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Finance Committee - June 14, 2018
CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D Thursday, June 14, 2018 - 3:00 PM Finance Committee Members: Diane Dixon, Chair / Council Member Will O'Neill, Mayor Pro Tem Kevin Muldoon, Council Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, Committee Member Larry Tucker, Committee Member Staff Members: Dave Kiff, City Manager Carol Jacobs, Assistant City Manager Dan Matusiewicz, Finance Director / Treasurer Steve Montano, Deputy Director, Finance Marlene Burns, Administrative Specialist to the Finance Director The Finance Committee meeting is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that the Finance Committee agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that the public be allowed to comment on agenda items before the Committee and items not on the agenda but are within the subject matter jurisdiction of the Finance Committee. The Chair may limit public comments to a reasonable amount of time, generally three (3) minutes per person. The City of Newport Beach’s goal is to comply with the Americans with Disabilities Act (ADA) in all respects. If, as an attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, we will attempt to accommodate you in every reasonable manner. Please contact Dan Matusiewicz, Finance Director, at least forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is feasible at (949) 644-3123 or dmatusiewicz@newportbeachca.gov. NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance Department 24 hours prior to the scheduled meeting. I.CALL MEETING TO ORDER II.ROLL CALL III.PUBLIC COMMENTS Public comments are invited on agenda and non-agenda items generally considered to be within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for the record. The Finance Committee has the discretion to extend or shorten the speakers’ time limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all speakers. As a courtesy, please turn cell phones off or set them in the silent mode. IV.CONSENT CALENDAR MINUTES OF MAY 10, 2018A. Recommended Action: Approve and file. DRAFT MINUTES 051018 June 14, 2018 Page 2 Finance Committee Meeting MINUTES OF MAY 24, 2018B. Recommended Action: Approve and file. DRAFT MINUTES 052418 V.CURRENT BUSINESS RESERVE POLICYA. Summary: Presentation of Draft Report: GFOA Risk Based Analysis of General Fund Reserve Requirements. Recommended Action: Staff recommends that the Finance Committee direct staff to bring any reserve policy changes for City Council approval, or continue to the next Finance Committee for further analysis and discussion. STAFF REPORT ATTACHMENT A PARAMETRIC INSURANCEB. Summary: Teleconference with SwissRE and the GFOA to discuss parametric insurance options. Recommended Action: Receive and file. MASTER FEE SCHEDULEC. Summary: Staff will present the Master Fee Schedule to the Finance Committee and subsequently will present to the City Council at the July 24, 2018, meeting. Recommended Action: Staff recommends that the Finance Committee direct staff to bring the fee changes for City Council approval, or continue to the next Finance Committee for further analysis and discussion. STAFF REPORT ATTACHMENT A ATTACHMENT B ATTACHMENT C June 14, 2018 Page 3 Finance Committee Meeting PROPOSED REVISIONS TO COUNCIL POLICY F-14 AUTHORITY TO CONTRACT D. Summary: Staff will propose changes to Policy - F14 pursuant to the specified requirements in the Federal Uniform Guidance for Federal Awards. Changes are required to be approved by the City Council prior to June 30, 2018, for continued eligibility to receive Federal grant funding. Recommended Action: Staff recommends that the Finance Committee direct staff to bring the policy changes for City Council approval. STAFF REPORT ATTACHMENT A DISCUSS POTENTIAL BALLOT INITIATIVE THAT MAY REQUIRE A VOTE OF THE ELECTORATE PRIOR TO THE ISSUANCE OF CERTAIN CERTIFICATES OF PARTICIPATION (COPS) AND OTHER LEASE REVENUE OBLIGATIONS E. Summary: On the June 12th City Council agenda, Council members will discuss a potential ballot initiative that would require a vote of the electorate prior to the issuance of certain COPs and other lease revenue obligations. Recommended Action: Discuss and develop pros and cons to City Council as necessary. DISCUSS POTENTIAL REORGANIZATION OF FINANCE COMMITTEEF. Summary: On the June 12th City Council agenda, Council members will discuss reorganizing the Finance Committee to be a 7-member all citizen's committee (versus one with 3 Council Members and 4 citizens), starting July 1, 2019. Recommended Action: Discuss and develop pros and cons to City Council as necessary. WORK PLAN REVIEWG. Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Receive and file. ATTACHMENT A VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) VII.ADJOURNMENT Finance Committee Meeting Minutes May 10, 2018 Page 1 of 9 CITY OF NEWPORT BEACH FINANCE COMMITTEE MAY 10, 2018 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 Pro Tem Will O'Neill, Committee Member William Collopy, Committee Member Joe Stapleton, and Committee Member Larry Tucker ABSENT: Council Member Kevin Muldoon (excused) and Committee Member Patti Gorczyca (excused) STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Budget Manager Susan Giangrande, Fire Chief Chip Duncan, Public Works Finance Administrator Jamie Copeland, Angela Crespi, Budget and Payroll Supervisor Shannon Espinoza, Senior Accountant Theresa Schweitzer, and Administrative Specialist to the Finance Director Marlene Burns. MEMBER OF THE PUBLIC: Jim Mosher III. PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher expressed concern with the lack of background material for the public to review in advance of today’s meeting. Noting there were no other members of the public who elected to speak on this item, Chair Dixon closed public comments. IV. CONSENT CALENDAR A. MINUTES OF APRIL 12, 2018 Recommended Action: Approve and file. MOTION: Committee Member Tucker moved, and Committee Member Collopy seconded, to approve the minutes, as revised. The motion carried (5 – 0, Muldoon, Gorczyca absent). V. CURRENT BUSINESS A. FINANCE COMMITTEE BUDGET REVIEW Summary: The Finance Committee has had the opportunity to review the City Manager’s 2018-2019 proposed Budget documents and a brief power point presentation. Staff will provide a high- level variance analysis to the Committee members and will address certain questions raised Finance Committee Meeting Minutes May 10, 2018 Page 2 of 9 by the Finance Committee during the April meeting. Staff will be available to answer any further questions the Committee may have pertaining to the 2018-2019 City Manager Proposed Budget. Recommended Action: Discuss and ask questions as necessary. Finance Director Matusiewicz provided an introduction noting the purpose of the agenda item was to address any specific questions and follow up on questions the Finance Committee members may have on various budget-related topics. Committee Member Tucker inquired regarding pension tiers. Staff responded there are approximately 75% active employees in Tier I (classic), 9% are transfers (Tier II - classic members transferred from outside agencies), and 119 current PEPRA employees. Some cities have adopted a Tier II system, and some have not, which may place Newport Beach in a difficult recruitment position in future years, especially for high-level positions requiring extensive or technical experience. High value candidates may not want to transfer to Newport if they are faced with a lower tier, reduce their pension benefit. City Manager Kiff stated that there has not yet been difficulty in recruitment overall due to Tier II and PEPRA. However, in future years, the decision for candidates to come to Newport Beach will likely factor more heavily on quality of life, rather than the level of benefits. Fire Chief Duncan commented the Fire Department has not had difficulty recruiting quality candidates due to the new pension formulas. Chair Dixon inquired as to the rate of attrition for classic Tier I employees. Finance Director Matusiewicz presented a slide, which detailed the decline in the number of classic employees over time. Currently, there is an approximate 5.8% attrition rate per year for the miscellaneous plan. City Manager Kiff has allowed the Police Department, on a case-by-case basis, to bring in lateral employees (Tier II) to fill positions requiring specialized training and experience. Committee Member Collopy inquired as to why the information presented did not cover the years in-between 2016 and 2019, as that information would support the understanding of trends. Chair Dixon inquired as to the benefit of utilizing actuarial numbers versus headcount numbers in analyzing costs related to personnel and pensions. Finance Director Matusiewicz stated the years in between 2016 and 2019 are not used in calculating a compound annual growth/attrition rate and that actuarial data was used in lieu for payroll records because the information was simply readily available. Finance Director Matusiewicz presented a slide detailing the General Liability and Workers Compensation trends. The cash balance for Workers Compensation is more stable while the cash balance for General Liability tends to be more volatile. Committee Member Collopy inquired as to the factor utilized to establish the Workers Compensation reserve fund. Finance Director Matusiewicz stated he establishes the baseline target by utilizing actual claim results (20 years). As a result of doing business in a particular year (i.e., the year in which a claim occurs), there are costs that may be paid out related to that claim over several years. The actuary projects loss based upon expected and actual claims paid, and recommend a confidence level for cities to be able to plan financially for actual costs which may vary significantly from expected costs. Previous Finance Committees have selected a 75% confidence level. Finance Director Matusiewicz further noted there are two existing situations, which were not included in the information under analysis by the actuary. With regard to this information, City staff is making a separate accounting for the claims not included in the valuation. One claim was a previously settled claim, and the other matter still pending. For budget purposes, he conservatively recommends using the Finance Department projection. He further explained that the reserve fund is funded by Departments contribution rates based on claims experience. Finance Committee Meeting Minutes May 10, 2018 Page 3 of 9 He also relies on cash transfers to fund short-falls that appear to be anomalies. Overall, he increased the amount charged to Departments, which is in line with the increasing trend for liability. Cash infusions are utilized to cover shortfalls on a one-time basis. Mayor Pro Tem O’Neill cautioned that certain liability information cannot be discussed outside of closed session. Generally, it was discussed that there could be an opportunity for the reallocation of funds based upon future scenarios. Finance Director Matusiewicz prefers to continue the process of funding liability to be at 100% of the target to reach the 75% confidence level in the liability reserve. Committee Member Tucker inquired regarding the 6.5% increase in the General Liability fund budget. Finance Director Matusiewicz responded this increase is based upon the potential outflow for the year for attorney’s fees and paying out claims versus to the amount charged to departments annually. Committee Member Collopy inquired as to why prior Finance Committees settled upon the 75% confidence level. Finance Director Matusiewicz responded that the actuary recommends a range at least a 70 to 85% confidence level for the liability reserve and the Finance Committee picked 75% somewhat arbitrarily as the target. Finance Director Matusiewicz stated there will now be an annual vs. bi-annual actuarial valuation based the volatility and severity of claims the City has incurred lately. Committee Member Tucker inquired why this was not part of the reserve study. Finance Director Matusiewicz noted the City pays an actuary to determine the amount the City should set-aside each year for liability costs. The GFOA study will cover catastrophic circumstances. Finance Director Matusiewicz stated the City is responsible for the first $500,000, per event. Committee Member Collopy inquired whether the actuary’s analysis includes Workers Compensation. Finance Director Matusiewicz responded the actuary provide a separate valuation for General Liability and Workers Compensation. Committee Member Collopy expressed support for ensuring the correct number is budgeted to responsibly address the City’s liability costs. Finance Director Matusiewicz stated he is recommending a conservative number based upon information known to City staff. The long- term target for Workers Compensation is $19 million, and current working capital is $16 million. Finance Director Matusiewicz stated Workers Compensation claims tend to be slower paying and the gap does not present as much of a concern as does the General Liability volatility. Committee Member Collopy received affirmation that each Department is paying into the fund annually and shortfalls are covered by reserves. Finance Director Matusiewicz is increasing the rate charge to each Department by approximately $1 million; however, this is still short of the actuary’s recommendation. Chair Dixon inquired as to the proposed increases for the upcoming fiscal year. Finance Director Matusiewicz responded $3.4 million is being set-aside annually for Workers Compensation. Discussion ensued regarding the presumptive job-related nature of certain claims. Chair Dixon affirmed there are significant impacts related to costs paid out in claims by public agencies, and whether these costs could potentially affect other City programs and services. Committee Member Tucker expressed concern that the numbers are increasing and inquired as to causes, especially in regard to legislation. City Manager Kiff responded that there is a presumptiveness of certain work activities, and there is limited control by the City or its medical consultants. Most claims are for safety-related positions. Finance Director Matusiewicz detailed the various claim trends. Finance Committee Meeting Minutes May 10, 2018 Page 4 of 9 City Manager Kiff detailed the presumptive nature of certain claims, including the impact of judicial and legislative action, which is directly translatable to a payable claim. He described various scenarios. Discussion ensued regarding the City’s involvement at the legislative level, through organizations such as the League of California Cities, and other joint efforts by local cities, to address presumptive claims. City Manager Kiff stated that subrogation of claims are part of the City’s Workers Compensation activities. Finance Director Matusiewicz reviewed revenue comparisons and variances on City-wide funds. There are currently no cost of living adjustments or vacancy savings factored into the proposed budget. Committee Member Collopy inquired as to the amount of the City’s merit increases in the proposed budget. City Manager Kiff responded there is not a separate merit budget, as employee step increases are part of the annual budgeting process. Chair Dixon affirmed code enforcement activities related to short-term rentals and various revenue sources. She inquired as to the ongoing process for these revenue generating activities. Finance Director Matusiewicz noted City staffing-up proactively to uncover non- reported short-term lodging activities and other self-reported business activities, which can generate revenue. Committee Member Collopy inquired as to the agreement with the School District for law enforcement patrol around schools and requested the City consider formalizing those types of service through a specific agreement. City Manager Kiff stated there is a formal agreement for the School Resource