
years. The estimated implicit rate subsidies are also provided.
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Projected Employer Total Cash Flows – Representative Years
Fiscal Year Explicit Implicit City Total
2017/18 $ 2,811,634 $ 632,353 $ 3,443,987
2018/19 $ 2,860,223 $ 626,021 $ 3,486,244
2019/20 $ 2,897,929 $ 631,255 $ 3,529,184
2020/21 $ 2,921,439 $ 653,895 $ 3,575,334
2021/22 $ 2,937,762 $ 668,334 $ 3,606,096
2022/23 $ 2,946,193 $ 659,444 $ 3,605,637
2023/24 $ 2,945,455 $ 658,679 $ 3,604,134
2024/25 $ 2,937,570 $ 662,844 $ 3,600,414
2025/26 $ 2,921,220 $ 647,863 $ 3,569,083
2026/27 $ 2,902,502 $ 658,996 $ 3,561,498
2027/28 $ 2,877,305 $ 658,973 $ 3,536,278
2028/29 $ 2,847,716 $ 648,951 $ 3,496,667
2029/30 $ 2,815,881 $ 629,091 $ 3,444,972
2030/31 $ 2,781,253 $ 606,391 $ 3,387,644
2031/32 $ 2,742,198 $ 581,657 $ 3,323,855
2032/33 $ 2,701,373 $ 543,250 $ 3,244,623
2033/34 $ 2,656,089 $ 533,005 $ 3,189,094
2034/35 $ 2,608,505 $ 547,938 $ 3,156,443
2035/36 $ 2,559,404 $ 550,094 $ 3,109,498
2036/37 $ 2,507,603 $ 540,050 $ 3,047,653
2037/38 $ 2,452,666 $ 571,855 $ 3,024,521
2038/39 $ 2,395,573 $ 613,326 $ 3,008,899
2039/40 $ 2,335,873 $ 656,057 $ 2,991,930
2040/41 $ 2,274,175 $ 655,587 $ 2,929,762
2041/42 $ 2,209,618 $ 689,561 $ 2,899,179
2042/43 $ 2,143,465 $ 732,656 $ 2,876,121
2043/44 $ 2,076,106 $ 726,364 $ 2,802,470
2044/45 $ 2,008,534 $ 689,365 $ 2,697,899
2045/46 $ 1,941,260 $ 684,822 $ 2,626,082
2050/51 $ 1,700,077 $ 416,782 $ 2,116,859
2055/56 $ 1,444,066 $ 150,001 $ 1,594,067
2060/61 $ 1,177,622 $ 11,662 $ 1,189,284
2065/66 $ 935,209 $ - $ 935,209
2070/71 $ 720,326 $ - $ 720,326
2075/76 $ 508,748 $ - $ 508,748
2080/81 $ 300,162 $ - $ 300,162
2085/86 $ 134,830 $ - $ 134,830
2090/91 $ 41,665 $ - $ 41,665
2095/96 $ 7,557 $ - $ 7,557
2100/01 $ - $ - $ -
All Years $114,638,959 $22,605,182 $137,244,141
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SECTION IV. BENEFIT PLAN PROVISIONS
This study analyzes the post-retirement health benefits provided by the City. Currently, eligible active
employees are offered a choice of medical (including prescription drug coverage) plans through the CalPERS
Health Program under the Public Employees’ Medical and Hospital Care Act (PEMHCA). The City offers the
same medical plans to eligible retirees except once a retiree is eligible for Medicare, the retiree must join a
Medicare HMO or Supplement Plan with Medicare being the primary payer.
Prior to January 1, 2006, the City sponsored a defined benefit healthcare plan which provided a fixed dollar
contribution towards the cost of medical coverage for eligible employees continuing medical coverage
through PEMHCA at retirement. The City’s contribution varied by employee group (up to a maximum of $450
per month for Police employees and $400 for all other employees).
Effective January 1, 2006, the City implemented a Retiree Health Savings program (RHS) for all new full-time
employees (Category 1) and for full-time employees whose age plus service as of January 1, 2006 was less
than 46 for public safety employees and 50 for all other employees (Category 2). Full-time active employees
whose age plus service as of January 1, 2006 was 46 or more for public safety employees and 50 or more for
all other employees (Category 3) continued to be eligible to receive the City’s fixed dollar contribution under
the prior defined benefit plan at retirement but the contribution is paid into the employee’s RHS account.
Employees already retired and eligible for a City contribution at January 1, 2006 (Category 4) continued to
receive the City’s contribution under the prior defined benefit plan but instead of being applied towards
medical coverage, the fixed dollar contribution amount less the minimum required employer PEMHCA
contribution for those continuing coverage through PEMHCA is made to an RHS account established for the
retiree. Employees in Category 3 could make a one-time election to be treated similarly to Category 2
employee with those not electing remaining in a Hybrid Plan (includes both the City’s fixed dollar contribution
but also some components of the RHS Plan). A description of the funding components is outlined in the chart
on the following page.
The RHS is a Health Reimbursement Arrangement (HRA) sponsored by the City which reimburses a
participant for post-employment medical (PEMHCA plan) dental, vision, long-term care, miscellaneous
medical expenses, and the PEMHCA minimum. In general, the RHS is a defined contribution program
sponsored by the City with several funding components as outlined in the table on the following page. Any
balance in the employee’s RHS account after the death of the employee and eligible spouse and dependents
will be forfeited.
Part-time employees can continue medical coverage through PEMHCA and receive the PEMHCA minimum
required contribution from the City which is scheduled to increase in the future based on the medical portion
of CPI. A history of the increases in past years and current amounts are as follows:
Calendar Year Minimum Required Employer Contribution
2009 $101.00
2010 $105.00
2011 $108.00
2012 $112.00
2013 $115.00
2014 $119.00
2015 $122.00
2016 $125.00
2017 $128.00
2018 $133.00
2019+ Adjusted Annually to reflect Medical Portion of CPI
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In general, the RHS is a defined contribution program sponsored by the City with the following funding
components:
Category 1 Category 2 Category 3* Category 4
Part A – Pre-
Retirement
Employee
Contributions
o 1% of base pay
mandatory contribution
o effective immediately
upon employment
o 1% of base pay
mandatory contribution
o effective January 1, 2006
o 1% of base pay
mandatory
contribution
o effective January 1,
2006
None
Part B – Pre-
Retirement City
Contributions:
o City contributes $2.50
per month for each year
of age plus service
during employment
o effective upon 5 years of
vesting service;
immediate vesting for
industrial disability
o retroactively deposited;
biweekly thereafter
o City contributes $2.50
per month for each year
of age plus service
during employment
o effective upon 5 years of
vesting service;
immediate vesting for
industrial disability
o retroactively deposited;
biweekly thereafter
None None
Part C – Leave
Conversion:
o mandatory transfer of a
portion of accumulated
leave during any leave
buyout
o amount of leave
conversion varies by
bargaining unit & subject
to negotiation
o not payable in cash
o mandatory transfer of a
portion of accumulated
leave during any leave
buyout
o amount of leave
conversion varies by
bargaining unit & subject
to negotiation
o not payable in cash
o mandatory transfer
of a portion of
accumulated leave
during any leave
buyout
o amount of leave
conversion varies by
bargaining unit &
subject to
negotiation
o not payable in cash
Part D –
Conversion
Contribution:
None o For fully converted
employees who retire
from the plan only
o City will make a one-time
contribution of $100 per
month the employee
contributed to the plan
prior to January 1, 2006
with a cap of $18,000
o City will make a one-
time contribution of
$75 per month the
employee
contributed to the
plan January 1, 2006
with a cap of $13,500
Part E – Post
Retirement
Contribution
o City will provide the
PEMHCA minimum
contribution when a
retiree’s RHS account
value has been exhausted
o City will provide the
PEMHCA minimum
contribution when a
retiree’s RHS account
value has been exhausted
o City will contribute
$400 per month ($450
for Police employees
retiring prior to
January 1, 2006)
o City will
contribute
$400 per
month ($450
for Police
employees) to
retiree’s or
surviving
spouse’s RHS
account
Part F – Other
Pre-Retirement
Employee
Contributions:
None None o Active full-time
employees are
required to make a
contribution of $100
per month
None
*Employees making a one-time election into the RHS Plan are treated as Category 2 employees.
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Premium Rates
The City participates in the CalPERS Health Program, a community-rated program, for medical coverage. The
tables below summarize the calendar 2017 and 2018 monthly medical premiums for the primary medical
plans in which the retirees are enrolled.
2017 Other So. Cal. Region Kaiser BS HMO PERSCare PERSChoice PERS Select
Retiree Only $ 599.54 $ 778.45 $ 802.24 $ 714.43 $ 633.46
Retiree Plus Spouse $1,199.08 $1,556.90 $1,604.48 $1,428.86 $1,266.92
Retiree Plus Family $1,558.80 $2,023.97 $2,085.82 $1,857.52 $1,647.00
Retiree Only- Medicare $ 300.48 N/A $ 389.76 $ 353.63 $ 353.63
Retiree Plus Spouse –
Medicare
$ 600.96 N/A $ 779.52 $ 707.26 $ 707.26
2017 Other So. Cal.
Region (Continued)
Sharp HMO
UHC
HMO
Anthem
HMO
Select
Anthem
HMO
Traditional
Health
Net
Salud
Health Net
Smart
Care
Retiree Only $ 614.46 $ 549.76 $ 659.03 $ 799.15 $ 473.46 $ 537.20
Retiree Plus Spouse $1,228.92 $1,099.52 $1,318.06 $1,598.30 $ 946.92 $1,074.40
Retiree Plus Family $1,597.60 $1,429.38 $1,713.48 $2,077.79 $1,231.00 $1,396.72
Retiree Only- Medicare N/A $ 324.21 N/A N/A N/A N/A
Retiree Plus Spouse –
Medicare
N/A $ 648.42 N/A N/A N/A N/A
2018 Other So. Cal. Region Kaiser BS HMO PERSCare PERSChoice PERS Select
Retiree Only $ 666.80 $ 695.97 $ 733.50 $ 698.96 $ 654.74
Retiree Plus Spouse $1,333.60 $1,391.94 $1,467.00 $1,397.92 $1,309.48
Retiree Plus Family $1,733.68 $1,809.52 $1,907.10 $1,817.30 $1,702.32
Retiree Only- Medicare $ 316.34 N/A $ 382.30 $ 345.97 $ 345.97
Retiree Plus Spouse –
Medicare
$ 632.68 N/A $ 764.60 $ 691.94 $ 691.94
2018 Other So. Cal.
Region (Continued)
Sharp
HMO
UHC
HMO
Anthem
HMO
Select
Anthem
HMO
Traditional
Health
Net
Salud
Health Net
Smart
Care
Retiree Only $ 618.14 $ 616.66 $ 659.69 $ 735.08 $ 461.56 $ 607.68
Retiree Plus Spouse $1,236.28 $1,233.32 $1,319.38 $1,470.16 $ 923.12 $1,215.36
Retiree Plus Family $1,607.16 $1,603.32 $1,715.19 $1,911.21 $1,200.06 $1,579.97
Retiree Only- Medicare N/A $ 330.76 N/A N/A N/A N/A
Retiree Plus Spouse –
Medicare
N/A $ 661.52 N/A N/A N/A N/A
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SECTION V. VALUATION DATA
The valuation was based on the census furnished to us by the City. A reconciliation and summary data
statistics as of the Valuation Date are provided in the following tables:
Age Distribution of Eligible Retired Participants & Beneficiaries
Age
Miscellaneous
Safety
Total*
MRC Only
Waives
Grand
Total
<50 0 1 1 5 10 16
50-54 6 17 23 4 12 39
55-59 39 34 73 4 15 92
60-64 52 64 116 9 12 137
65-69 67 55 122 4 12 138
70-74 50 40 90 4 16 110
75-79 35 21 56 1 12 69
80-84 22 16 38 0 8 46
85+ 17 3 20 1 24 45
Total: 288 251 539 32 121 692
Average Age: 69.6 66.6 68.2 60.6 69.1 68.0
Average Retirement Age: 57.5 51.5 54.7 53.8 50.6 53.9
* Note: Currently receiving the $400 or $450 per month contribution.
Age/Service Distribution of All Active Benefit Eligible Employees
Age
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
Total
Hybrid
Plan
RHS
Plan
Part
Time
20-24 26 26 0 10 16
25-29 57 19 76 0 51 25
30-34 42 41 28 1 112 0 98 14
35-39 20 33 59 26 3 141 0 131 10
40-44 17 6 33 26 9 2 93 0 90 3
45-49 10 15 19 43 11 11 1 110 3 101 6
50-54 9 9 14 24 18 31 14 119 34 75 10
55-59 2 6 11 8 7 12 5 3 54 23 26 5
60-64 3 3 4 5 4 6 5 3 33 20 6 7
65-69 3 3 1 2 0 1 2 0 1 13 5 3 5
70+ 1 0 0 1 0 2 1 0 0 5 3 0 2
Total: 190 135 169 136 52 65 28 6 1 782 88 591 103
Average Age: 42.8 57.3 41.3 39.1
Average Service: 12.7 27.2 11.5 7.5
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Age/Service Distribution of Benefit Eligible Miscellaneous Employees
Age
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
Total
Hybrid
Plan
RHS
Plan
Part
Time
20-24 22 22 0 6 16
25-29 39 13 52 0 29 23
30-34 19 17 17 53 0 40 13
35-39 15 21 26 11 1 74 0 65 9
40-44 15 3 17 14 3 52 0 49 3
45-49 10 13 12 24 7 7 73 2 67 4
50-54 9 8 14 21 9 23 8 92 20 62 10
55-59 2 6 11 7 5 11 4 3 49 18 26 5
60-64 3 3 4 5 4 6 4 2 31 18 6 7
65-69 3 3 1 2 0 1 1 0 1 12 5 3 4
70+ 1 0 0 1 0 2 1 0 0 5 3 0 2
Total: 138 87 102 85 29 50 18 5 1 515 66 353 96
Average Age 44.4 58.5 43.3 39.0
Average Service 12.7 27.2 11.6 6.7
Age/Service Distribution of Benefit Eligible Safety Employees
Age
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
Total
Hybrid
Plan
RHS
Plan
Part
Time
20-24 4 4 0 4 0
25-29 18 6 24 0 22 2
30-34 23 24 11 1 59 0 58 1
35-39 5 12 33 15 2 67 0 66 1
40-44 2 3 16 12 6 2 41 0 41 0
45-49 0 2 7 19 4 4 1 37 1 34 2
50-54 0 1 0 3 9 8 6 27 14 13 0
55-59 0 0 0 1 2 1 1 5 5 0 0
60-64 0 0 0 0 0 0 1 1 2 2 0 0
65-69 0 0 0 0 0 0 1 0 0 1 0 0 1
70+ 0 0 0 0 0 0 0 0 0 0 0 0 0
Total: 52 48 67 51 23 15 10 1 0 267 22 238 7
Average Age 39.0 53.7 38.3 41.0
Average Service 11.7 27.0 11.4 18.1
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SECTION V I. ACTUARIAL ASSUMPTI ONS AND METHODS
The liabilities set forth in this report are based on the actuarial assumptions described in this section.
Fiscal Year: July 1st to June 30th
Valuation Date: June 30, 2017
Funding Periods Covered: FY2018/19 and FY2019/20
Funding Policy: The actuarially determined contribution (ADC) assuming the City’s funding
strategy is to fund the normal cost (current accrual for benefits being earned)
plus an amortization of the net (unfunded accrued) OPEB liability over 10
years.
Expected Rate of Return: 6.5% per annum. This discount rate assumes the City continues to fully fund
for its retiree health benefits through the California Employers’ Retiree Benefit
Trust (CERBT) under its investment allocation strategy 1. The rate reflects the
CERBT published median interest rate for strategy 1 of 7.28% with an
additional margin for adverse deviation.
Discount Rate: 6.5% per annum.
Sensitivity analysis showing a 1% increase or decrease in the discount rate is
also provided.
Inflation: 2.75% per annum
Payroll Increases: 3.0% per annum, in aggregate
Merit Increases: Merit increases from the most recent CalPERS pension plan experiences study.
The benefits are not payroll related but each individual’s projected cost is
allocated over their lifetime as a level-percentage of pay.
Wage Inflation: 3.0% per annum, in aggregate.
Salary Increases: For cost method purposes the merit increases from the CalPERS pension plan
are used.