Officers. They are a resource at the school, and not assigned to patrol. Their role is to proactively work within the school population. The additional officers would spend more time around the school during the opening and release time. He does understand there is an interest in exploring establishing a stronger role for officers at the school and this matter will be discussed at the City Council meeting on May 22, 2018. Committee Member Stapleton inquired as to the decrease in business tax and Finance Director Matusiewicz responded that there was a cut back on staffing resulting in a decline in revenues. Staff is proposing a staff person dedicated to enhance compliance in this area. Committee Member Collopy and Chair Dixon discussed and expressed interest in remaining competitive in tax revenue, particularly the Transiency Occupancy Tax (TOT). Chair Dixon requested a comparative analysis of the TOT rates for other cities in the region. Discussion ensued regarding the status of various hotels remodels and additional room inventory coming back online in the community. Chair Dixon opened public comments. Jim Mosher expressed concern regarding understanding the percent change in the budget documentation provided. Deputy Finance Director Steve Montano noted there was a formatting error in the printed version. The PowerPoint slide reflects the correct formatting. Committee Member Collopy inquired as to the greatest concern the City Manager has regarding the proposed Fiscal Year 2018-2019 budget. City Manager Kiff supports the proposed budget and is comfortable with the City’s position on pensions. He does not have concern pension funding will impact service delivery in other operational areas. He is always concerned about adding new positions; however, he does acknowledge the new PEPRA formula allows the City to bring in new employees to address specific services. He does urge caution in relation to the Court’s recent decision regarding contract employees, which, if interpreted to the extreme, could result in a determination that contractors are actually City employees. If it is a City function, there is an argument the contractors are City employees. City Manager Kiff noted there are existing independent contractors who are now being brought in- Finance Committee Meeting Minutes May 10, 2018 Page 5 of 9 house as employees. Chair Dixon requested this matter be monitored and brought back to the Committee for review. Chair Dixon inquired as to any reduction in services as a result of the additional pension paydown programs. She does support further accelerated payments. City Manager Kiff does not believe services are shortchanged as the result of the pension payments. The City staff is currently at the maximum they can handle work-load wise and he is cautious about balancing resources and service delivery expectations. Committee Member Collopy is very interested in the results of the reserve study, and is hopeful the results will allow the City to free up any funds that are available to redirect to other needs. Jim Mosher expressed concern with correlating the adopted budget with the breakdown that is available on the City’s website, particularly as related to employee costs. He inquired if there is a relationship between the City’s management structure and the organization of the budget and whether the public was aware of the organizational restructure that is being proposed for the City. Finance Director Matusiewicz responded staff will likely include the net difference of the employee costs as related to the proposed restructuring as a revision to the proposed budget. He referred to the upcoming Joint Meeting of the City Council/Finance Committee where proposed revisions will be reviewed. Committee Member Collopy inquired as to costs related to any proposed reorganization of City organizational structure. City Manager Kiff noted various proposed changes in the organization structure, included information regarding revenue increase potential, and a net cost increase to the budget of approximately $180,000 to $200,000. A three-year plan will be proposed relative to operations and revenue. The Department changes will be on the checklist. Chair Dixon stated the City Council had been made aware of the net costs and gave preliminary direction at a previous City Council meeting. The PowerPoint Presentation and audio for the meeting are now live on-demand via the City’s website for the public’s review. Noting there were no further members of the public who elected to speak on this item, Chair Dixon closed public comments. There was no further action taken on this item. B. LONG RANGE FINANCIAL FORECAST Summary: Staff will provide a preview and update on the latest draft of our new Long Range Financial Forecast. Recommended Action: Receive and file. Deputy Finance Director Montano demonstrated the new PFM Whitebirch long range forecasting software program, which allows for analysis of various assumptions, including growth, recession, and special circumstances, as related to the City’s long-range financial planning. He demonstrated the “what-if” scenario capabilities and other alternatives regarding baselines. Deputy Finance Director Montano generally addressed the impacts of various financial factors, including adopted Memorandum of Understanding with bargaining units. Committee Member Collopy inquired as to the purpose of the software in terms of the duties and responsibilities of staff and the Finance Committee. Deputy Finance Director Montano Finance Committee Meeting Minutes May 10, 2018 Page 6 of 9 Montano stated the software allows for confirmation staff is operating and planning in the “right” direction, especially in regard to pension funding decisions. Finance Director Matusiewicz confirmed the City is ramping up pension contributions to the appropriate level and ramp-up contributions for the Harbor and Beaches Capital Plan. In the first years of the ramp-up, staff will be utilizing the surplus to balance the budget; however, this is not the plan for future years. The software’s modeling feature allows for viewing various scenarios and confirms staff’s projections. He suggested the software be utilized to inform the budget planning process on an annual basis, rather than monthly review, and suggested an annual Fall review. In response to Committee Member Collopy, City Manager Kiff confirmed the surplus is composed of approximately 60% from expense savings and 40% from excess revenues. Mayor Pro Tem O’Neill confirmed the City is not facing real structural deficits, and that conservative planning results in a surplus. Discussion ensued regarding revenue projections. Chair Dixon opened public comments. Noting there were no members of the public who elected to speak on this item, Chair Dixon closed public comments. There was no further action taken on this item. Chair Dixon excused herself from the meeting (4:36 p.m.) and Mayor Pro Tem O’Neill presided over the remainder of the meeting. C. AGREED UPON PROCEDURES (AUP) ON INTERNAL CONTROLS Summary: Staff will provide an oral update on AUP performed by City auditors, White Nelson Diehl Evans. The intent of the AUP is to test the City’s internal control processes and procedures of Wire Transfers and certain other electronic payments. Recommended Action: Receive and file. Finance Director Matusiewicz provided a brief report. The auditors spent two days with City staff to ensure internal controls were robust. They will return with a report and further work on internal controls. The report will be presented to the Finance Committee and upon recommendation of the Committee, the staff will forward information to the City Council. Mayor Pro Tem O’Neill opened public comments. Noting there were no members of the public who elected to speak on this item, Mayor Pro Tem O’Neill closed public comments. There was no further action taken on this item. D. ASSESSMENT DISTRICT (AD) 117 UPDATE Summary: Staff will provide an oral update on the progress of AD 117. This AD was formed by property owners within the area bounded by Bayside Drive, Avocado Ave, Coast Highway and Carnation Avenue with the intent to underground overhead utilities. Property owners were provided the option of paying their assessment in cash. The balance of the assessment will be financed by the City secured by the real property of the property owners. This is “No-Commitment Debt” meaning neither the faith nor credit of the City of the Newport Beach will be pledged as collateral or as a further backstop for the proposed financing. Recommended Action: Receive and file. Finance Committee Meeting Minutes May 10, 2018 Page 7 of 9 Finance Director Matusiewicz noted several undergrounding financing projects had costs come in higher than expected as compared to the amount voted upon by property owners. Previous Finance Committee’s have not wanted to review smaller finance smaller financings and assessment districts, but staff wanted to inform the committee as relative to the $4 million project since the last assessment district financing was in 2012. Property owners have the option of paying their portion in full, or financing balances through special assessments. There is no commitment on the part of the City, as this is debt secured solely on land-secured financing. One-hundred percent of the direct financing costs are absorbed by approximately 250 homes. There is no action required by the Finance Committee other than to receive and file the information. Mayor Pro Tem O’Neill opened public comments. Noting there were no individuals who elected to speak on this item, Mayor Pro Tem O’Neill closed public comments. There was no further action taken on this item. E. UPTOWN NEWPORT COMMUNITY FACILITIES DISTRICT (CFD) UPDATE Summary: The Uptown Newport development agreement stated that staff would work cooperatively to form a CFD to finance the undergrounding of overhead electrical power transmission lines. Staff will brief the Finance Committee on the topic as the project appears to be moving forward for Council consideration soon. The proposed financing is secured by the real property currently owned by the developer(s). The is “No-Commitment Debt” meaning neither the faith nor credit of the City of the Newport Beach will be pledged as collateral or as a further backstop for the proposed financing. Recommended Action: Receive and file. This item was continued to a future meeting due to potential lack of quorum. F. RISK BASED RESERVE STATUS UPDATE Summary: Staff will provide an oral update on the Risk Based Reserve Study being performed by the Government Finance Officers’ Association (GFOA) of the United States and Canada. Recommended Action: Receive and file Staff provided a status update regarding the risk-based reserve study. The GFOA consultant is processing the various elements of the report and is meeting with staff for preliminarily review to ensure the model’s assumptions are correct. The report is anticipated to come before the Finance Committee within the next month. Mayor Pro Tem O’Neill opened public comments. Noting there were no individuals who elected to speak on this item, Mayor Pro Tem O’Neill closed public comments. There was no further action taken on this item. G. WORK PLAN REVIEW Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Receive and file The Finance Committee and staff reviewed and approved the following meeting schedule: Finance Committee Meeting Minutes May 10, 2018 Page 8 of 9 May 22, 2018, 4:30 p.m.-6:00 p.m. Joint Meeting with City Council/Finance Committee May 22, 2018 City Council meeting where the budget public hearing will be set for June 12, 2018. May 24, 2018 Finance Committee meeting where there will be a review of recommendations that will be presented to City Council, related to budget. Finance Director Matusiewicz inquired if there were any other matters the Finance Committee would like to see as part of their review of the proposed budget. Discussion ensued as to the contents of staff’s checklist, a document, which details proposed revisions/modifications to the currently proposed budget. Mayor Pro Tem O’Neill confirmed that the “checklist” is a supplement to the currently proposed budget that includes items the City Council has already agreed upon, including items such as new agreements with vendors, and other items, which have not yet been approved; however, are pending City Council review. Mayor Pro Tem O’Neill opened public comments. Jim Mosher requested clarification regarding the proposed budget and public hearing date. It was confirmed the City Council will set the initial public hearing on the budget for June 12, 2018, at which time it is anticipated the City Council will adopt the budget. The City Council does have the ability to adopt the budget at the second meeting in June, if necessary; however, they prefer to have it adopted well in advance of the June 30, 2018, deadline. Noting there were no further individuals who elected to speak on this item, Mayor Pro Tem O’Neill closed public comments. There was no further action taken on this item. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON- DISCUSSION ITEM) Chair Dixon proposed a review of any charter amendment as related to debt issuance at a future Finance Committee meeting. There was consensus from the Committee to place it on a next meeting. VII. ADJOURNMENT The Finance Committee adjourned at 4:52 p.m. to the next regular meeting of the Finance Committee. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on May 7, 2018, at 1:37 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. Finance Committee Meeting Minutes May 10, 2018 Page 9 of 9 Attest: ___________________________________ _____________________ Diane Dixon, Chair Date Finance Committee Finance Committee Meeting Minutes May 24, 2018 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE MAY 24, 2018 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 - via teleconference (Chair), Mayor Pro Tem Will O'Neill (Chair), Council Member Kevin Muldoon (arrived 3:08 p.m.) 