Pre-retirement Turnover: According to the termination rates under the CalPERS pension plan. Sample
rates for Miscellaneous employees are as follows:
Entry Age
Service 20 30 40 50
0 17.42% 16.06% 14.68% 13.32%
5 8.68% 7.11% 5.54% 0.97%
10 6.68% 5.07% 0.71% 0.38%
15 5.03% 3.47% 0.23% 0.04%
20 3.70% 0.21% 0.05% 0.01%
25 2.29% 0.05% 0.01% 0.01%
30 0.05% 0.01% 0.01% 0.01%
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Sample rates for Firefighter employees are as follows:
Entry Age
Service 20 30 40 50
0 9.5% 9.5% 9.5% 9.5%
5 2.6% 2.6% 2.6% 1.0%
10 0.9% 0.9% 0.3% 0.3%
15 0.8% 0.8% 0.2% 0.2%
20 0.7% 0.2% 0.2% 0.2%
25 0.6% 0.1% 0.1% 0.1%
30 0.1% 0.1% 0.1% 0.1%
Sample rates for Safety employees are as follows:
Entry Age
Service 20 30 40 50
0 10.1% 10.1% 10.1% 10.1%
5 2.5% 2.5% 2.5% 0.9%
10 1.8% 1.8% 0.5% 0.5%
15 1.1% 1.1% 0.3% 0.3%
20 0.8% 0.2% 0.2% 0.2%
25 0.7% 0.1% 0.1% 0.1%
30 0.1% 0.1% 0.1% 0.1%
Pre-retirement Mortality: According to the pre-retirement mortality rates under the CalPERS pension
plan updated to reflect the most recent experience study. Sample deaths per
1,000 employees applicable to employees are as follows:
Age Males Females
25 0.4 0.2
30 0.5 0.3
35 0.6 0.4
40 0.8 0.5
45 1.1 0.7
50 1.6 1.0
55 2.3 1.4
60 3.1 1.8
Post-retirement Mortality: According to the post-retirement mortality rates under the CalPERS pension
plan updated to reflect the most recent experience study. Sample deaths per
1,000 employees applicable to Miscellaneous and Safety retirees are as
follows:
Age Males Females
55 6.0 4.2
60 7.1 4.4
65 8.3 5.9
70 13.1 9.9
75 22.1 17.2
80 39.0 29.0
85 69.7 52.4
90 129.7 98.9
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Sample deaths per 1,000 employees applicable to industrial disabled retirees
are as follows:
Age Males Females
55 6.0 4.2
60 7.5 5.2
65 11.2 8.4
70 16.4 14.0
75 28.3 23.2
80 49.0 39.1
85 76.8 62.5
90 129.7 98.9
Disability Rates: According to the disability rates under the CalPERS pension plan updated to
reflect the most recent experience study. Sample industrial disabilities per
1,000 employees:
Age Miscellaneous Safety Firefighter
25 0.0 3.2 1.2
30 0.0 6.4 2.5
35 0.0 9.7 3.7
40 0.0 12.9 4.9
45 0.0 16.1 6.1
50 0.0 19.2 7.4
55 0.0 66.8 72.1
Retirement Rates: According to the retirement rates under the CalPERS pension plan updated to
reflect the most recent experience study as follows:
Miscellaneous Employees
Tier 1 – 2.5%@ Age 55
Tier 2 – 2.0%@ Age 60
Tier 3 – 2.0%@ Age 62
Fire Employees
Tier 1 – 3.0%@ Age 50
Tier 2 – 2.0%@ Age 50
Tier 3 – 2.7%@ Age 57
Safety Employees
Tier 1 – 3.0%@ Age 50
Tier 2 – 3.0%@ Age 55
Tier 3 – 2.7%@ Age 57
Participation Rates: 100% of eligible full-time employees under the Hybrid Plan are assumed to
participate at retirement with 65% assumed to continue coverage through
PEMHCA. 18% of eligible part-time employees are assumed to elect to
continue coverage under PEMHCA at retirement. For employees in the RHS
Plan, the City is responsible for the PEMHCA minimum required contribution
but may be eligible for reimbursement by the retiree from their individual RHS
account. For purposes of the valuation, 35% of employees in the RHS Plan are
assumed to continue coverage under PEMHCA at retirement with the City
paying the full PEMHCA minimum required contribution.
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Spouse Coverage: 60% of future retirees are assumed to cover their spouse. Male spouses are
assumed to be 3 years older than female spouses. Actual spouse coverage and
spouse ages are used for current retirees.
Waived Retiree Re-election: 20% of the current retiree population currently under 65 re-elect PEMHCA plan
at age 65; 0% of those currently over age 65 re-elect.
Claim Cost Development: The valuation claim costs are based on the premiums paid for medical
insurance coverage. The City participates in CalPERS, a community rated plan.
An implicit rate subsidy can exist when the non-Medicare rates for retirees are
the same as for active employees. Since non-Medicare eligible retirees are
typically much older than active employees, their actual medical costs are
typically higher than for active employees. The current valuation contains an
estimate of the implicit rate subsidy.
Medical Trend Rates: Medical costs are adjusted in future years by the following trends:
Year PPO HMO
2018 Actual Actual
2019 7.0% 6.5%
2020 6.5% 6.0%
2021 6.0% 5.5%
2022 5.5% 5.0%
2023+ 5.0% 5.0%
[The prior valuation assumed 0.5% lower initial trend rates.]
Minimum Contribution: The PEMHCA minimum required contribution is assumed to increase 4.0% per
year.
Fixed Dollar Contribution: Assumed to remain constant in future years.
Medicare Participation: Assume 100% participation.
Actuarial Cost Method: The actuarial cost method used to determine the allocation of the retiree
health actuarial liability to the past (accrued), current and future periods is the
Entry Age Normal (EAN) cost method. The EAN cost method is a projected
benefit cost method which means the “cost” is based on the projected benefit
expected to be paid at retirement.
The EAN normal cost equals the level annual amount of contribution from the
employee’s date of hire (entry date) to their retirement date that is sufficient to
fund the projected benefit. For plans unrelated to pay, the normal cost is
calculated to remain level in dollars; for pay-related plans the normal cost is
calculated to remain level as a percentage of pay. The City has elected to
determine the EAN normal cost as a level percentage of pay. The EAN actuarial
accrued liability equals the present value of all future benefits for retired and
current employees and their beneficiaries less the portion expected to be
funded by future normal costs.
All employees eligible as of the measurement date in accordance with the
provisions of the Plan listed in the data provided by the City were included in
the valuation.
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Actuarial Value of Assets: The valuation assumes investment gains and losses are smoothed over a 5-
year period. The actuarial value of assets shall be no less than 80% of the
market value of assets and shall be no more than 120% of the market value of
assets.
Amortization of NOL: The unfunded actuarial accrued or net OPEB liability (NOL) is being amortized
over 10 years using a level-dollar method. Future bases will be layered in on
the same basis.
CalPERS Pension Plan The rates used are from the CalPERS 1997-2011 Experience Study.
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SECTION VII. ACTUARI AL CERTIFICATION
This report summarizes the actuarial valuation for the City of Newport Beach (the “City”) as of June 30, 2017.
The purpose of the valuation is to measure the City’s liability for OPEB benefits and to determine an
actuarially determined contribution (ADC) for the fiscal periods ending June 30, 2018 and June 30, 2019. The
ADC is a target or recommended contribution to a defined benefit OPEB plan for the applicable period,
determined in accordance with the parameters and in conformity with Actuarial Standards of Practice. The
valuation results will also serve as the basis for complying with GASB 75 applicable for the fiscal year ending
June 30, 2018.
To the best of our knowledge, the report presents a fair position of the funded status of the plan. The
valuation is based upon our understanding of the plan provisions as summarized within the report. The
information presented herein is based on the actuarial assumptions and substantive plan provisions
summarized in this report and participant information and asset information furnished to us by the Plan
Sponsor. We have reviewed the employee census provided by the Plan Sponsor for reasonableness when
compared to the prior information provided but have not audited the information at the source, and
therefore do not accept responsibility for the accuracy or the completeness of the data on which the
information is based. When relevant data may be missing, we may have made assumptions we feel are
neutral or conservative to the purpose of the measurement. We are not aware of any significant issues with
and have relied on the data provided.
The discount rate and other economic assumptions have been selected by the Plan Sponsor. Demographic
assumptions have been selected by the Plan Sponsor with the concurrence of Nyhart. In our opinion, the
actuarial assumptions are individually reasonable and in combination represent our estimate of anticipated
experience of the Plan. All calculations have been made in accordance with generally accepted actuarial
principles and practice.
Future actuarial measurements may differ significantly from the current measurements presented in this
report due to such factors as the following:
plan experience differing from that anticipated by the economic or demographic assumptions;
changes in economic or demographic assumptions;
increases or decreases expected as part of the natural operation of the methodology used for these
measurements (such as the end of an amortization period); and
changes in plan provisions or applicable law.
While some sensitivity analysis was provided in the report, we did not perform an analysis of the potential
range of future measurements due to the limited scope of our engagement.
To our knowledge, there have been no significant events prior to the current year's measurement date or as
of the date of this report that could materially affect the results contained herein.
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Neither Nyhart nor any of its employees has any relationship with the plan or its sponsor that could impair or
appear to impair the objectivity of this report. Our professional work is in full compliance with the American
Academy of Actuaries “Code of Professional Conduct” Precept 7 regarding conflict of interest. The
undersigned meet the Qualification Standards of the American Academy of Actuaries to render the actuarial
opinion contained herein.
Should you have any questions please do not hesitate to contact me.
Certified by:
Marilyn K. Jones, ASA, EA, MAAA, FCA Date: October 31, 2017
Consulting Actuary
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SECTION VIII. DEFINITIONS
The definitions of the terms used in the actuarial valuations are noted below.
Actuarial Assumptions – Assumptions as to the occurrence of future events affecting health care costs, such
as: mortality, turnover, disablement and retirement; changes in compensation and Government provided
health care benefits; rates of investment earnings and asset appreciation or depreciation; procedures used to
determine the Actuarial Value of Assets; characteristics of future entrants for Open Group Actuarial Cost
Methods; and other relevant items.
Actuarial Cost Method – A procedure for determining the Actuarial Present Value of Future Benefits and
expenses and for developing an actuarially equivalent allocation of such value to time periods, usually in the
form of a Service Cost and a Total (Accrued) OPEB Liability.
Actuarially Determined Contribution - A target or recommended contribution to a defined benefit OPEB
plan for the reporting period, determined in accordance with the parameters and in conformity with Actuarial
Standards of Practice.
Annual OPEB Cost – An accrual-basis measure of the periodic cost of an employer’s participation in a defined
benefit OPEB plan.
Actuarial Present Value (also referred to as Actuarial Liability) – The value of an amount or series of
amounts payable or receivable at various times, determined as of a given date by the application of a
particular set of Actuarial Assumptions. For purposes of this standard, each such amount or series of
amounts is:
a. adjusted for the probable financial effect of certain intervening events (such as changes in
coverage, marital status, etc.);
b. multiplied by the probability of the occurrence of an event (such as survival, death, disability,
termination of employment, etc.) on which the payment is conditioned; and
c. discounted according to an assumed rate (or rates) of return to reflect the time value of money.
Deferred Outflow / (Inflow) of Resources – represents the following items that have not been recognized in
the OPEB Expense:
a. Differences between expected and actual experience of the OPEB plan
b. Changes in assumptions
c. Differences between projected and actual earnings in OPEB plan investments (for funded plans
only)
Explicit Subsidy – The difference between (a) the amounts required to be contributed by the retirees based
on the premium rates and (b) actual cash contribution made by the employer.
Funded Ratio – The actuarial value of assets expressed as a percentage of the actuarial accrued liability.
Healthcare Cost Trend Rate – The rate of change in the per capita health claims costs over time as a result
of factors such as medical inflation, utilization of healthcare services, plan design, and technological
developments.
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Implicit Rate Subsidy – In an experience-rated healthcare plan that includes both active employees and
retirees with blended premium rates for all plan members, the difference between (a) the age-adjusted
premiums approximating claim costs for retirees in the group (which, because of the effect of age on claim
costs, generally will be higher than the blended premium rates for all group members) and (b) the amounts
required to be contributed by the retirees.
Normal Cost – The portion of the Actuarial Present Value of plan benefits and expenses which is allocated to
a valuation year by the Actuarial Cost Method.
OPEB – Benefits (such as death benefits, life insurance, disability, and long-term care) that are paid in the
period after employment and that are provided separately from a pension plan, as well as healthcare benefits
paid in the period after employment, regardless of the manner in which they are provided. OPEB does not
include termination benefits or termination payments for sick leave.
OPEB Expense – Changes in the Net OPEB Liability in the current reporting period, which includes Service
Cost, interest cost, changes of benefit terms, expected earnings on OPEB Plan investments, reduction of
active employees’ contributions, OPEB plan administrative expenses, and current period recognition of
Deferred Outflows / (Inflows) of Resources.
Pay-as-you-go – A method of financing a benefit plan under which the contributions to the plan are generally
made at about the same time and in about the same amount as benefit payments and expenses becoming
due.
Per Capita Costs – The current cost of providing postretirement health care benefits for one year at each age
from the youngest age to the oldest age at which plan participants are expected to receive benefits under the
plan.
Present Value of Future Benefits – Total projected benefits include all benefits estimated to be payable to
plan members (retirees and beneficiaries, terminated employees entitled to benefits but not yet receiving
them, and current active members) as a result of their service through the valuation date and their expected
future service. The actuarial present value of total projected benefits as of the valuation date is the present
value of the cost to finance benefits payable in the future, discounted to reflect the expected effects of the
time value (present value) of money and the probabilities of payment. Expressed another way, it is the
amount that would have to be invested on the valuation date so that the amount invested plus investment
earnings will provide sufficient assets to pay total projected benefits when due.
Real Rate of Return – the rate of return on an investment after adjustment to eliminate inflation.
Select and Ultimate Rates – Actuarial assumptions that contemplate different rates for successive years.
Instead of a single assumed rate with respect to, for example, the healthcare trend rate assumption, the
actuary may apply different rates for the early years of a projection and a single rate for all subsequent years.
For example, if an actuary applies an assumed healthcare trend rate of 6.5% for year 20W0, 6.0% for 20W1,
5.5% for 20W2, then 5.0% for 20W3 and thereafter, then 6.5%, 6% and 5.5% are select rates, and 5% is the
ultimate rate.
Service Cost (also referred to as Normal Cost) – The portion of the Actuarial Present Value of projected
benefit payments that are attributed to a valuation year by the Actuarial Cost Method.
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Substantive Plan – The terms of an OPEB plan as understood by the employer(s) and plan participant.
Total OPEB Liability (also referred to as Actuarial Accrued Liability) – That portion, as determined by a
particular Actuarial Cost Method, of the Actuarial Present Value of Future Benefits which is attributed to past
periods of employee service (or not provided for by the future Service Costs).
ATTACHMENT B
PRESENTATION
November 9, 2017
City of Newport Beach
June 30, 2017 Updated
OPEB Actuarial Valuation
Retiree Health Program
1
Purpose of June 30, 2017 OPEB Valuation
•Updated Funding Valuation
•Develop recommended actuarially determined contribution (ADC) previously
referred to as the annual required contribution (ARC)
•Fund normal cost (current benefit accrual) plus payment towards net (unfunded accrued) OPEB liability
•No requirement to prefund
•Earnings used to pay future contributions for benefits
•Commitment to prefund ADC allows for higher discount rate for accounting
•Comply With GASB 75 (New) Accounting Requirements
•Effective commencing with fiscal year ending June 30, 2018
•Separates funding and accounting (ARC goes away)
•Biennial valuations still required
Page 2
3
City’s Retiree Health Program
•Current Counts
• 591 Employees in
RHS Plan
•88 Employees in
Hybrid Plan
•539 Retirees with $400/$450 to RHS
Account
•32 Retirees
Receiving PEMHCA
MRC
•103 Part-Time
Employees who
may become
eligible for PEMHCA
MRC if retiring from City
•Effective January 1, 2006, City Implemented a Retiree Health Savings (RHS) Program
•All non-grandfathered & future active employees receive contributions into their RHS account while working for the City
•Hybrid Plan for grandfathered employees - City still pays $400/$450 monthly contribution at retirement but into a RHS account
•Retired employees - City still pays $400/$450 monthly contribution but into a RHS account
•Part-time employees receive PEMHCA minimum required contribution (MRC)
•City Participates in CalPERS Health Program for Medical Coverage
•City may be responsible for the PEMHCA minimum required contribution ($128 per month in 2017, $133 in 2018 & scheduled to increase based on medical price inflation)
•Implied subsidy as non-Medicare premiums based on pool of actives and non-Medicare retirees
Implied Subsidy Defined