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 Finance Director Steve Montano, Accounting Manager Rukshana Virany, Budget Analyst Amy Mayfield, Budget Manager Susan Giangrande, Deputy City Attorney Armeen Komeili, Budget and Payroll Supervisor Shannon Espinoza, and Administrative Specialist to the Finance Director Marlene Burns. MEMBER OF THE PUBLIC: Jim Mosher III. PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher noted a proposal from a previous meeting which would reconstitute the Finance Committee membership to exclude sitting City Council Members. He expressed support for this change in the interest of keeping the Finance Committee’s review and recommendations independent, as well as to ensure all City Council Members are receiving and reviewing information from the Finance Committee in an equal fashion. City Manager Kiff noted this item does not appear on today’s agenda and discussion at this time would not be appropriate for the Finance Committee. Chair Dixon noted this item can be added to a future agenda by the Finance Committee during agenda item five. Noting there were no other members of the public who elected to speak on this item, Chair Dixon closed public comments. Chair Dixon deferred Chairmanship for this meeting to Mayor Pro Tem O’Neill. Chair O’Neill proceeded to Chair the meeting from this point forward. IV. CURRENT BUSINESS B. UPTOWN NEWPORT COMMUNITY FACILITIES DISTRICT (CFD) UPDATE Summary: Finance Committee Meeting Minutes May 24, 2018 Page 2 of 8 The Uptown Newport development agreement stated that staff would work cooperatively to form a CFD to finance the undergrounding of overhead electrical power transmission lines. Staff will brief the Finance Committee on the topic as the project appears to be moving forward for Council consideration soon. The proposed financing is secured by the real property currently owned by the developer(s). The is “No-Commitment Debt” meaning neither the faith nor credit of the City of the Newport Beach will be pledged as collateral or as a further backstop for the proposed financing. Recommended Action: Receive and file. Council Member Muldoon recused himself from participation in this item and left the room for the duration of the item. Finance Director Matusiewicz noted previous Finance Committee’s have not addressed Community Facilities Districts (CFD) or assessment districts historically. There is a CFD contemplated to underground high-powered transmission lines in front of the subject development. The project scope has grown, and by handing this matter off to another agency, the City may lose control over pricing terms. Once the City Council forms the CFD it is recommended the authorizing resolution contains specific language to establish parameters for price setting. Committee Member Tucker inquired as to the level of risk that would be assumed by the City in the development of a CFD. Finance Director Matusiewicz noted a certain number of property owners would be assessed a “Mello-Roos” tax to fund the CFD. There is no City money at stake. Committee Member Tucker requested clarification related to the Finance Committee’s role in this matter. Finance Director Matusiewicz stated this item is a general “receive and file” informational update and there is no action required by the Finance Committee. Committee Member Gorczyca inquired as to financing and administration of the the proposed CFD. Finance Director Matusiewicz stated the funding has grown to approximately $8 million to include both the undergrounding and a community park and the the financing and administration would be carried out by the California Statewide Communities Development Authority (CSCDA) Chair O’Neill opened public comments. Jim Mosher expressed support to broaden the Finance Committee’s ability to review policy decisions and make recommendations as to the overall financial impacts of program and projects to the City of Newport Beach. Noting there were no further members of the public who elected to speak on this item, Chair O’Neill closed public comments. MOTION: The Finance Committee unanimously (Council Member Muldoon recused) accepted this report with a “receive and file” action. A. FINANCE COMMITTEE BUDGET RECOMMENDATION(S) TO COUNCIL Summary: The Finance Committee has had the opportunity to review the City Manager’s Fiscal Year 2018-2019 proposed budget documents since April 10, 2018. City staff has presented brief power point presentations to Finance Committee summarizing the budget, addressing committee questions and provided a variance analysis of the budget. Staff will be available to answer any further questions the Committee may have pertaining to the Fiscal Year 2018-2019 proposed budget. Recommended Action: Finance Committee Meeting Minutes May 24, 2018 Page 3 of 8 Make written recommendation(s) to the Council concerning the City Manager’s Fiscal Year 2018-2019 proposed budget. Committee Member Tucker requested the City Manager to provide brief updates on budget checklist items, excluding any items, which are proposed as part of the Capital Improvement Program (CIP). City Manager Kiff spoke regarding the proposed formation of a Harbor Department, which is currently a Division. Some Council Members have expressed support for an increased role for the Division including larger-scale maintenance projects. There will be an increase in cost associated with the formation of a Harbor Department, including making the positions permanent, such as Director (tied to Library Director salary level). There is potential for revenue offset by pulling in contracted management of Marina Park and having the program managed in-house. The total net cost of the change is approximately $150,000. Currently, the program is moving toward approximately $1 million in costs. Discussion ensued regarding costs going forward for in-house management of the proposed Department. City Manager Kiff spoke regarding the past establishment of the Library Department as a comparison and noted the future City Council and City Manager will have the ability to adjust the proposed Department, as necessary. Committee Member Collopy inquired as to how the City Council can ensure the next City Manager will manage the growth of the program, ideally with net-zero growth. City Manager Kiff stated the choice of the next City Manager’s financial management style is determined by the City Council who selects the individual and the direction they provide regarding the budget. Committee Member Gorczyca inquired as to the benefit changes that will result when the positions move to permanent status. City Manager Kiff stated the costs include their PEPRA benefits, as the employees will not fall under the Tier II or Tier I, “Classic,” pension programs. City Manager Kiff discussed the proposed addition of officers to school programs, an option that was determined based upon discussions with Dr. Navarro. There is a deletion of the two (2) additional sworn officers and the proposed addition of three (3) community services officers. He also discussed the potential addition of matrons related to female custody transfers. He spoke regarding the cite and release impacts of intoxicated individuals, and would prefer to keep them in custody in Newport Beach as opposed to the County Jail for longer periods of time. Committee Member Gorczyca inquired whether there was a cooperative agreement with the schools for officers. City Manager Kiff stated there was a potential for cost-sharing as long as Dr. Navarro’s school board was agreeable to the terms. As a follow-up, Committee Member Collopy inquired as to the hours the officers would be available at the schools. City Manager Kiff stated there may be circumstances where officers may be pulled away due to other city- wide safety matters; however, it is anticipated they would be available during school hours. Committee Member Gorczyca inquired how many officers are currently at the schools. Chair O’Neill stated that on principle, in deference to school safety concerns, the City does not discuss the information related to officer’s schedules at the school. Council Member Muldoon is not in support of the addition of three (3) community service officers and he does have serious concerns related to the formation of a Harbor Services Department. He confirmed the two (2) new officers have been removed from the proposed budget. He supports the concept of an additional officer to be shared with the schools. He supports the concept of perhaps one (1) community service officer who could be blended with sworn staff. He expressed his concerns regarding bifurcating the vote on the recommended budget so as to affirm his support for the budget, overall. Finance Committee Meeting Minutes May 24, 2018 Page 4 of 8 Committee Member Tucker stated that the day-to-day operational issues and policy direction are the jurisdiction of the City Council. The Finance Committee does not have jurisdiction over those matters, especially given that the Committee is constituted partially of non-elected members. He will be supporting a motion to recommend approval to the City Council of the City Manger’s proposed budget, but would exclude any comment from the Finance Committee on the budget checklist. Committee Member Gorczyca stated that the budget checklist is not the purview of the Finance Committee. Chair O’Neill mentioned that although he believes the Finance Committee does have purview over many of the issues presented in the budget checklist, he is in support of the Finance Committee voting strictly on the proposed budget and not comment on the budget checklist. He also spoke regarding the potential for adding matrons in the jail in order to potentially avoid future litigation. There are also impacts to hiring the three (3) additional community services officers; however, there are also impacts to the potential permanent closure of the jail. Council Member Dixon inquired as to the other services that may be performed by the matrons. City Manager Kiff stated there must be continuous coverage in the jail for females when in custody, although the matrons may also be assigned to records-type duties when their services are not required for jail custody purposes. The female matrons are non-sworn employees. Council Member Muldoon stated there are automation opportunities where law clerks or interns could response to law enforcement records requests and there may be other ways the need for additional matrons may be addressed. He does not want to vote “no” on the City Manager’s proposed budget. Committee Member Tucker stated his preference that the Finance Committee not take a position on the budget checklist. Chair O’Neill inquired as to the “fund transfer” listed on the top of a distributed document. Finance Director Matusiewicz assured there was no double counting in the proposed budget for the transfer of cash from the Internal Service Fund (ISF). Committee Member Collopy inquired as to the creation of the Harbor Department. Chair O’Neill stated the proposed Harbor Department has not yet been approved. He further commented that at the last City Council meeting, approval was given for a stand-alone Utilities Department and to move Municipal Operations under the Public Works Department at an estimated cost savings. Discussion of a stand-alone Harbor Department was continued to the next City Council meeting. It was confirmed there will be an additional cost to create the proposed Department. The staff report on the item was comprehensive and is publically available. City Manager Kiff spoke regarding service delivery model changes in the Fire Department, including increasing service capability for Emergency Medical Services (EMS). The change would entail the ability for additional stations to provide Advanced Life Support (ALS) services, through the addition of a certified Paramedic at the station. There will be more staff who are Firefighter/Paramedics, rather than Firefighter/EMT’s. Chair O’Neill noted that there are few Firefighters who have elected to become Paramedic certified, even though the City does pay for the Paramedic training. Most Firefighters would prefer to remain just Firefighters. Committee Member Collopy inquired if the Fire Chief places priority for hiring on those candidates who apply already Paramedic certified. City Manager Kiff did not recollect if this was the current policy for the Fire Department. Finance Committee Meeting Minutes May 24, 2018 Page 5 of 8 Committee Member Gorczyca stated that one of her previous clients, a Fire Authority, reported approximately 90% of their calls for service were calls requiring Paramedic service. City Manager Kiff confirmed the City of Newport Beach Fire Department reports approximately 89% of their calls as requiring Paramedic service. City Manager Kiff noted additional dollars were placed in the proposed budget for facility cleaning, including bathrooms, plexiglass, and to address various contract costs for maintenance. There were also proposed reductions in capital expenses, as reflected in distributed documentation. Chair O’Neill stated he would prefer to redirect the presentation back to the Finance Committee for their discussion on the proposed budget. The Committee Members had no further questions or discussion at this time. Chair O’Neill opened public comments. Jim Mosher expressed his support for the Finance Committee to ensure the public has the appropriate documentation and details to understand the proposed budget, and suggested this be part of their recommendation to the City Council. He requested additional detail in the budget document, including projects that are presumed approved by staff once the budget has been approved by the City Council, details as to the specified changes in the budget from year-to- year, specific highlighting of budget checklist items which are added to the proposed budget, and notice as to where the City’s airport issues allocation is located in the document. He expressed concern with the amount of discretion the City Manager has over line items in the budget, and suggested lowering the budget and purchasing authority for the new City Manager to ensure fiscal accountability. Noting there were no further members of the public who elected to speak on this item, Chair O’Neill closed public comments. Chair O’Neill, in deference to previous comments made by Council Member Muldoon and Committee Member Tucker, suggested the recommendations explicitly exclude any items from the budget checklist. Council Member Muldoon confirmed he specifically wanted to exclude any recommendation related to the three (3) proposed community service officers. Committee Member Tucker responded to comments made by Mr. Mosher, in that the public speaker would like appointed officials serving on the various Commissions and Committees to have more discretion as related to policy recommendations and decision-making. Committee Member Tucker believes the resolutions creating most City Council-appointed Commissions and Committees provide for a narrower scope of discretion than Mr. Mosher would prefer. MOTION: Committee Member Tucker moved, and Committee Member Stapleton seconded, to recommend approval to the City Council of the Fiscal Year 2018-2019 budget as proposed by the City Manager, while taking no position or making any specific recommendation on either the Capital Improvement Program or budget checklist items. Committee Member Gorczyca preferred to review the budget checklist prior to the vote, particularly the pension information. Discussion ensued as to items, which are on the list and where they can be located in the distributed documents and on-line. City Manager Kiff confirmed the budget checklist is actually a supplement to the original proposed budget. Staff noted the proposed Unfunded Accrued Liability (UAL) payment is approximately $34.5 million across all funds, and the amount that is discretionary is $8.8 million. The information was available via the PowerPoint Presentation that was provided at a recent City Council meeting. Committee Member Collopy admitted to struggling with the motion on taking no position on Capital Improvement Program. He does believe it is the Committee’s responsibility to take a Finance Committee Meeting Minutes May 24, 2018 Page 6 of 8 position on total amounts and to recommend the proposed budget is balanced. He agreed the Committee should not take positions on individual line items. Committee Member Tucker stated the Committee is taking a position on pension liabilities, as they are already built into the proposed operational budget. In regard to the Capital Improvement Program, there are various sources which supplement the operational budget funding for projects and the Capital Improvement Program is essentially a summation of a large number of proposed projects. It is not necessarily the purview of the Finance Committee to approve the projects, as the City Council is the appropriate authority to review and approve specific projects. Chair O’Neill noted that although the Finance Committee does not approve specific capital projects, it does recommend whether the total dollar amount proposed to be spent is fiscally responsible. Discussion ensued regarding the role of the Finance Committee in recommending overall budgets to the City Council, and to what level of detail should they be reviewing items. It was agreed upon by consensus to continue the discussion of the role of the Finance Committee, including the constitution of its membership to a future meeting. Committee Member Gorczyca expressed concern with recommending approval of the proposed budget without reviewing additional detail, including the results of the reserve study and any impacts of upcoming bargaining unit negotiations. In addition, she does not have enough information to recommend the $8.8 million for the pension pay down, nor the status of having a new City Manager on-board. She is tending toward abstaining on the item. Further discussion ensued further as to the level