Retiree Expected Cost minus Average Costs (Premium Charged)
•Exists when non-Medicare retirees & actives pooled together for Medical coverage
•Retiree Cost > Pooled Groups Average Costs
•Implied Rate Subsidy = Expected Retiree Cost less Average Cost (Premium Charged for Coverage)
•Required to be included as employer liability
•New ASOP 6 – GASB defers to ASOPs
•Newly issued GASB 74 & 75
4
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
25 30 35 40 45 50 55 60 65
An
n
u
a
l
C
l
a
i
m
C
o
s
t
s
Age
Average Cost
Actual Cost
Actuarial Valuation Process
•Updated Funding Valuation
• Collect Plan, Census & Rate (Premium) Information
•Project City’s Contributions (Monthly $400/$450/PEMHCA MRC plus
Implied Subsidy) Contributions Expected to be Paid for All
Future Years (Projected Cash Flows)
•Demographic assumptions: e.g. mortality, withdrawal, retirement
•Financial assumptions: e.g. discount (interest rate), healthcare costs,
healthcare trend
•Discount Projected Cash Flows to Measurement Date to
Determine Present (Value in Today’s $s) Value of City’s
Contributions
•Allocate Present Value to Past (Accrued or Earned), Current
Period Accrual & Future Accruals Using Actuarial Cost
Method
Page 5
5
Projected City Contributions
•Updated Funding Valuation
•Develop recommended actuarially determined
contribution (ADC) for prefunding
•No requirement to prefund but ADCs allow City to
use higher discount rate for accounting
•Comply With GASB 74 and 75 (New) Accounting
Requirements
•GASB 74 disclosure requirement for funded OPEB
plans effective fiscal year ending June 30, 2017
•GASB 75 new accounting commencing with fiscal
year ending June 30, 2018
•Biennial valuations still required
•10-Year Projections of Contributions & Funded Status
Page 6
Fiscal Year Explicit Contributions Implied Subsidy Projected Direct Contributions
2017/18 $ 2,811,634 $ 632,353 $ 3,443,987
2018/19 $ 2,860,223 $ 626,021 $ 3,486,244
2019/20 $ 2,897,929 $ 631,255 $ 3,529,184
2020/21 $ 2,921,439 $ 653,895 $ 3,575,334
2021/22 $ 2,937,762 $ 668,334 $ 3,606,096
2022/23 $ 2,946,193 $ 659,444 $ 3,605,637
2023/24 $ 2,945,455 $ 658,679 $ 3,604,134
2024/25 $ 2,937,570 $ 662,844 $ 3,600,414
2025/26 $ 2,921,220 $ 647,863 $ 3,569,083
2026/27 $ 2,902,502 $ 658,996 $ 3,561,498
: : : :
All Years $114,638,959 $22,605,182 $137,244,141
Present Value (In
Today’s $s) Assuming 6.5%
Interest Rate $ 39,762,000 $ 8,969,000 $ 48,731,000
* Net of any required retiree contributions for coverage
6
7
Valuation Results
Present Value of City Contributions (Actuarial Liability) at June 30, 2015 @7.0% $47,414,000
Decrease due to passage of time ( 552,000)
Decrease due to more favorable experience ( 1,209,000)
Increase due to new entrants 422,000
Increase due to updates to the initial healthcare trend 82,000
Increase due to lowering the discount rate to 6.5% 2,575,000
Present Value of City Contribution (Actuarial Liability) at June 30, 2017 @6.5% $48,731,000
Portion attributable to current year accrual or normal cost ( 509,000)
Portion of liability not yet accrued or future normal cost accruals ( 3,607,000)
Total (Accrued) OPEB Liability at June 30, 2017 @6.5% $44,614,000
Actuarial Value of Plan Assets (Funded Portion) - AVA ( 19,218,000)
Net (Unfunded Accrued) OPEB Liability at June 30, 2017 @6.5% $25,396,000
•AVA - $140K accumulated losses not
recognized
•Key assumption change: Lowered discount rate from 7.0% to 6.5%
•Recommended
Contributions (Normal Cost plus 10 year level $
Payment of Net
OPEB Liability
•FY18/19 $3.835M
•FY19/20 $3.852M
$19,218,534
$25,395,732
$3,607,170 $509,433
Total Actuarial Liability = $48,731,869
Total (Accrued) OPEB Liability - Funded
Total (Accrued) OPEB Liability - Unfunded
Liability for Future Years' Accruals
Current Year Accrual (Normal Cost)
8
GASB 75 Impact
GASB 75 Accounting for Fiscal Year Ending June 30, 2018
•Recognize Net (Unfunded Accrued) OPEB Liability (NOL) on City’s Financial Statement
•Measured at June 30, 2017; Estimate = $25,396,000 (Market Value Basis)
•Note Disclosures and Required Supplementary Information (RSI) Similar to
GASB 68
•Interest Rate and Healthcare Trend Rate Sensitivity Measurements
•GASB 75 Expensing Required Every Fiscal Year – Faster Recognition of
Gains/Losses
- Interim period updates required
•GASB 74 Disclosure of Net (Unfunded) OPEB Liability (NOL) – To be provided by CERBT (the OPEB Plan)
Questions
9
November 9, 2017
City of Newport Beach
June 30, 2017 Updated
OPEB Actuarial Valuation
Retiree Health Program
1
Purpose of June 30, 2017 OPEB Valuation
•Updated Funding Valuation
•Develop recommended actuarially determined contribution (ADC) previously
referred to as the annual required contribution (ARC)
•Fund normal cost (current benefit accrual) plus payment towards net (unfunded accrued) OPEB liability
•No requirement to prefund
•Earnings used to pay future contributions for benefits
•Commitment to prefund ADC allows for higher discount rate for accounting
•Comply With GASB 75 (New) Accounting Requirements
•Effective commencing with fiscal year ending June 30, 2018
•Separates funding and accounting (ARC goes away)
•Biennial valuations still required
Page 2
3
City’s Retiree Health Program
•Current Counts
•591 Employees in
RHS Plan
•88 Employees in
Hybrid Plan
•539 Retirees with $400/$450 to RHS
Account
•32 Retirees
Receiving PEMHCA
MRC
•103 Part-Time
Employees who
may become
eligible for PEMHCA
MRC if retiring from City
•Effective January 1, 2006, City Implemented a Retiree Health Savings (RHS) Program
•All non-grandfathered & future active employees receive contributions into their RHS account while working for the City
•Hybrid Plan for grandfathered employees -City still pays $400/$450 monthly contribution at retirement but into a RHS account
•Retired employees -City still pays $400/$450 monthly contribution but into a RHS account
•Part-time employees receive PEMHCA minimum required contribution (MRC)
•City Participates in CalPERS Health Program for Medical Coverage
•City may be responsible for the PEMHCA minimum required contribution ($128 per month in 2017, $133 in 2018 & scheduled to increase based onmedical price inflation)
•Implied subsidy as non-Medicare premiums based on pool of actives and non-Medicare retirees
Implied Subsidy Defined
Retiree Expected Cost minus Average Costs (Premium Charged)
•Exists when non-Medicare retirees & actives pooled together for Medical coverage
•Retiree Cost > Pooled Groups Average Costs
•Implied Rate Subsidy = Expected Retiree Cost less Average Cost (Premium Charged for Coverage)
•Required to be included as employer liability
•New ASOP 6 –GASB defers to ASOPs
•Newly issued GASB 74 & 75
4
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
25 30 35 40 45 50 55 60 65
An
n
u
a
l
C
l
a
i
m
C
o
s
t
s
Age
Average Cost
Actual Cost
Actuarial Valuation Process
•Updated Funding Valuation
•Collect Plan, Census & Rate (Premium) Information
•Project City’s Contributions (Monthly $400/$450/PEMHCA MRC plus
Implied Subsidy) Contributions Expected to be Paid for All
Future Years (Projected Cash Flows)
•Demographic assumptions: e.g. mortality, withdrawal, retirement
•Financial assumptions: e.g. discount (interest rate), healthcare costs,
healthcare trend
•Discount Projected Cash Flows to Measurement Date to
Determine Present (Value in Today’s $s) Value of City’s
Contributions
•Allocate Present Value to Past (Accrued or Earned), Current
Period Accrual & Future Accruals Using Actuarial Cost
Method
Page 5
5
Projected City Direct (Pay-go) Contributions
•Updated Funding Valuation
•Develop recommended actuarially determined
contribution (ADC) for prefunding
•No requirement to prefund but ADCs allow City to
use higher discount rate for accounting
•Comply With GASB 74 and 75 (New) Accounting
Requirements
•GASB 74 disclosure requirement for funded OPEB
plans effective fiscal year ending June 30, 2017
•GASB 75 new accounting commencing with fiscal
year ending June 30, 2018
•Biennial valuations still required
•10-Year Projections of Contributions & Funded Status
Page 6
Fiscal Year Explicit Contributions Implied Subsidy ProjectedDirect Contributions
2017/18 $ 2,811,634 $ 632,353 $ 3,443,987
2018/19 $ 2,860,223 $ 626,021 $ 3,486,244
2019/20 $ 2,897,929 $ 631,255 $ 3,529,184
2020/21 $ 2,921,439 $ 653,895 $ 3,575,334
2021/22 $ 2,937,762 $ 668,334 $ 3,606,096
2022/23 $ 2,946,193 $ 659,444 $ 3,605,637
2023/24 $ 2,945,455 $ 658,679 $ 3,604,134
2024/25 $ 2,937,570 $ 662,844 $ 3,600,414
2025/26 $ 2,921,220 $ 647,863 $ 3,569,083
2026/27 $ 2,902,502 $ 658,996 $ 3,561,498
::::
All Years $114,638,959 $22,605,182 $137,244,141
Present Value (In
Today’s $s)Assuming 6.5%
Interest Rate $ 39,762,000 $ 8,969,000 $ 48,731,000
* Net of any required retiree contributions for coverage
6
7
Valuation Results
Present Value of City Contributions (Actuarial Liability)at June 30,2015 @7.0%$47,414,000
Decrease due to passage of time ( 552,000)
Decrease due to more favorable experience ( 1,209,000)
Increase due to new entrants 422,000
Increase due to updates to the initial healthcare trend 82,000
Increase due to lowering the discount rate to 6.5%2,575,000
Present Value of City Contribution (Actuarial Liability)at June 30,2017 @6.5%$48,731,000
Portion attributable to current year accrual or normal cost ( 509,000)
Portion of liability not yet accrued or future normal cost accruals ( 3,607,000)
Total (Accrued)OPEB Liability at June 30,2017 @6.5%$44,614,000
Actuarial Value of Plan Assets (Funded Portion)-AVA ( 19,218,000)
Net (Unfunded Accrued)OPEB Liability at June 30,2017 @6.5%$25,396,000
•AVA -$140K accumulated losses not
recognized
•Key assumption change: Lowered discount rate from 7.0% to 6.5%
•Recommended
Contributions (Normal Cost plus 10 year level $
Payment of Net
OPEB Liability
•FY18/19 $3.835M
•FY19/20 $3.852M
$19,218,534
$25,395,732
$3,607,170 $509,433
Total Actuarial Liability = $48,731,869
Total (Accrued) OPEB Liability - Funded
Total (Accrued) OPEB Liability - Unfunded
Liability for Future Years' Accruals
Current Year Accrual (Normal Cost)
8
Projected City Contributions
‘---Closed Group –No New Entrants ---‘---------------Open Group –New Entrants* ---------------
Fiscal Year NormalCost Amort. of UAL ADC NormalCost (NC Implicit)Amort. of UAL ADC % of Salary
2018/19 $577,812 $3,257,104 $3,834,916 $577,812 ($211,956)$3,257,104 $3,834,916 0.77%
2019/20 $538,945 $3,257,104 $3,796,049 $595,147 ($218,315)$3,257,104 $3,852,251 0.77%
2020/21 $500,120 $3,257,104 $3,757,224 $555,901 ($223,893)$3,257,104 $3,813,005 0.70%
2021/22 $470,859 $3,257,104 $3,727,963 $555,659 ($232,053)$3,257,104 $3,812,763 0.68%
2022/23 $441,417 $3,257,104 $3,698,521 $556,397 ($240,433)$3,257,104 $3,813,501 0.66%
2023/24 $415,484 $3,257,104 $3,672,588 $562,557 ($250,016)$3,257,104 $3,819,661 0.65%
2024/25 $392,222 $3,257,104 $3,649,326 $573,769 ($260,858)$3,257,104 $3,830,873 0.64%
2025/26 $371,243 $3,257,104 $3,628,347 $587,840 ($272,342)$3,257,104 $3,844,944 0.64%
2026/27 $352,388 $3,257,104 $3,609,492 $605,043 ($284,736)$3,257,104 $3,862,147 0.64%
2027/28 $332,628 $3,257,104 $3,589,732 $623,337 ($297,490)$3,257,104 $3,880,441 0.64%
2028/29 $315,304 $0 $315,304 $646,097 ($311,611)$0 $646,097 0.64%
2029/30 $297,885 $0 $297,885 $669,795 ($325,917)$0 $669,795 0.65%
2030/31 $281,732 $0 $281,732 $697,091 ($341,362)$0 $697,091 0.65%
2031/32 $263,977 $0 $263,977 $724,901 ($356,852)$0 $724,901 0.66%
2032/33 $245,618 $0 $245,618 $754,719 ($373,263)$0 $754,719 0.67%
2033/34 $227,098 $0 $227,098 $786,480 ($390,754)$0 $786,480 0.67%
2034/35 $208,854 $0 $208,854 $821,003 ($409,528)$0 $821,003 0.68%
2035/36 $191,171 $0 $191,171 $857,446 ($429,346)$0 $857,446 0.69%
2036/37 $173,597 $0 $173,597 $896,598 ($450,766)$0 $896,598 0.70%
2037/38 $155,452 $0 $155,452 $937,192 ($472,964)$0 $937,192 0.71%
*Projections assume that employees terminating or retiring will be replaced with comparable employees with aggregate
payroll increasing 3.0%
Item No. 5A1
OPEB Valuation Review
Updated Presentation, Slide 8
November 9, 2017
9
GASB 75 Impact
GASB 75 Accounting for Fiscal Year Ending June 30, 2018
•Recognize Net (Unfunded Accrued) OPEB Liability (NOL) on City’s Financial Statement
•Measured at June 30, 2017; Estimate = $25,396,000 (Market Value Basis)
•Note Disclosures and Required Supplementary Information (RSI) Similar to
GASB 68
•Interest Rate and Healthcare Trend Rate Sensitivity Measurements
•GASB 75 Expensing Required Every Fiscal Year –Faster Recognition of
Gains/Losses
-Interim period updates required
•GASB 74 Disclosure of Net (Unfunded) OPEB Liability (NOL) –To be provided by CERBT (the OPEB Plan)
Questions
10
November 9, 2017
City of Newport Beach
June 30, 2017 Updated
OPEB Actuarial Valuation
Retiree Health Program
1
Purpose of June 30, 2017 OPEB Valuation
•Updated Funding Valuation
•Develop recommended actuarially determined contribution (ADC) previously
referred to as the annual required contribution (ARC)
•Fund normal cost (current benefit accrual) plus payment towards net (unfunded accrued) OPEB liability
•No requirement to prefund
•Earnings used to pay future contributions for benefits
•Commitment to prefund ADC allows for higher discount rate for accounting
•Comply With GASB 75 (New) Accounting Requirements
•Effective commencing with fiscal year ending June 30, 2018
•Separates funding and accounting (ARC goes away)
•Biennial valuations still required
Page 2
3
City’s Retiree Health Program
•Current Counts
•591 Employees in
RHS Plan
•88 Employees in
Hybrid Plan
•539 Retirees with $400/$450 to RHS
Account
•32 Retirees
Receiving PEMHCA
MRC
•103 Part-Time
Employees who
may become
eligible for PEMHCA
MRC if retiring from City
•Effective January 1, 2006, City Implemented a Retiree Health Savings (RHS) Program
•All non-grandfathered & future active employees receive contributions into their RHS account while working for the City
•Hybrid Plan for grandfathered employees -City still pays $400/$450 monthly contribution at retirement but into a RHS account
•Retired employees -City still pays $400/$450 monthly contribution but into a RHS account
•Part-time employees receive PEMHCA minimum required contribution (MRC)
•City Participates in CalPERS Health Program for Medical Coverage
•City may be responsible for the PEMHCA minimum required contribution ($128 per month in 2017, $133 in 2018 & scheduled to increase based onmedical price inflation)
•Implied subsidy as non-Medicare premiums based on pool of actives and non-Medicare retirees
Implied Subsidy Defined
Retiree Expected Cost minus Average Costs (Premium Charged)
•Exists when non-Medicare retirees & actives pooled together for Medical coverage
•Retiree Cost > Pooled Groups Average Costs
•Implied Rate Subsidy = Expected Retiree Cost less Average Cost (Premium Charged for Coverage)
•Required to be included as employer liability
•New ASOP 6 –GASB defers to ASOPs
•Newly issued GASB 74 & 75
4
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
25 30 35 40 45 50 55 60 65
An
n
u
a
l
C
l
a
i
m
C
o
s
t
s
Age
Average Cost
Actual Cost
Actuarial Valuation Process
•Updated Funding Valuation
•Collect Plan, Census & Rate (Premium) Information
•Project City’s Contributions (Monthly $400/$450/PEMHCA MRC plus
Implied Subsidy) Contributions Expected to be Paid for All
Future Years (Projected Cash Flows)
•Demographic assumptions: e.g. mortality, withdrawal, retirement
•Financial assumptions: e.g. discount (interest rate), healthcare costs,
healthcare trend
•Discount Projected Cash Flows to Measurement Date to
Determine Present (Value in Today’s $s) Value of City’s
Contributions
•Allocate Present Value to Past (Accrued or Earned), Current
Period Accrual & Future Accruals Using Actuarial Cost
Method
Page 5
5
Projected City Direct (Pay-go) Contributions
•Updated Funding Valuation
•Develop recommended actuarially determined
contribution (ADC) for prefunding
•No requirement to prefund but ADCs allow City to
use higher discount rate for accounting
•Comply With GASB 74 and 75 (New) Accounting
Requirements
•GASB 74 disclosure requirement for funded OPEB
plans effective fiscal year ending June 30, 2017
•GASB 75 new accounting commencing with fiscal
year ending June 30, 2018
•Biennial valuations still required
•10-Year Projections of Contributions & Funded Status
Page 6