of information the Finance Committee should review or have access to prior to making a recommendation of approval of the proposed budget to the City Council. Chair O’Neill affirmed the original motion, as amended, to recommend approval to the City Council of the Fiscal Year 2018-2019 budget as proposed by the City Manager, while taking no position or making any specific recommendation on either the Capital Improvement Program or budget “checklist” items. Council Member Muldoon reported a potential conflict of interest on the budget “checklist” related to the 800 megahertz matter however, since the current motion before the Finance Committee explicitly excludes any position or recommendation on that item, he does feel it is appropriate for him to vote. MOTION: Committee Member Tucker moved, and Committee Member Stapleton seconded, to recommend approval to the City Council of the Fiscal Year 2018-2019 budget as proposed by the City Manager, while taking no position or making any specific recommendation on either the Capital Improvement Program or budget “checklist” items. AYES: Dixon, O'Neill, Collopy, Stapleton, Tucker NOES: None. ABSENT: None. ABSTAIN: Gorczyca There was no further action taken on this item. C. WORK PLAN REVIEW Summary: Finance Committee Meeting Minutes May 24, 2018 Page 7 of 8 Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Receive and file. Finance Director Matusiewicz reported there are currently two (2) meetings of the Finance Committee scheduled for June (June 14 and 28). Deputy Finance Director Montano stated proposed June 14 agenda items include a discussion of parametric insurance with the City’s GFOA consultants and a presentation regarding the Advanced Metering Infrastructure (AMI). Discussion ensued regarding the need for a meeting on June 28, 2018. The City Council will be discussing items related to a proposed Charter amendment and the membership and responsibilities of the Finance Committee at their June 12, 2018, meeting. By Finance Committee consensus, it was decided to include the following items on the June 14, 2018, Finance Committee agenda: proposed Charter amendment, membership and responsibilities of the Finance Committee, reserve policy report/discussion, and master fee schedule. The June 14, 2018, is forecasted to be a longer meeting due to the aforementioned subject matter, and discussion of the need for a June 28, 2018, meeting will be made at that time. Council Member Muldoon stated the membership qualifications and responsibilities of the Finance Committee are determined by the City Council via resolution. Committee Member Gorczyca inquired as to the ability for the Finance Committee to schedule meetings in July and August. Discussion ensued as to the City Council appointment schedule for Commission and Committee members whose terms end on June 30, 2018. The City Council has traditionally made appointments/reappointments to the various Commissions/Committees at the end of June. City Manager Kiff will confer with the City Clerk’s Office as to the exact schedule. Committee Member Gorczyca expressed her interest in having enough time to properly vet the results of the reserve study, especially as it relates to debt. She referenced an initiative to place a ballot measure related to indebtedness before the voters. Discussion ensued regarding the length of time required to properly review the items which are forecasted for the upcoming June meetings, particularly the results of the reserve study and any proposed increases/decreases to city-wide fees. There was Committee consensus to direct Administrative Specialist to the Finance Director Marlene Burns to send out a meeting notice for the June 28, 2018, meeting. Chair O’Neill on opened public comments. Jim Mosher expressed his support for an expanded role for the Finance Committee, including review of policy and budget decisions related to fiscal matters. He does not believe any action by the Finance Committee to recommend items to the City Council overrides the City Council’s ability to take action. He also supports a change in the membership of the Finance Committee to include only non-elected officials, and was interested in the viewpoints of the current Committee as related to this matter. Noting there were no further members of the public who elected to speak on this item, Chair O’Neill closed public comments. There was no further action taken on this item. Finance Committee Meeting Minutes May 24, 2018 Page 8 of 8 V. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON- DISCUSSION ITEM) Committee Member Tucker requested an item added to the June 14, 2018, Finance Committee agenda related to the membership of the Finance Committee. VI. ADJOURNMENT The Finance Committee adjourned at 4:24 p.m. to the next regular meeting of the Finance Committee. Filed with these minutes are copies of all materials distributed at the meeting. The agenda for the Regular Meeting was posted on May 21, 2018, at 2:05 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 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5A June 14, 2018 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Dan Matusiewicz, Finance Director (949) 644-3123 or danm@newportbeachca.gov SUBJECT: RISK–BASED ANALYSIS OF GENERAL FUND RESERVE REQUIREMENTS FOR THE CITY OF NEWPORT BEACH DISCUSSION The Government Financial Officers Association (GFOA) was selected to assist staff with analyzing risks through an analytical framework intended to determine reserve levels appropriate for the City of Newport Beach. GFOA, working closely with staff, performed a thorough examination of the City’s primary and secondary risk factors that generally influence the amount of reserves the City should hold. A first working draft of the report can be found in Attachment A for the Committee’s review. Committee review, comment and recommendations will inform the final content of the report. RECOMMENDED ACTION Staff recommends that the Finance Committee direct staff to bring any reserve policy changes deemed necessary for City Council approval. Prepared by: Submitted by: /s/ Steve Montano /s/ Dan Matusiewicz Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director Attachment: A. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach ATTACHMENT A A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach, California Draft – May 2018 A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach, California Draft – May 2018 Produced by: The Government Finance Officers Association A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 2 of 57 Table of Contents Section 1 - Executive Summary ..................................................................................................................... 3 Section 2 - Introduction ................................................................................................................................ 6 Section 3 - The Approach to Uncertainty ...................................................................................................... 8 Section 4 - Extreme Events ......................................................................................................................... 12 Section 5 - Revenue Volatility ..................................................................................................................... 33 Section 6 - Secondary Risks ......................................................................................................................... 43 Section 7 - Putting it All Together ............................................................................................................... 50 Section 8 - Next Steps ................................................................................................................................. 55 Section 9 - Appendix 1: Reserves in Comparable Cities .............................................................................. 56 A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 3 of 57 Section 1 - Executive Summary A local government’s “reserves” are the portion of fund balance serves as a hedge against risk. The City of Newport Beach (City) has asked the question: “what is the right amount of general fund reserves for us?” The Government Finance Officers Association (GFOA) has helped the City answer this question by examining the risks that the City is subject to. First, we identified the risks that posed the most clear and present danger to the City. According to the City’s disaster management plan, these include earthquakes, floods, and fires. Landslides and high winds could also be potentially damaging, but less so than earthquakes, floods, and fires. We also accounted for the other risks, such as the potential for decreased revenues and increased pension costs due to an economic downturn. Next, for each risk we calculated the probability that the City would experience one of the aforementioned risks over a ten-year period and, if an event did occur, what the magnitude of the loss would be for the City’s general fund. To calculate the probability and magnitude of events, we primarily used the following sources of data: • Newport Beach’s own experience. For example, the City’s revenue losses during 2001 “Dot.Bomb” recession and 2007 “Great Recession” provide insight into the potential losses the City could incur during a future recession. • The experience of other California cities. Fortunately, Newport Beach hasn’t had a lot of direct experience with many of the extreme events it is at risk for. The experiences of other California cities can serve as analogues. • Research produced by other agencies. For example, the United States Geological Survey makes available information on the likelihood of earthquakes in the Los Angeles area. • Expertise of City staff. City staff work every day on preparing the City for the risks it faces. Staff helped us fill in gaps in the source of data above. For example, the City’s fire chief helped estimate the cost to respond to a wildfire. We modeled each risk individually and then combined each individual risk into a ten-year model of the City’s reserves. Our analysis produced the graph below. The vertical axis represents a given amount of reserves that the City might choose to hold. The horizontal axis represents the level of confidence the City could have that a given amount of reserves would be sufficient to cover the losses the City might incur over a ten-year period. For example, the City can be 80% confident that a reserve of $10.4 million would cover the City’s extraordinary general fund expenditures for the risks covered in this report over a ten- year period. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 4 of 57 Exhibit 1.1: Confidence that a Given Level of General Fund Reserves will be Sufficient over 10 Years Reserves (Millions of Dollars) Percent Confidence GFOA cannot prescribe a precise level of reserves because the exact amount the City might wish to maintain is a product of the City’s appetite for risk. However, we can make a number of suggestions to help the City identify a risk management strategy that makes sense for Newport Beach. • There is a point at which the curve begins to rise sharply. This is the point at which the City starts to receive less value from reserves. In the graph above, this is between the 80% confidence level ($10.4 million) and 90% confidence level ($13.0 million). This represents the range at which reserves produce the best value for the City. • The City should supplement reserves with other risk management strategies. Understandably, City officials might not be satisfied with an 80% or 90% chance of being able to cover damages from the risks we described in this report. Other financial risk management tools like debt or insurance could be used to provide additional confidence. • The City may wish to have some reserves beyond our efficient range to account for the fact that our analysis cannot account for every risk the City could possibly experience. Our analysis does cover the most clear and present dangers to the City, but some additional amount of reserves could be prudent. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 5 of 57 • The City can examine the reserves held by comparable cities. Our examination of comparable cities suggests that the efficient range of reserves we found is in line with the emergency reserves maintained by other cities. • The City could elect to hold more reserves than our recommended efficient range based on global climate change. Our analysis is based on historical records. Global climate change could increase the City’s vulnerability to naturally occurring extreme events.1 Hence, historical data could underestimate the likelihood and/or severity of extreme events in the future. Unfortunately, no one can say precisely what the impact of climate change will be. Hence, GFOA could not make an objective adjustment to the results of our analysis. This means that there could be a case for reserving a higher amount than the efficient range described above (or pursuing other risk management strategies). GFOA’s Microsoft Excel risk model2 provides the City with the ability to adjust the likelihood and/or magnitude of future extreme events, if it would like to test different scenarios. For example, if we were to double the likelihood of a flood then the 80% and 90% confidence levels increase to $10.8 million and $13.5 million, respectively. • Select a range of preferred reserves, instead of a single target number. GFOA’s research into how local governments can best maintain financial sustainability has found that decision-making “boundaries” are essential. For example, if the City were to adopt a policy to maintain reserves between X% and Y% of revenues, then that would constitute a clear boundary that defines when reserves are too high and too low. Compare this to if the City just adopted a policy of that reserves should be at X% of revenues. It is then impossible to say how far reserves can go above or below this number and still be at acceptable levels. A range also can accommodate the risk appetites of more City officials. Thus, a range might be more reflective of the preferences of a greater number of people. 1 According to “The Impact of Climate Change on Natural Disaster”, an article from NASA’s “Earth Observatory”: “outcomes of an increase in global temperatures include increased risk of drought and increased intensity of storms, including tropical cyclones with higher wind speeds, a wetter Asian monsoon, and, possibly, more intense mid- latitude storms.” https://earthobservatory.nasa.gov/Features/RisingCost/rising_cost5.php?src=share 2 GFOA provides the model to the City so that the City can update the model on its own. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 6 of 57 Section 2 - Introduction “Reserves” are the portion of a local government’s fund balance that are available to respond to the unexpected. Reserves are the cornerstone of financial flexibility. Reserves provide a government with options to respond to emergencies and afford a buffer against shocks and other forms of risk. Managing reserves, though, can be a challenge. Foremost, is the question of how much money to maintain in a general fund reserve? How much is enough and when does a reserve become too much? This can be a sensitive question because money held in reserve is money taken from constituents, and the argument could be made that excessive reserves should be returned to residents in the form of lower taxes/fees or enhanced services. The City of Newport Beach has been considering this question recently, especially given its vulnerability to extreme events like earthquakes and floods and because of the potential for revenue instability owing to an economic downturn. The City engaged the GFOA to help produce a recommendation to help the City decide how much reserves is appropriate for the general fund. GFOA is a non-profit association of over 19,000 state and local government finance professionals and elected officials from across North America. A key part of GFOA’s mission is to promote best practices in public finance, including reserve policies. GFOA’s approach to reserves does not suppose “one-size-fits-all.” But, GFOA’s “Best Practice” on general fund reserves recommends, at a minimum, that general-purpose governments, regardless of size, maintain reserves of no less than two months of regular operating revenues or regular operating expenditures (i.e., reserves equal to about 16.7 percent of revenues).3 However, this 16.7 percent is only intended as a rule-of-thumb, and it needs to be adjusted according to local conditions. To make the adjustment, GFOA worked with the City to conduct an analysis of the risks influencing the need for reserves as a hedge against uncertainty and loss. A “risk” is defined as the probability and magnitude of a loss, disaster, or other undesirable event.4 The GFOA’s framework of risk assessment is based on the risk management cycle: identify risk; assess risk; identify risk mitigation approaches; assess expected risk reduction; and select and implement mitigation methods. The framework focuses primarily on risk retention, or using reserves, to manage risk. However, the framework also encourages the City to think about how other risk management methods might alleviate the need to hold larger reserves. In other words, can the City manage its risks in some other way besides holding reserves? For example, could insurance or debt instruments complement the City’s reserve strategy? A thorough examination of the risk factors should lead to a range of desired reserves and improve the City’s understanding of its overall risk profile. 3 GFOA Best Practice. “Appropriate Level of Unrestricted Fund Balance in the General Fund.” GFOA. 2009. 4 Definition of risk taken from: Douglas W. Hubbard. The Failure of Risk Management: Why It’s Broken and How to Fix It. John Wiley and Sons, Inc. Hoboken, New Jersey. 2009. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 7 of 57 As a first step to this project, GFOA conducted a review of the risk factors influencing the amount of reserves a municipal government should hold.5 This review enabled the City and GFOA to classify factors as either primary or secondary risks. Exhibit 1.1 lists how the risk factors were classified. Exhibit 2.1 – Categorization of Risk Factors that Influence Reserve Levels for Newport Beach Primary Risk Factors Vulnerability to extreme events and public safety concerns, with emphasis on: • Earthquakes • Floods (includes landslides and tsunamis) • Fires • High Winds Revenue source stability, particularly as it relates to the potential for revenue decline from an economic downturn Secondary Risk Factors Pension costs increase owing to underperformance of plan assets during an economic downturn Leverage from indebtedness (other than pensions) Liquidity concerns Expenditure spikes (e.g., from impending lawsuits) Growth The next section gives an overview of how we analyze these risks and what you can expect to see in the rest of this report. 5 The risk factors and basic review method were developed and published in the GFOA publication: Shayne C. Kavanagh. Financial Policies. (Government Finance Officers Association: Chicago, IL) 2012. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 8 of 57 Section 3 - The Approach to Uncertainty The accomplished forecasting scientist, Spyros Makridakis, suggests a “Triple-A” approach for dealing with highly uncertain phenomena.6 1. Accept. First we must accept that we are subject to uncertainty. For example, earthquakes could experience a great deal of variability, from a barely noticeable tremor to “the big one”. 2. Assess. Next, we must assess the potential impact of the uncertainty, with history providing a useful reference point. The experiences of other local governments is also a good reference point. For example, we used the historical experiences of Newport Beach and other California cities to estimate the potential impact of future extreme events. 3. Augment. The range of uncertainty we actually face will almost always be greater than what we initially assess it to be. Therefore, we must augment our understanding of risk beyond what our historical experiences show us. For example, the City has not experienced a major wildfire recently. This does not mean there is no risk of a future wildfire. Also, the City has not experienced a major earthquake, but it could in the future. We can augment our understanding of risk using a technique called “Probability Management”.7 Probability Management is an application of modern information processing technology that allows us to simulate thousands of potential events (e.g., wildfires, earthquakes) so that we can observe the probability of events of various magnitudes coming to pass. In order to use Probability Management, we express any given type of extreme event as a range of possibilities that the City might experience. This range is called a “distribution”. A distribution is a shape that signifies how frequently the City might expect to experience a certain type of event and/or how severe the event might be. The most common type of distribution is called the “normal distribution”, more popularly known as the “bell curve”. Many phenomena fit a bell curve. To help us understand how to read a distribution, we can start with an example that is related to everyday life: Exhibit 3.1 shows a bell curve for the height of American men. The horizontal axis of Exhibit 3.1 represents height. The vertical axis represents frequency. 5’9” is the most common height, so it is shown at the top of the curve. Much taller men, like NBA centers, would be found on the right-hand side of the curve. Very short men would be found on the left. 6 See: Spyros Makridakis, Robin Hogarth, and Anil Gaba. Dance with Chance: Making Luck Work for You. (Oneworld Publications: Oxford, England). 2009. 7 The discipline of “Probability Management” was developed by Dr. Sam Savage, author of The Flaw of Averages. You can learn more about Probability Management at probabilitymanagement.org. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 9 of 57 Exhibit 3.1 – The Normal Distribution for American Men Frequency Height The normal distribution can help analyze the City’s risk. To illustrate, the severity of an economic downturn is roughly normally distributed. A few economic downturns are slight, few are severe, but most are closer to average. Another common type of distribution we use in our analysis is called a “lognormal” distribution. A lognormal distribution is shown in Exhibit 3.2. Earthquakes, for example, fit a lognormal distribution. Exhibit 3.2 shows that tremors of a small magnitude are the most common type of earthquake, by far. Large magnitude earthquakes are very rare. Exhibit 3.2 – Lognormal Distribution for Earthquakes Frequency Magnitude Very Short Very Tall Average 5’9” A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 10 of 57 Expressing Newport Beach’s vulnerability as distributions allows us to calculate the probability that an event of a given magnitude will come to pass. When we associate a dollar amount with that event, we can estimate the probability or chance that Newport Beach will need to have a given amount of money on- hand to respond. Exhibit 3.3 is not a distribution, but is a type of graphic we will use often in this report. It is called a “cumulative probability chart”. It shows that increasing amounts of reserves are needed to gain more confidence that the City will have enough money to cover the extraordinary cost to the general fund arising from an earthquake. We can see that reserving $2.0 million will give the City a 90% chance of being able to cover the costs that the general fund would incur as a result of an earthquake. The curve is relatively flat for most of the chart and then begins to move sharply upward. This is because increasingly large amounts of money are needed to cover the costs from the most extreme earthquakes. Exhibit 3.3 - Percent of Earthquake’s Covered by Varying General Fund Reserve Levels As we move to the right of the graph, the amount Newport Beach needs to reserve to cover the cost of an earthquake increases. At the top right, as the line color changes to orange, it indicates an increasing level of reserves to address greater than 95% confidence level. For most risks the City faces, GFOA recommends a range of possible reserve amounts for the City to consider. This is because there is never one single, objectively best amount of reserves to hold. The amount of reserves the City will want hold will partially be a function of the City’s willingness to take on risk. If City officials are willing to take on risk, they might opt for lower reserves and spending more money on current services. If officials are more risk averse, they might opt for higher reserves. GFOA’s recommended ranges of reserves are based on where reserves produce the best value or “bang for the buck”. For example, on Exhibit 3.3 we see that to go from 95% confidence to 99% confidence would require an extraordinary amount of money. Conversely, to go from 75% to 80% does not cost nearly as much. Hence, we recommend that the City pick reserve targets that offer the best value. On Exhibit 3.3, we see that range lies between $1.1 million and $2.0 million for earthquakes. Other strategies for covering risk beyond these amounts may be more financially savvy (e.g., debt or insurance). $0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99% Mi l l i o n s At 85% confidence level, the City would require $1.1 million in reserves. At 90% confidence level, the City would require $2.0 million in reserves. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 11 of 57 In Section 4 of this report, we will review all of the City’s primary risks posed by extreme events. In Section 5, we cover revenue instability owing to economic downturns. We will analyze them in the manner described above and suggest where reserves offer the greatest value. Section 6 reviews secondary risk factors that have less weighty implications for the City’s reserve strategy. These risks will be analyzed in a similar way to the primary risks. After we analyze the individual risks, in Section 7, we will consider the risks holistically. This section will address the following concerns: • It is highly unlikely that the City will experience many of the extreme events discussed in this report in a short time period. This means that simply adding the reserve amounts for each event on top of one another would cause the City to reserve more than its appetite for risk suggests is needed. • Considering the risks over a multi-year time period provides a more complete perspective on potential vulnerability and how to use reserves. • The occurrence of one risk could impact the likelihood of another. For example, a severe economic downturn could lead to lower returns on the City’s pension assets, leading to higher pension costs. In Section 8, we provide our recommended steps for how the City might move forward using our analysis. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 12 of 57 Section 4 - Extreme Events Although Newport Beach has received reimbursement from insurance and public agencies in the past for natural disasters and has insurance coverages that would help in recovery from future disasters, having adequate reserves in place is important to quickly and decisively respond to extreme events. For example, FEMA reimbursement will not over all the costs the City incurs and it could be months, if not years, to receive reimbursement. As the City’s hazard mitigation plan indicates, earthquakes, floods, wildfires, landslides, and strong winds are potentially the most costly natural disasters for Newport Beach.8 In discussions with City staff, the first three disasters represent the greatest risk and will be the focus of this section of the analysis. Fortunately, Newport Beach has not experienced a substantial earthquake in recent history. Therefore, we have no historical data to suggest what damage an earthquake might do. Instead, we will rely on historical data for earthquakes that have occurred in other areas in California. We use these cases to establish the range of potential damage that Newport Beach might experience. We cannot assume that all the points along the range of potential damages is equally likely – for example, it is more likely that Newport Beach will experience seismic activity of smaller magnitude than a large seismic event. Theory suggests, and our examination of the data confirms, that the range of potential damages takes the shape of a lognormal curve. Simply stated, Newport Beach is much more likely to incur natural disasters of less severity and lower cost with greater frequency than higher cost, more severe 8 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016. FEMA, CalOES, and Reserves The U.S. Federal Emergency Management Agency (FEMA) reimburses local governments for monies spent in response to a federally-declared disaster. The California Governor's Office of Emergency Services (CalOES) provides assistance to local governments for State of California-declared disasters. In both cases, reimbursement is only partial (typically 75 percent for FEMA) and is often not immediate. Therefore, local governments must have the financial capacity to respond quickly and decisively, independent of other governmental financial support. Frequency of Quake Exhibit 4.1 – Sample Lognormal Curve Severity of Quake A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 13 of 57 natural disasters.9 For illustrative purposes, the image above is a lognormal curve of seismic activity. The odds of experiencing tremors is much greater than the odds of experiencing earthquakes. It is also significantly more likely that the City experiences tremors than a catastrophic event (“The Big One”). The severity of earthquakes, floods, and wildfires are attributable to several factors. Factors impacting the severity of earthquakes include magnitude, density of an area, depth of the earthquake, distance from the epicenter, local geological conditions, secondary effects (e.g., floods, landslides, fires), and architecture.10 Factors impacting the severity of floods include amount of precipitation as well as the size, shape, and land use of the surface area where rainwater reaches.11 Factors influencing the severity of fires include topography, temperature and relative humidity, and vegetation.12 In addition, an area’s level of preparedness to respond13 to a natural disaster affects severity and cost. Controlling for many of these factors is beyond the scope of our analysis. Therefore, in the following subsections, we select proxy variables (such as population density) to help estimate the impact an extreme event will have on Newport Beach. We will also return to specific factors affecting Newport Beach’s potential damages from these hazards based on the City’s natural hazards mitigation plan later in this report when we recommend an overall reserve strategy. Because the City does not have information on cost of past earthquakes and wildfires, we gathered additional sources of data. This includes reference cases using publically available data from FEMA- declared disasters.14 Additionally, we use other Southern California FEMA-declared disasters as additional analogues to the three floods for which the City has cost information. There are two important limitations with these datasets. One is the reference information may represent instances of greater damage than what the City may experience. The second limitation is the FEMA information includes all cost reimbursement, including those to the general and enterprise funds. The following sections on each type of extreme event will further explain any notable features of the data sets we used. Subsection A - Earthquakes Developing a reserve strategy for a severe natural disaster is complicated because a disastrous earthquake is a very low probability event with potentially extreme consequences. Unlike, for example, a recession 9 GFOA used standard statistical procedures to turn the data from Exhibit 2 into a lognormal distribution. 