Fiscal Year Explicit Contributions Implied Subsidy ProjectedDirect Contributions
2017/18 $ 2,811,634 $ 632,353 $ 3,443,987
2018/19 $ 2,860,223 $ 626,021 $ 3,486,244
2019/20 $ 2,897,929 $ 631,255 $ 3,529,184
2020/21 $ 2,921,439 $ 653,895 $ 3,575,334
2021/22 $ 2,937,762 $ 668,334 $ 3,606,096
2022/23 $ 2,946,193 $ 659,444 $ 3,605,637
2023/24 $ 2,945,455 $ 658,679 $ 3,604,134
2024/25 $ 2,937,570 $ 662,844 $ 3,600,414
2025/26 $ 2,921,220 $ 647,863 $ 3,569,083
2026/27 $ 2,902,502 $ 658,996 $ 3,561,498
::::
All Years $114,638,959 $22,605,182 $137,244,141
Present Value (In
Today’s $s)Assuming 6.5%
Interest Rate $ 39,762,000 $ 8,969,000 $ 48,731,000
* Net of any required retiree contributions for coverage
6
7
Valuation Results
Present Value of City Contributions (Actuarial Liability)at June 30,2015 @7.0%$47,414,000
Decrease due to passage of time ( 552,000)
Decrease due to more favorable experience ( 1,209,000)
Increase due to new entrants 422,000
Increase due to updates to the initial healthcare trend 82,000
Increase due to lowering the discount rate to 6.5%2,575,000
Present Value of City Contribution (Actuarial Liability)at June 30,2017 @6.5%$48,731,000
Portion attributable to current year accrual or normal cost ( 509,000)
Portion of liability not yet accrued or future normal cost accruals ( 3,607,000)
Total (Accrued)OPEB Liability at June 30,2017 @6.5%$44,614,000
Actuarial Value of Plan Assets (Funded Portion)-AVA ( 19,218,000)
Net (Unfunded Accrued)OPEB Liability at June 30,2017 @6.5%$25,396,000
•AVA -$140K accumulated losses not
recognized
•Key assumption change: Lowered discount rate from 7.0% to 6.5%
•Recommended
Contributions (Normal Cost plus 10 year level $
Payment of Net
OPEB Liability
•FY18/19 $3.835M
•FY19/20 $3.852M
$19,218,534
$25,395,732
$3,607,170 $509,433
Total Actuarial Liability = $48,731,869
Total (Accrued) OPEB Liability - Funded
Total (Accrued) OPEB Liability - Unfunded
Liability for Future Years' Accruals
Current Year Accrual (Normal Cost)
8
Projected City Contributions
‘---Closed Group –No New Entrants ---‘---------------Open Group –New Entrants* ---------------
Fiscal Year NormalCost Amort. of UAL ADC NormalCost (NC Implicit)Amort. of UAL ADC % of Salary
2018/19 $577,812 $3,257,104 $3,834,916 $577,812 ($211,956)$3,257,104 $3,834,916 0.77%
2019/20 $538,945 $3,257,104 $3,796,049 $595,147 ($218,315)$3,257,104 $3,852,251 0.77%
2020/21 $500,120 $3,257,104 $3,757,224 $555,901 ($223,893)$3,257,104 $3,813,005 0.70%
2021/22 $470,859 $3,257,104 $3,727,963 $555,659 ($232,053)$3,257,104 $3,812,763 0.68%
2022/23 $441,417 $3,257,104 $3,698,521 $556,397 ($240,433)$3,257,104 $3,813,501 0.66%
2023/24 $415,484 $3,257,104 $3,672,588 $562,557 ($250,016)$3,257,104 $3,819,661 0.65%
2024/25 $392,222 $3,257,104 $3,649,326 $573,769 ($260,858)$3,257,104 $3,830,873 0.64%
2025/26 $371,243 $3,257,104 $3,628,347 $587,840 ($272,342)$3,257,104 $3,844,944 0.64%
2026/27 $352,388 $3,257,104 $3,609,492 $605,043 ($284,736)$3,257,104 $3,862,147 0.64%
2027/28 $332,628 $3,257,104 $3,589,732 $623,337 ($297,490)$3,257,104 $3,880,441 0.64%
2028/29 $315,304 $0 $315,304 $646,097 ($311,611)$0 $646,097 0.64%
2029/30 $297,885 $0 $297,885 $669,795 ($325,917)$0 $669,795 0.65%
2030/31 $281,732 $0 $281,732 $697,091 ($341,362)$0 $697,091 0.65%
2031/32 $263,977 $0 $263,977 $724,901 ($356,852)$0 $724,901 0.66%
2032/33 $245,618 $0 $245,618 $754,719 ($373,263)$0 $754,719 0.67%
2033/34 $227,098 $0 $227,098 $786,480 ($390,754)$0 $786,480 0.67%
2034/35 $208,854 $0 $208,854 $821,003 ($409,528)$0 $821,003 0.68%
2035/36 $191,171 $0 $191,171 $857,446 ($429,346)$0 $857,446 0.69%
2036/37 $173,597 $0 $173,597 $896,598 ($450,766)$0 $896,598 0.70%
2037/38 $155,452 $0 $155,452 $937,192 ($472,964)$0 $937,192 0.71%
*Projections assume that employees terminating or retiring will be replaced with comparable employees with aggregate
payroll increasing 3.0%
Item No. 5A1
OPEB Valuation Review
Updated Presentation, Slide 8
November 9, 2017
9
GASB 75 Impact
GASB 75 Accounting for Fiscal Year Ending June 30, 2018
•Recognize Net (Unfunded Accrued) OPEB Liability (NOL) on City’s Financial Statement
•Measured at June 30, 2017; Estimate = $25,396,000 (Market Value Basis)
•Note Disclosures and Required Supplementary Information (RSI) Similar to
GASB 68
•Interest Rate and Healthcare Trend Rate Sensitivity Measurements
•GASB 75 Expensing Required Every Fiscal Year –Faster Recognition of
Gains/Losses
-Interim period updates required
•GASB 74 Disclosure of Net (Unfunded) OPEB Liability (NOL) –To be provided by CERBT (the OPEB Plan)
Questions
10
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5B
November 9, 2017 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov SUBJECT: LONG-TERM FINANCIAL FORECAST
DISCUSSION
The Finance Committee Chair requested that staff provide a performance summary of the City’s top three revenue sources. The attached report summarizes the budget and actual receipt history for property, sales,
and transient occupancy taxes between fiscal years 2014 and 2017 and projects the same for fiscal years 2018 through 2020. Staff will also review pension funding scenarios including less aggressive payment
plans and other financial updates that are relevant to the current and future budgets.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Attachment: A. Top Three Revenue Historical Analysis and Projection
ATTACHMENT A
TOP THREE REVENUE HISTORICAL ANALYSIS AND PROJECTION
CITY OF NEWPORT BEACH TOP 3 REVENUE SOURCES
Historical Analysis and Future Projection
Historical Projected
Property Tax
2014 2015 2016 2017 2018 2019 2020
Budget 77,434,791 81,965,214 85,770,279 91,685,344 97,120,660 104,021,074 108,181,917
/77,954,939 82,298,226 88,810,860 94,350,181 99,067,690 104,021,074 109,222,128
Variance (Actual +Over/-Under Budget)520,148 333,012 3,040,581 2,664,837 1,947,030 - 1,040,211
Pct Var From Budget 0.7%0.4%3.5%2.9%2.0%0.0%1.0%
YOY Growth 4,343,286 6,512,635 5,539,320 4,717,509 4,953,384 5,201,054
Pct YOY Growth 5.6%7.9%6.2%5.0%5.0%5.0%
Sales Tax
2014 2015 2016 2017 2018 2019 2020
Budget 30,193,894 32,800,745 37,000,093 34,612,648 35,932,370 35,487,307 35,867,041
/30,869,941 32,878,836 36,808,460 33,702,895 34,872,297 35,487,307 35,867,041
Variance (Actual +Over/-Under Budget)676,047 78,091 (191,633) (909,753) (1,060,073) - -
Pct Var 2.2%0.2%-0.5%-2.6%-3.0%0.0%0.0%
YOY Growth 2,008,895 3,929,624 (3,105,566) 1,169,402 615,010 379,734
Pct YOY Growth 6.5%12.0%-8.4%3.5%1.8%1.1%
Transient Occupancy Tax
2014 2015 2016 2017 2018 2019 2020
Budget 17,291,420 19,377,767 20,656,850 22,578,447 24,327,966 23,975,985 25,174,784
/18,176,369 20,369,158 21,083,199 22,382,361 23,053,832 23,975,985 25,174,784
Variance (Actual +Over/-Under Budget)884,949 991,391 426,349 (196,086) (1,274,134) - -
Pct Var 5.1%5.1%2.1%-0.9%-5.2%0.0%0.0%
YOY Growth 2,192,789 714,041 1,299,162 671,471 922,153 1,198,799
Pct YOY Growth 12.1%3.5%6.2%3.0%4.0%5.0%
Property Tax Notes: Consistent and vigorous demand for coastal property has allowed the City to enjoy long-term growth trends with its number
one revenue source. Value changes along with infill development in Newport Beach result in continued appreciation in property values through FY
17. We project continued strong growth through FY 20. Property taxes are calculated by multiplying the property's tax assessed value by the tax
rate, which is set at 1%, per Proposition 13. Properties are valued by the Assessor on January 1st annually by reviewing the values from the prior
year. Proposition 13 allows a maximum of 2% CPI applied to the property valuation. The most recent CPI that will be applied for the 2018-19 tax
roll valuation is 2.0%.
Sales Tax Notes: FY 17 sales tax is, and FY 18 to FY 20 sales tax receipts are projected to be, lower than expected due to the tapering of high-end
auto sales, especially Tesla and Mercedes, an increase in the number of auto leases which results in lower sales tax when compared to auto sales,
negative audit corrections and an increase in on-line shopping overall. In FY 16, approximately $2.7 million of the sales tax increase is due to a one-
time true-up payment from the state known as the “triple-flip.”