10 Sarah Zielinski, “Seven Factors that Contribute to the Destructiveness of an Earthquake,” Smithsonian, February 23, 2011, http://www.smithsonianmag.com/science-nature/seven-factors-that-contribute-to-the-destructiveness- of-an-earthquake-44395116/. 11 Ross Gorte, “The Rising Cost of Wildfire Protection,” (Bozeman, MT: Headwater Economics, 2013), http://headwaterseconomics.org/wphw/wp-content/uploads/fire-costs-background-report.pdf. 12 Becky L. Estes, Eric E. Knapp, Carl N. Skinner, Jay D. Milner, and Haiganoush K. Preisler, “Factors influencing fire severity under moderate burning conditions in the Klamath Mountains, northern California, USA,” Ecosphere 8: 5 (2017), 1-20, http://onlinelibrary.wiley.com/doi/10.1002/ecs2.1794/pdf. 13 The State of Queensland, Office of the Queensland Chief Scientist, “What factors contribute to floods?,” http://www.chiefscientist.qld.gov.au/publications/understanding-floods/what-factors-contribute. 14 FEMA Public Assistance Funded Projects Summary provides information on “Federal disaster grant assistance for debris removal, emergency protective measures, and the repair, replacement, or restoration of disaster-damaged, publicly owned facilities and the facilities of certain Private Non-Profit (PNP) organizations.” Federal Emergency Management Agency, “FEMA Public Assistance Funded Projects Summary,” http://www.fema.gov/media- library/assets/documents/28344, updated December 8, 2017. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 14 of 57 that will almost certainly happen within the foreseeable future due to routine economic cycles, Newport Beach may not experience a severe earthquake for many years. For a risk factor like revenue volatility (due to a recession) it makes sense to reserve an amount that is within the relatively well-defined range suggested by the City’s historical experiences because we know that: A) a recession will happen in the foreseeable future, and B) certain tax revenues will decline by a roughly predictable amount at that time. To deal with the unique problems posed by a severe earthquake, we turn to the emerging field of municipal “resiliency.”15 Resiliency is defined as a government’s ability to absorb an extreme event and bounce back from it. Further, resiliency is enhanced when a government has multiple options to respond to an extreme event. When considering financial preparedness to respond, a municipality has three basic options. • Reserves. Reserves are under the complete control of a municipality, thus provide the most flexibility. • Debt. A municipality could access the debt market to pay for costs of responding. • Insurance. A municipality could purchase insurance to provide reimbursement of costs incurred. For a lower probability event with potentially extreme consequences, there are disadvantages to relying exclusively on reserves. Chief among them include, the length of time to accumulate sufficient reserves to cover the costs associated with a catastrophic event and the important opportunity costs of holding these monies in reserve – for example, a municipality could use the money to lower taxes or provide more services. The resiliency philosophy suggests that we should think about how all three options could be used to create financial preparedness to deal with an extreme event or a natural disaster. In order to think about how the three funding mechanisms above might apply to the City’s financial preparedness strategy for earthquakes, we first need to better define the range of damages the City could experience. To do this, we draw from earthquake events listed in FEMA’s database for California cities and towns. The reference examples reflect a similar seismic hazard risk profile as Newport Beach, according to the U.S. Geological Survey.16 In fact, Newport Beach experienced some light shaking from the 2010 Baja California earthquake listed below, but did not incur major unexpected costs to its general fund.17 Exhibit 4.A.1 lists the events (including magnitude of earthquake, as applicable), estimated damages18 adjusted for inflation to 2017 dollars, population density at the year of the event, and estimated damages per capita. 15 See for example, the Rockefeller Foundations “100 Resilient Cities” program, of which GFOA is a partner. www.100resilientcities.org. 16 U.S. Geological Survey, “Simplified 2014 Hazard Map (PGA, 2% in 50 years), https://earthquake.usgs.gov/hazards/hazmaps/conterminous/2014/images/HazardMap2014_lg.jpg 17 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016. 18 GFOA estimates the total cost using the typical FEMA reimbursement rate of 75 percent of total cost. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 15 of 57 Exhibit 4.A.1: Estimated Damages from Select California Earthquakes Estimated Damages (2017 $) Population Density (year of event) Estimated Damage per Capita 2003 San Simeon - 6.6 magnitude Arroyo Grande $30,943 2,849 $11 Atascadero $36,888,800 1,077 $34,248 Morro Bay $380,373 1,960 $194 Pismo Beach $32,552 2,315 $14 San Luis Obispo $9,815 3,464 $3 Guadalupe $948,145 4,975 $191 Santa Maria $52,292 3,855 $14 Subtotal $38,342,920 20,495 $1,871 2010 Baja California - 7.2 magnitude Brawley $48,205 3,249 $15 Calexico $9,002,756 4,597 $1,958 Calipatria $180,405 2,071 $87 El Centro $2,100,258 3,845 $546 Holtville $3,294,249 5,164 $638 Imperial $695,131 2,518 $276 Subtotal $15,321,004 21,444 $714 2014 South Napa - 6.0 magnitude American Canyon $71,048 4,229 $17 Calistoga $7,866 2,040 $4 Napa $11,171,809 4,485 $2,491 Yountville $681,714 1,884 $362 Benicia $103,049 2,160 $48 Vallejo $717,781 3,920 $183 Subtotal $12,753,267 18,718 $681 TOTAL $66,417,191 60,657 $1,095 Mean $3,495,642 3,192 $1,095 Median $380,373 3,249 $117 Sources: Federal Emergency Management Agency and U.S. Census Bureau Compared to the other two earthquakes referenced, the 2010 Baja California earthquake incurred the lowest damage per capita at $714. However, Calexico’s damages per capita were higher than the other affected municipalities in the dataset for the event. Atascadero’s damages from the 2003 San Simeon earthquake are the highest amongst the reference examples and represents an extreme case due to high A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 16 of 57 cost of repairing its historic city hall building.19 Due to this and for the purpose of the analysis, we remove Atascadero from the sample cost per capita and will return to it at the end of this subsection. Because the estimated damages reflect total cost to the entire municipal government and this analysis focuses on the general fund only, we need to adjust these figures to make them relevant to the general fund. We do this by assuming that the general fund’s share of the assets owned by the municipality will be roughly analogous to the share of damages experienced by the general fund.20 This ratio is shown in the exhibit below as general fund’s share of total assets. We apply this ratio to the estimated damages per capita figures shown in Exhibit 4.A.1. Exhibit 4.A.2 lists the estimated general fund damage per capita.21 To arrive at a general fund reserve recommendation, we first translate the reference cost per capita in Exhibit 4.A.2 and apply it to Newport Beach’s current population density of 3,641 residents per square mile. This results in total estimated cost ranging from $6,000 to $7.3 million, which is far too vast to be of much help in making decisions about Newport Beach’s financial strategy. Therefore, we assume potential earthquake damage to take the shape of a lognormal distribution, where the City is much more likely to experience a minor rather than an extreme earthquake.22 19 Creig P. Sherbune, “Financing City Hall: A look at who’s paying the $34 million,” Atascadero News, September 23, 2011, http://www.atascaderonews.com/v2_news_articles.php?heading=0&story_id=4237&page=72. 20 We exclude land since land is not susceptible to earthquake damage in the same way as the built environment. 21 According to Holtville’s FY 2016 CAFR, it does not maintain a complete accounting of capital assets. Thus, the relative share of capital assets for governmental activities is unavailable and we exclude it from the reference set as well. 22 GFOA used standard statistical procedures to turn the data from Exhibit 3.A.2 into a lognormal distribution. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 17 of 57 Exhibit 4.A.2: Estimated General Fund Damages Per Capita from Select California Earthquakes General Fund’s Share of Total Assets Estimated General Fund Damage Per Capita 2003 San Simeon - 6.6 magnitude Arroyo Grande 54% $6 Atascadero 81% $27,581 Morro Bay 51% $99 Pismo Beach 60% $8 San Luis Obispo 48% $1 Guadalupe 42% $81 Santa Maria 63% $9 2010 Baja California - 7.2 magnitude Brawley 35% $5 Calexico 64% $1,256 Calipatria 57% $50 El Centro 40% $218 Holtville N/A N/A Imperial 46% $127 2014 South Napa - 6.0 magnitude American Canyon 82% $14 Calistoga 31% $1 Napa 77% $1,915 Yountville 71% $258 Benicia 51% $25 Vallejo 61% $112 Sources: Federal Emergency Management Agency, U.S. Census Bureau, each cities’ respective CAFR Exhibit 4.A.323 provides a cumulative probability chart of the potential general fund cost the City would incurred for an earthquake. The horizontal axis represents the percent likelihood of earthquakes covered. The vertical axis represents the amount of reserves that are required to cover the cost. For example, the 85 percent mark vertical axis intersects with the orange line at a general fund reserve of $1.1 million. As the graph moves closer to the right, a greater amount in reserves is needed to cover the less probable and more severe earthquakes. At the top right, as the line changes from blue to orange, we see that the amount of reserves required to approach 99% confidence is so high that it does not even fit on our chart. 23 Exhibit 3.A.3 does not graph the amount required to cover 99.9% of earthquakes in order to focus on more probable scenarios. To cover 99.9% of earthquakes would require $380.3 million from the general fund. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 18 of 57 Exhibit 4.A.3 - Percent of Earthquake’s Covered by Varying General Fund Reserve Levels As we move to the right of the graph, the amount Newport Beach needs to reserve to cover the cost of an earthquake increases. At the top right, as the line color changes to orange, it indicates an increasing level of reserves to address greater than 95% confidence level. Of course, the City can be more confident by setting aside more reserves. But to be completely confident, the City would need to reserve a very high amount, and as we discussed earlier, there are significant opportunity costs in doing so. Instead, Newport Beach might consider how reserves, debt, and insurance can work together. First, let us consider establishing some basic principles. • Reserves make the most sense at the left-hand side of the curve. Here the City gets the most “bang for the buck” because each extra dollar of reserves buys the greatest increases in confidence. • Debt is probably the most useful closer to the middle of the curve. The middle of the curve represents severe but not catastrophic damage. Here, the City would likely need to fund a significant response to a disaster but the City’s tax base would not be so impaired (e.g., stores closed and residents dislocated on a long-term basis) that paying back the debt would be problematic. • Insurance is probably most useful closer to the right-hand side of the curve. The right-hand side of the curve represents catastrophic damage. In this case, the City’s tax base might be impaired for a significant duration making repayment of debt difficult. Further, the premium payments for insurance coverage for only a catastrophic event would be less than for coverage that includes both severe and catastrophic events. Insurance can also complement the City’s risk mitigation strategy should it decide to reserve an amount closer to the left-hand side of the curve. Exhibit 4.A.3 shows the “value” the City gets from reserves. Where the curve is flatter, the value of reserves is high because a relatively modest increase in the size of reserves “buys” a substantial increase in the confidence the City can have that its reserves will be adequate for an earthquake. Where the curve $0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99% Mi l l i o n s At 85% confidence level, the City would require $1.1 million in reserves. At 90% confidence level, the City would require $2.0 million in reserves. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 19 of 57 gets steeper, the City needs to put aside more money to gain less confidence. In Exhibit 4.A.3, we can see that the “value” provided by reserves starts to decrease significantly after about $1.1 million. For example, the City can be 80 percent confident of covering the damage from an earthquake at $745,000. It can “buy” an extra 5 percentage points of confidence to get to 85 percent with a reserve of $850,000 – a difference of $233,000. By way of comparison, going to 90 percent confidence, requires a reserve of $2.0 million. In other words, to increase confidence from 85 percent to 90 percent requires nearly doubling the reserve amount, and to go from 90 to 95 percent requires over two and a half times the reserve. This pattern suggests the following range for reserves: • On the low end, $1.1 million. This is the point up to which the curve is flattest. That means it is where each additional 5 percent of confidence requires an approximately similar increase in reserves. $1.1 million provides the City with an 85 percent likelihood of being able to cover all damages from an earthquake with general fund reserves. • On the high end, $2.0 million. This is the point where the City can be 90 percent confident it could cover all damages from an earthquake with general fund reserves. It is also the point right before the curve turns much more sharply upwards, where much greater levels of reserve are necessary to be more confident. Choosing a number within the range suggested above will depend on the City’s appetite for risk. In considering these numbers, we must also remember that the City of Newport Beach itself has not incurred large costs from an earthquake and that the numbers above are all based on analogues generated from the experience of other cities. Hence, it is useful to consider how Newport Beach’s vulnerability to earthquakes might compare to other cities’. First, all of the cities used as analogues in this report have a similar seismic hazard risk profile to Newport Beach, according to the U.S. Geological Survey. So, the analogues should be roughly comparable. However, the cities might differ in some of their specific characteristics that make them more vulnerable or less vulnerable to damages. To gain more insight on this point, we compared the disaster management plans of different cities in the region to see the potential earthquake damages that were contemplated for each city.24 We found, for example, that Newport Beach’s plan contemplated slightly lower damages25 from an earthquake at the San Andreas fault, compared to the average for the plans we examined.26 However, we also found that Newport Beach’s “worst case scenario” from activity along the San Joaquin Hills fault was considered to be more severe than that of the other cities’.27 As we saw in Exhibit 4.A.3, using reserves for the most severe 24 We reviewed only disaster management plans produced by the same consultant as the consultant used by Newport Beach for its disaster management plan. The intent was to compare plans that were developed using similar methodologies and assumptions. 25 Because the disaster management plans do not estimate costs that would be incurred by the municipal governments themselves in the event of an earthquake, we compared the reports using building-related economic losses. Building losses include structural and non-structural damage buildings as well as their contents. Income losses relate to the inability to operate during a period because of damages sustained during a disaster as well as money spent on temporary living expenses due to displacement. Presumably the costs incurred by the municipal governments would be proportional. 26 Damages were scaled to population to increase comparability. 27 These plans contemplated damages to the entire community, including private property, overlapping governments, and more. So, the plans did not offer insight into the potential cost of an earthquake to the municipal A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 20 of 57 possible earthquake is not economical. Hence, this suggests that the City might wish to give special consideration to financial risk management strategies for damages in excess of reserves. For potential damages in excess of the reserve target the City selects, Newport Beach should consider other financing tools like debt and insurance. The scope of this analysis is limited to general fund reserves, so GFOA cannot provide more specific guidance on the exact points on the curve in Exhibit 4.A.3 at which the City should consider debt versus insurance, but we can provide the following recommendations to help the City develop a more robust strategy: • Develop a contingent capital arrangement. For damage levels at which the City chooses to use debt, the City should arrive at pre-arranged terms with a lender to be able to access a loan when the need arises. This will eliminate the need to negotiate terms during high-stress periods in the aftermath of an extreme event, and the City will have a much more favorable negotiating position before an event than immediately after. • Consider inter-fund borrowing. A loan does not necessarily have to come from an external creditor. If the City has resources in other funds that are not likely to be compromised by a severe disaster, the City could use inter-fund borrowing to provide the resources needed by the general fund. Similar to a contingent capital agreement with an external lender, the City should develop a robust internal borrowing policy prior to an event to govern the terms of the loan. • Consider “parametric” insurance in addition to traditional indemnity insurance. Indemnity insurance is the type of insurance that most governments have traditionally purchased, where the insurance corresponds to the value of the assets being insured, and reimbursement is paid out after a certain deductible has been met. The advantage of traditional indemnity insurance is that there is a known damage threshold past which the City is covered. Parametric insurance is a newer type of insurance for providing coverage for extreme events, having increased in popularity in the last 15 years or so. Parametric coverage provides the policyholder (the City) with a payment amount that is defined ahead of time, should a defined event come to pass (an earthquake of a certain magnitude). Parametric insurance could be more useful for providing an injection of liquidity because the holder of the policy receives the defined payment immediately upon verification by a third party that the given event occurred, which usually would be within a matter of days. As a simple illustration, a parametric policy might provide the City of Newport Beach with $5 million upon the occurrence of a 7.0 magnitude earthquake, after the U.S. Geological Survey verifies the magnitude of the quake. This feature of parametric insurance also eliminates much of the administrative hassle that would be associated with a traditional indemnity policy (e.g., working with claims adjusters). A final advantage is that the proceeds from the policy payout are completely fungible – the City could use them to fund whatever service it deems necessary whereas indemnity policies might require the policyholder to use the funds to repair or replace the asset that was insured. But, an important disadvantage of parametric insurance is that the policy is triggered by the magnitude of the event, not the damages incurred by the City. So, if the City were to experience a 6.9 magnitude quake, to continue our previous example, it would receive nothing from a parametric policy regardless of government. However, it reasonable to assume that the cost to municipal government would be roughly proportionate to the damage done to the entire community. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 21 of 57 the damages it experienced. Additionally, parametric insurance is still a relatively new insurance instrument, and fewer insurance companies sell parametric policies compared to indemnity policies. A robust insurance strategy could make use of both traditional indemnity and parametric insurance. For example, traditional indemnity insurance could be used to protect against loss of the City’s assets, while parametric insurance could be used to compensate the City for the losses in tax revenue it would experience from an impaired tax base, for instance. As mentioned earlier in this subsection, the estimated damages recorded by Atascadero from the 2003 San Simeon earthquake represent an extreme case. For these extreme events, alternative financing tools aside from reserves may be prudent. Additionally, Atascadero’s example highlights additional strategies for Newport Beach to explore. As seen with Atascadero’s city hall, historic buildings are vulnerable when seismic activity occurs. To help mitigate risk associated with historic buildings, the City could explore retrofitting, insurance, and other mitigation strategies for buildings that poise the greatest risk as identified in the City’s disaster management plan. Earthquake Checkpoints A severe earthquake is a very low probability event with potentially extreme consequences. This means that reserves are not a sufficient risk management tool, on their own. This is because there would be significant opportunity costs to accumulate enough reserves to cover the cost of a severe earthquake The City should complement its reserves with debt and/or insurance instruments to provide additional financial capacity to respond to an extreme event. A reserve between $1.1 million and $2.0 million should be sufficient to provide the City with 85% to 90% confidence that it will be able to cover the cost of an earthquake. This is the range of reserves that is the most “efficient” use of reserves. Subsection B – Floods (Includes Landslides & Tsunamis) As a coastal city, Newport Beach faces the risk of flooding from storms, high waves, tsunamis, and rising sea levels. The Santa Ana River, San Diego Creek, and San Joaquin Hills’ streams can also cause flooding, with San Diego Creek flooding having caused significant damage to the City.28 The City has experienced three severe storm and flooding events that were FEMA-declared disasters in December 2004 to January 2005, February 2005, and December 2010 to January 2011. The three events serve as references to what the City could experience, but to further explore the possibility of potential damages, we reviewed FEMA’s database for additional severe storms and flooding in Orange County. Exhibit 4.B.1 lists the cities, estimated damages29,30 adjusted for inflation to 2017 dollars, population density the year of the event, and estimated damages per capita. Exhibit 4.B.2 adjusts the estimated damage per capita amounts to focus only the general fund. As with the previous section on 28 City of Newport Beach, “Local Hazard Mitigation Plan,” 2016. 29 GFOA estimates the total cost using the typical FEMA reimbursement rate of 75 percent of total cost. 30 GFOA used figures provided by Newport Beach for two of the events that had differing reimbursement rates from FEMA to account for reimbursement from California Governor's Office of Emergency Services. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 22 of 57 earthquakes, we identify the general fund’s share of capital assets using information from each respective cities’ most recent comprehensive annual financial report. Doing this allows us to focus on the general fund, which is the focus of our report. Finally, it should be noted that FEMA’s data groups floods and landslides together. Hence, the figures used in this section of the report include potential damages from both types of events. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 23 of 57 Exhibit 4.B.1: Estimated Flood Damages in Orange County Cities Event & Cities Estimated Damages (2017 $) Population Density (year of event) Estimated Damage per Capita December 2004 to January 2005 Severe Storms and Flooding Anaheim $3,598,878 6,650 $541 Brea $139,873 3,205 $44 Costa Mesa $165,976 6,967 $24 Dana Point $300,346 5,315 $57 Fullerton $285,815 5,947 $48 Huntington Beach $195,454 7,199 $27 Irvine $370,533 2,722 $136 La Habra $153,089 8,118 $19 Laguna Beach $202,153 2,655 $76 Laguna Niguel $602,195 4,269 $141 Mission Viejo $2,783,161 5,379 $517 Newport Beach $323,705 3,430 $94 San Clemente $162,317 3,329 $49 San Juan Capistrano $1,823,232 2,443 $746 Seal Beach $59,568 2,149 $28 Villa Park $355,940 2,857 $125 Mean $720,140 4,540 $167 February 2005 Storms and Flooding Anaheim $140,931 6,650 $21 Brea $18,309 3,205 $6 Huntington Beach $95,525 7,199 $13 Laguna Beach $41,707,677 2,655 $15,709 La Habra $7,409 8,118 $1 Mission Viejo $193,583 5,379 $36 Newport Beach* $39,242 3,430 $11 San Juan Capistrano $5,426,949 2,443 $2,221 Santa Ana $78,899 12,207 $6 Mean $47,708,523 51,287 $18,025 December 2010 to January 2011 Winter Storms and Flooding Aliso Viejo $53,536 6,433 $8 Anaheim $353,016 6,747 $52 Dana Point $169,772 5,131 $33 Fountain Valley $9,326 6,132 $2 Garden Grove $25,406 9,525 $3 Huntington Beach $158,026 7,103 $22 Irvine $101,227 3,212 $32 Laguna Beach $752,198 2,568 $293 Laguna Hills $15,056 4,549 $3 La Habra $10,415 8,174 $1 A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 24 of 57 Lake Forest $199,308 4,336 $46 Mission Viejo $272,051 5,260 $52 Newport Beach* $252,499.05 3,578 $71 Rancho Santa Margarita $102,462 3,692 $28 San Clemente $1,641,417 3,395 $483 San Juan Capistrano $264,001 2,450 $108 Santa Ana $13,379 11,901 $1 Seal Beach $19,902 2,141 $9 Tustin $9,943 6,818 $1 Mean $232,786 5,429 $66 January 2017 Severe Winter Storms and Flooding Dana Point $16,041.69 5,233 $3 Huntington Beach $69,783.05 7,501 $9 Laguna Beach $60,545.96 2,620 $23 Newport Beach $6,292.03 3,641 $2 Placentia $10,366.21 7,949 $1 San Juan Capistrano $53,170.35 2,569 $21 Santa Ana $109,245.72 12,256 $9 Westminster $11,433.36 9,111 $1 Yorba Linda $228,128 3,503 $65 Mean $62,778 6,043 $15 Reference Group Mean $1,211,674 5,310 $417 Reference Group Median $153,089 5,131 $28 Sources: Federal Emergency Management Agency, U.S. Census Bureau, and City of Newport Beach, CA * Figure provided by the City, which differs from the FEMA database and may contain reimbursement from California Governor's Office of Emergency Services. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 25 of 57 Exhibit 4.B.2: Estimated General Fund Damages Per Capita from Select California Floods Event & Cities General Fund Share of Capital Assets Estimated GF Damage Per Capita Anaheim 32% $173 Brea 64% $28 Costa Mesa 100% $24 Dana Point 100% $57 Fullerton 78% $38 Huntington Beach 72% $20 Irvine 100% $136 La Habra 66% $12 Laguna Beach 66% $50 Laguna Niguel 100% $141 Mission Viejo 99% $510 Newport Beach 78% $74 San Clemente 51% $25 San Juan Capistrano 42% $311 Seal Beach 59% $16 Villa Park 100% $125 February 2005 Storms and Flooding Anaheim 32% $7 Brea 64% $4 Huntington Beach 72% $10 Laguna Beach 66% $10,326 La Habra 66% $1 Mission Viejo 99% $35 Newport Beach* 78% $9 San Juan Capistrano 42% $927 Santa Ana 80% $5 December 2010 to January 2011 Winter Storms and Flooding Aliso Viejo 100% $8 Anaheim 32% $17 Dana Point 100% $33 Fountain Valley 50% $1 Garden Grove 61% $2 Huntington Beach 72% $16 Irvine 100% $32 Laguna Beach 66% $193 Laguna Hills 88% $3 La Habra 66% $1 Lake Forest 100% $46 Mission Viejo 99% $51 Newport Beach 78% $55 A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 26 of 57 Rancho Santa Margarita 100% $28 San Clemente 51% $246 San Juan Capistrano 42% $45 Santa Ana 80% $1 Seal Beach 59% $5 Tustin 87% $1 January 2017 Severe Winter Storms and Flooding Dana Point 100% $3 Huntington Beach 72% $7 Laguna Beach 66% $15 Newport Beach 78% $1 Placentia 78% $1 San Juan Capistrano 42% $9 Santa Ana 80% $7 Westminster 86% $1 Yorba Linda 90% $58 Sources: Federal Emergency Management Agency, U.S. Census Bureau, each cities’ respective CAFR The estimated general fund damages range greatly for the over 50 reference examples, but there are more instances of lower cost damages than higher cost damages. At the lower end, there were several cities that recorded under $1 per capita in general fund damages, including La Habra for the February 2005 storms and flooding, La Habra, Santa Ana, and Tustin for the December to January 2011 winter storms and flooding, and Placentia and Westminster for the January 2017 severe winter storms and flooding. Consecutive days of rain resulted in large damages recorded for the February 2005 storms and flooding disaster. At the higher end, Laguna Beach recorded $10,300 in general fund damages per capita, followed by San Juan Capistrano at $927. The volume of rain left Laguna Beach’s soil saturated, which resulted in a landslide the following May.31 Significant rain in San Juan Capistrano almost compromised the levee at San Juan Creek and improvements have been underway since to mitigate the creek’s flooding risk.32 This pattern of many smaller floods and few very large ones suggests a lognormal distribution, like we used for earthquakes. As with the earthquake analysis, to make the reference cases more applicable to Newport Beach, we apply each reference’s general fund cost per capita to the City’s current population density of 3,641 residents per square mile. The lognormal distribution of the referenced floods is shown in Exhibit 4.B.3.33 The horizontal axis represents the percent of floods that should be covered by the amount of general fund reserves shown on the vertical axis. 31 U.S. Department of Commerce, National Oceanic and Atmospheric Administration, “A History of Significant Weather Events in Southern California,” updated May 2017, https://www.weather.gov/media/sgx/documents/weatherhistory.pdf. 32 Orange County, CA Public Works, “Background Information,” http://www.ocflood.com/nfc/projects_a/sjc/background. 33 Exhibit 4.B.3 does not graph the amount required to cover 99.9% of floods in order to focus on more probable scenarios. To cover 99.9% of floods would require $41.5 million. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 27 of 57 As the line changes from blue to orange, it represents the increasing amount of reserves that are required beyond the 95 percent confidence level. Note, as stated earlier, these figures represent total estimated cost of floods in 2017 dollars, exclusive of any FEMA reimbursement. For example, if the City wants to cover 75 percent of possible flood events, it would reserve an amount of $217,000. As we move to the right, we see that it requires greater reserves to cover each additional 5 percent of floods. To cover 90 percent of floods would require $652,000, over twice as much that is required to cover 75 percent of floods. This is because the right hand side of the graph represents increasingly extreme and, therefore, increasingly unlikely possible future floods. In order to cover the most extreme floods (those above our 95th percentile), the City might consider other strategies besides general fund reserves because of the high cost of covering additional flood possibilities. Examples of such strategies might be loans and insurance. Exhibit 4.B.3 - Percent of Floods Covered by Varying Reserve Levels5 To cover 75% of floods, the City would reserve $217,000. 