TOT Notes: The rate of year-over-year growth in TOT revenue is anticpated to be lower over the next few years due to the confluence of
simultaneous hotel renovations. See bar chart below that depicts historical TOT revenue growth. Renovations are scheduled at Pelican Hill
beginning in September 2017 through June 2018 that will result in lower hotel tax. The Duke Hotel will undergo room renovations from October
2017 through June 2018 and will open as a Renaissance hotel. All 498 rooms will be renovated and TOT revenue is anticipated to decrease for the
duration of the renovations. The Radisson Hotel started undergoing significant renovations in October 2016 and is anticipating completion and
rebranding as a Hyatt in May 2018. Nearly half of all Radisson rooms will be unavailable during the renovation; however higher room rates are
anticipated when the hotel is rebranded as a Hyatt.
Projected
Projected
Projected
Historical
Historical
Historical
All General Fund Revenue
2014 2015 2016 2017 2018 2019 2020
Budget 170,130,361 181,451,410 194,296,230 200,105,331 210,193,365 218,664,157 225,224,082
/174,432,930 185,828,583 199,245,805 204,832,321 212,295,298 218,664,157 225,224,082
Variance (Actual +Over/-Under Budget)4,302,568 4,377,173 4,949,575 4,726,990 2,101,934 - -
Pct Var 2.5%2.4%2.5%2.4%1.0%0.0%0.0%
YOY Growth 11,395,653 13,417,222 5,586,517 7,462,977 6,368,859 6,559,925
Pct YOY Growth 6.5%7.2%2.8%3.6%3.0%3.0%
ProjectedHistorical
Long-Range Financial Planning
Update
FINANCE COMMITTEE
NOVEMBER 9, 2017
Item No. 5B1
Long-Term Financial Forecast
Staff Presentation
November 9, 2017
3 Preliminary Pension UAL Payment Options
(Rough Staff Estimates)
2
$25,698,507
$47,412,878
$33,871,716
$34,652,232
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
$50,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Default Minimum 2017-18 Level More Confident Level $ Payment Plan
1
3
Pension UAL Payment Options
~$25.7 -$34.7 Million
2
Spring Decision –Bring Pension Credits Forward?
Underutilized Pension Credits
OPEB Actuarial Determined Cost (ADC)
5 Year Projection
2019 2020 2021 2022 2023
NOL Amort. Pmt.3,257,104 3,257,104 3,257,104 3,257,104 3,257,104
Normal Cost 577,817 595,147 555,901 555,659 556,397
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
OPEB Actuarial Determined Contribution
(ADC)
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Explicit NC Implicit NC NOL Pmt
Workers’ Comp & General Liability
1)Higher safety claims experience in workers compensation
2)Workers’ Compensation Claim payments trickle out over 10-20 years
a)No Immediate rush to fill shortfall
b)Potential candidate for a longer investment horizon
3)General Liability Claims mature rapidly by comparison
4)There are more Gen Liability claims than what the actuary is considering
5)Recommend moving to an annual valuation
6)Shortfalls in Funded Status and annual contribution should be considered during budget
development
Claims & Judgements Reserve Status
General Liability Workers' Comp TOTAL
Reserves
Cash Reserve 6/30/17 7,109,061 16,135,932 23,244,993
Target at 75% Confidence Level (CL)5,877,000 19,629,000 25,506,000
(Short)/Over Target 1,232,061 (3,493,068)(2,261,007)
Annual Set-Aside 2017-18
2017-18 Department Internal Service Charge 4,068,234 2,753,921 6,822,155
Recommended 2018-19 Dept Charge @ 75% CL 6,239,000 4,661,000 10,900,000
Proposed Increase to Dept Rates (2,170,766)(1,907,079)(4,077,845)
Proposed Interfund Transfer 1/3 of Reserve Shortfall -(1,164,356)(1,164,356)
(2,170,766)(3,071,435)(5,252,201)
To Be Reviewed at a Future Meeting
•Facilities Financial Plan (FFP)
•Harbor and Beaches Master Plan
General Fund Top Three
Revenues
Property Tax
•Residential use values increased 7.1%, a total of $2.9 billion, and represented 88.7% of all
growth experienced in the City.
•Assessor has restored $133.4 million of previously Proposition 8 reduced values between 2008
and 2012. There is still approximately $300 million left to be restored on the 884 homes reduced
during the recession.
•With the first 8 months of sales data processed for 2017, SFRs are selling for 10.66% more than
in the previous calendar year. Prices for the full calendar year 2016 were up 8.38%. The Median
Price of all SFR in 2017 is $2,262,500 which is $342,000 higher than the peak price experienced
in 2007 at $2,020,500.
•Looking ahead, property valuation for FY 2018-19 will increase by the maximum allowed under
Proposition 13 –2%.
Growth of Assessed Value
Transfer of Ownership 2013-2017
PROPERTY TAX
Property Tax
2014 2015 2016 2017 2018 2019 2020
Budget 77,434,791 81,965,214 85,770,279 91,685,344 97,120,660 104,021,074 109,222,128
/77,954,939 82,298,226 88,810,860 94,350,181 99,067,690 104,021,074 109,222,128
Variance (Actual +Over/-Under Budget)520,148 333,012 3,040,581 2,664,837 1,947,030 - -
Pct Var From Budget 0.7%0.4%3.5%2.9%2.0%0.0%0.0%
YOY Growth 4,343,286 6,512,635 5,539,320 4,717,509 4,953,384 5,201,054
Pct YOY Growth 5.6%7.9%6.2%5.0%5.0%5.0%
ProjectedHistorical
PROPERTY TAX GROWTH FORECAST
ORIGINAL
CAGR
ADJUSTED
CAGR
BASE FORECAST RECESSION
FORECAST
NEAR-TERM
FORECAST
5%4%4%2-4%5%
Sales Tax by
Industry
Groups
Sales Tax Revenues Comparison
SALES TAX
Sales Tax
2014 2015 2016 2017 2018 2019 2020
Budget 30,193,894 32,800,745 37,000,093 34,612,648 35,932,370 35,487,307 35,867,041
/30,869,941 32,878,836 36,808,460 33,702,895 34,872,297 35,487,307 35,867,041
Variance (Actual +Over/-Under Budget)676,047 78,091 (191,633) (909,753) (1,060,073) - -
Pct Var 2.2%0.2%-0.5%-2.6%-3.0%0.0%0.0%
YOY Growth 2,008,895 3,929,624 (3,105,566) 1,169,402 615,010 379,734
Pct YOY Growth 6.5%12.0%-8.4%3.5%1.8%1.1%
ProjectedHistorical
SALES TAX GROWTH FORECAST
ORIGINAL
CAGR
ADJUSTED
CAGR
BASE FORECAST RECESSION
FORECAST
NEAR-TERM
FORECAST
3.1%3.1%3.1%-5 to +8%1.1 to 3.5%
Newport Beach Annual Hotel Occupancy Rate
Source: Newport Beach and Co.
TRANSIENT OCCUPANCY TAX
Transient Occupancy Tax
2014 2015 2016 2017 2018 2019 2020
Budget 17,291,420 19,377,767 20,656,850 22,578,447 24,327,966 23,975,985 25,174,784
/18,176,369 20,369,158 21,083,199 22,382,361 23,053,832 23,975,985 25,174,784
Variance (Actual +Over/-Under Budget)884,949 991,391 426,349 (196,086) (1,274,134) - -
Pct Var 5.1%5.1%2.1%-0.9%-5.2%0.0%0.0%
YOY Growth 2,192,789 714,041 1,299,162 671,471 922,153 1,198,799
Pct YOY Growth 12.1%3.5%6.2%3.0%4.0%5.0%
ProjectedHistorical
TRANSIENT OCCUPANCY TAX GROWTH FORECAST
ORIGINAL
CAGR
ADJUSTED
CAGR
BASE FORECAST RECESSION
FORECAST
NEAR-TERM
FORECAST
7.8%5%5%-2 to +9%3-5%
GENERAL FUND REVENUE
All General Fund Revenue
2014 2015 2016 2017 2018 2019 2020
Budget 170,130,361 181,451,410 194,296,230 200,105,331 210,193,365 218,664,157 225,224,082
/174,432,930 185,828,583 199,245,805 204,832,321 212,295,298 218,664,157 225,224,082
Variance (Actual +Over/-Under Budget)4,302,568 4,377,173 4,949,575 4,726,990 2,101,934 - -
Pct Var 2.5%2.4%2.5%2.4%1.0%0.0%0.0%
YOY Growth 11,395,653 13,417,222 5,586,517 7,462,977 6,368,859 6,559,925
Pct YOY Growth 6.5%7.2%2.8%3.6%3.0%3.0%
ProjectedHistorical
GENERAL FUND GROWTH FORECAST
BASE FORECAST RECESSION
FORECAST
NEAR-TERM
FORECAST
3.8%-2 to +9%-0.8%to 7.6%
Long-Range Financial Planning
Update
FINANCE COMMITTEE
NOVEMBER 9, 2017
City of Newport
Beach Property Tax
Dollar Breakdown
Recapturing
Proposition 8
Reductions
Breakdown of 7.75% Sales Tax Rate