34 State of California Governor’s Office of Emergency Management, “2013 California Multi-Hazard Mitigation Plan,” Chapter 6 - Other Hazards: Risks And Mitigation, http://www.caloes.ca.gov/for-individuals-families/hazard- mitigation-planning/state-hazard-mitigation-plan. $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 $1.8 $2.0 5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99% Mi l l i o n s At 75% confidence level, the City would need a reserve of $217,000. At 90% confidence level, the City would need a reserve of $652,000. The Risk of Tsunamis A tsunami is a tidal wave caused by the displacement of a large body of water. Multiple kinds of geological events could cause a tsunami, such as an earthquake or volcano. FEMA has recorded only one tsunami causing damage to California cities. Due to a 2011 tsunami, three cities incurred damages, ranging from about $7,000 to $104,000 (for the entire city government, not just general fund). Of course, many other tsunamis have landed on California: over 80 in the last 150 years.34 Although this data set is limited, it does appear that most tsunamis would cause damage that is roughly comparable to other types of flooding Newport Beach might experience. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 28 of 57 So, to summarize a recommended reserve range: • On the low end, $217,000. This is the 75 percent confidence level and is the point at which the City will get the most value from reserves. After this point, each additional 5 percentage points of confidence requires over 1.3 times the amount of reserve. We can consider this a less risk averse reserve strategy. • On the high end, $652,000. This is the 90 percent confidence level. At this point, over two times as much reserves are required as at the 75% confidence level. This might be considered a more risk averse approach. When selecting a reserve target, the City might also take into account its current flood mitigation efforts, including infrastructure improvements to flood walls, etc.35 Such mitigation efforts might prevent some floods from occurring at all and/or lessen the impact. Flood Checkpoints Floods are similar to earthquakes in that they are rare events with potentially extreme consequences. Newport Beach has experienced three floods in its recent history, giving us some useful past experience to draw upon to estimate future risk. We supplemented this with the experience of other cities in the region. A reserve between $217,000 and $652,000 should be sufficient to provide the City with 75% to 90% confidence that it will be able to cover the cost of a flood. This is the range of reserves that is the most “efficient” use of reserves. Subsection C – Fires The City of Newport Beach is vulnerable to fires because of the area’s weather, topography, and vegetation. In the past, the City and surrounding areas have experienced fires, with the most severe in recent years affecting nearby Laguna Beach in 1993.36 The City’s primary risk from wildfires arises from its proximity to Crystal Cove State Park. In recent years, fortunately, the City has not experienced fires for which it incurred damages. Also, nearby cities with comparable risk of wildfire have not experienced many fires either. So, rather than draw from analogues as with other extreme events, we worked with the City’s Fire Chief to estimate the potential cost the City could incur for a fire. According to the Fire Chief, most fires last about four to six hours, with the maximum duration being approximately 12 hours. This is simply because there is not enough vegetation in Newport Beach to cause a large-scale fire. If the City were to experience a fire, it can contract with the County as well as the State of California Office of Emergency Services through an assistance-by-hire agreement to help address the fire. The table below provides a summary of items needed and estimates from City’s Fire Chief on the number of units needed for each item to fight a 4-hour and 12-hour fire. Each unit would be required for the full duration of the fire. The table also includes the hourly rate per the assistance-by hire-agreement. This allows us to calculate the total estimated cost for a 4-hour and 12-hour fire. 35 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016. 36 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” updated 2016. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 29 of 57 A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 30 of 57 Exhibit 3.C.1: Estimated Cost of 4-Hour and 12-Hour Fire to City of Newport Beach # of Units Needed Total Cost Item 4-hour fire 12-hour fire Hourly Rate 4-hour fire 12-hour fire Hand Crew (Firefighter) 18.00 36.00 $36.84 $2,652 $15,915 Hand Crew Supervisor (Fire Captain) 1.00 2.00 $71.56 $286 $1,717 Hand Crew Supervisor (Fire App. Engineer) 1.00 2.00 $62.77 $251 $1,506 Hand Crew Supervisor (Firefighter) 1.00 1.00 $55.97 $224 $672 Heavy Fire Equipment Operator 1.00 1.00 $96.11 $384 $1,153 Fire Pilot 1.00 2.00 $73.49 $294 $1,764 Lead Fire Pilot 1.00 1.00 $84.50 $338 $1,014 Type 3 Engine 2.00 2.00 $80.00 $640 $1,920 Crew Carrying Vehicle 1.00 2.00 $21.75 $87 $522 Dozer Transport 1.00 1.00 $73.25 $293 $879 Dozer 1.00 1.00 $72.50 $290 $870 Dozer Trailer 1.00 1.00 $14.00 $56 $168 Dozer Tender 1.00 1.00 $26.00 $104 $312 Fuel Tender 1.00 1.00 $36.75 $147 $441 Patrol Unit (Type 6) 1.00 3.00 $80.00 $320 $2,880 Water Tender 1.00 1.00 $36.75 $147 $441 Helicopter - Bell Super Huey 1.00 1.00 $1,329.74 $5,319 $15,957 Helicopter - Bell 412 1.00 1.00 $4,191.13 $16,765 $50,294 Total $28,598 $98,425 The potential cost that the City could incur is not as simple as a range between $28,600 and $98,400. This is because there is uncertainty that a fire might cost less or more than these estimated figures. In fact, research shows that when people estimate a range of possibilities for an uncertain event, they usually make the range too narrow. In other words, they underestimate the amount of risk.37 This is not a failure in judgment – it is just the way in which the human mind works. After all, if people were able to accurately judge risk, we would not need projects like the one GFOA is performing for Newport Beach. In fact, GFOA had the opportunity to validate this proposition at another local government. We asked the fire chief in that jurisdiction to estimate variability in fire size and then compared the cost to data from actual fires we collected from the region. We found that the chief underestimated the variability in fire size in a manner very similar to how research suggests people routinely underestimate uncertainty. This does not mean that the figures in Exhibit 3.C.1 are not helpful – to the contrary, they provide an excellent starting point which we can transform into a probabilistic distribution. We created a distribution that extends the tails of the distribution beyond the range suggested by Exhibit 3.C.1. We set the size of the tails by doubling the size of the range from Exhibit 3.C.1. Research suggests that human judges 37 Jack Soll and Joshua Klayman (2004). “Over-confidence in Interval Estimates”. Journal of Experimental Psychology: Learning Memory and Cognition. 30, pages 299-314. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 31 of 57 typically underestimate uncertainty by about 50%. Doubling the range compensates for this. Exhibit 3.C.2 shows the resulting probabilistic cumulative probability chart of fire cost. Exhibit 3.C.2 – Confidence that Wild Fire Cost will be Covered by Reserves The incremental cost to cover fires increases at the 85th percentile or when reserve reach $118,500. The horizontal axis shows the confidence a given reserve will cover the cost of a fire. The vertical axis shows the amount of reserves. As the line moves from left to right, we see cost increasing and the color change from blue to orange to reflect greater uncertainty to cover closer to 100% of fires. Up until the 85th percentile, each additional 5 percent incremental coverage of fires will require about 10% more reserves. The cost then increases to about 20% more reserves by the 95th percentile and to 35% more by the 99th percentile. Here is the range in between which reserves are most “efficient”: • Reserve $118,500 to cover 85% of fires as a less risk-averse approach. This represents the point on the graph where the City maintains maximum incremental coverage through reserves. • Reserve $159,000 to cover 95% of fires as a more risk-averse approach. This is where the City would get greater coverage through reserves before the incremental cost noticeably increases. Newport Beach also benefits from a strong mutual aid system among the local governments in the region. Newport Beach also undertakes fire prevention programs, training, vegetation management, and other related activities to lessen the impact of wildfires in the area. This helps manage the fire risk that the City is subject to from fires and complements the City’s reserve strategy. Fire Checkpoints The City has not experienced a wildfire in many years. This means there is no useful historical data to draw upon. Therefore, we worked with the City’s Fire Chief to estimate a range of potential costs. We used statistical techniques to widen the range we developed with the Fire Chief. This was intended to compensate for the natural human tendency to underestimate future uncertainty. A reserve between $118,500 and $159,000 should be sufficient to give the City 85% to 95% confidence that it could cover the cost of a wildfire. This is the most “efficient” use of reserves. $0 $25,000 $50,000 $75,000 $100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000 5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99% At 95% confidence level, the City would need a reserve of $159,000. At 85% confidence level, the City would need a reserve of $118,500. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 32 of 57 Subsection D – High Winds Newport Beach is subject to high winds on a regular basis, but the damages are not as potentially severe as for the other risks we have examined. Hence, high winds is a higher frequency, lower consequence event compared to the others we have examined so far. For our analysis, we assumed that the City would be exposed to some costs to respond to high winds every year. We found damages have ranged between $60,000 and $140,000 per year. However, we only had a few years’ worth of data to consult. Hence, we doubled the range of potential damages. Doubling a range that is based on little data is a rule of thumb for approximating the range in which 95% of future events should fall.38 We assumed that the City’s regular budget was capable of absorbing the damage from an “average” year, or about $100,000. Therefore, reserves would only be necessary for wind damages that were beyond what happens in an average year. Exhibit 3.D.1 shows the reserves the City would need for a given level of confidence. The City wouldn’t need any reserves for about 50% confidence and below, because wind damages up to that point would be covered by the regular City budget. The required reserves increases rapidly after that. 95% confidence would require about $86,000. Exhibit 3.D.1 – Reserves Required for High Winds Damage (in thousands of dollars) Reserves (thousands of dollars) Level of Confidence High Wind Checkpoints High winds are a high frequency, lower consequence event. The City’s budget can absorb lower wind damages. Reserves can help with higher damages. $86,000 would give the City 95% confidence of being able to cover the costs of a high wind event. 38 See: Spyros Makridakis, Robin Hogarth, and Anil Gaba. Dance with Chance: Making Luck Work for You. (Oneworld Publications: Oxford, England). 2009. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 33 of 57 Section 5 - Revenue Volatility An important risk for any local government is revenue volatility, primarily owing to downturns in the economy. For example, Newport Beach’s revenue declined about 9% from fiscal year (FY) 2008 to FY 2010 due to the Great Recession. Reserves can be used to help a local government make a “soft landing” in the event of a revenue downturn. In this section of the report, we will analyze the City’s vulnerability to revenue downturns. In Newport Beach, property taxes are, by far, the single most important revenue source at about half of general fund revenues. Sales taxes are the second most important at about 15%. Transient occupancy taxes are the third largest at about 12%. The remaining revenues comprise about a quarter of general fund revenues and include sources such as building permits and business licenses. Exhibit 5.1 summarizes the City’s general fund revenue portfolio between FY 2013 and FY 2017. In the subsections below, we will examine each of the major revenues. The objective is to determine if the composition of the revenue base has changed such that the City of Newport Beach is more vulnerable or less vulnerable to revenue downturns than in the past. This is important because in the last section we will use the City’s historical revenue data to analyze risk to the revenue portfolio as a whole. Subsection A - Property Taxes In addition to being the largest revenue source, property taxes are also the most stable. While general fund revenues declined 9% from FY 2008 to FY 2010, property tax revenues increased by 1.5%. Exhibit 5.A.1 compares the change in property tax to the changes to the City’s other revenue sources during this period. The most obvious reason for the property tax’s strength is that Newport Beach is a very desirable locale, next to the Pacific Ocean. For example, when it comes to home values, Newport Beach is in the top five to six percent of California cities.40 Also, Newport Beach is in the top third of California cities where the average home value has now met or exceeded 2007-08 highs.41 39 Percentages are based on an average of fiscal years 2013 through 2017. 40 According to Zillow’s average home valuation database, Newport Beach has 40th highest average home value out of the 719 California cities included in their database. 41 According to Zillow’s average home valuation database. Exhibit 5.1 – Composition of Newport Beach’s General Fund Revenue Portfolio39 Property taxes, are by far, the most important revenue source Exhibit 5.A.1 – Change in Revenues, FY 2008 to FY 2010 Property Taxes 1.5% Sales Taxes -20.2% Transient Occupancy Tax -11.7% Other -19.2% Total -9.2% 0.0%20.0%40.0%60.0% Property Taxes Sales Taxes Transient Occupancy Tax Other A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 34 of 57 Another strength of the City of Newport Beach’s property tax base is the composition of its largest taxpayers. For example, some cities have a few taxpayers that constitute a very large proportion of the total tax base. This presents a risk if those taxpayers cease to do business in the locale. The prototypical example would be a large manufacturing plant in an industry that is undergoing significant structural changes. In Newport Beach, the largest property taxpayer is The Irvine Company, which accounts for about 2.87% of the total taxable assessed value in the City. The Irvine Company buys and holds real estate. Hence, even if the Irvine Company ran into financial difficulties, it seems unlikely that its real estate assets would lose much, if any, value. Past The Irvine Company, the next largest property taxpayer, PH Finance LLC, constitutes only 0.53% of the City’s total taxable assessed value and the share of the tax base attributable the largest taxpayers declines from there: the 10th largest, John Hancock Life Insurance, comprises 0.21% of the total taxable value. So, as demonstrated above, the largest property taxpayers in Newport Beach do not comprise an overwhelming portion of the tax base. Further, the nature of their holdings do not seem to pose a risk of precipitous declines in value due to changing business conditions because they are not concentrated in a potentially vulnerable sector of the economy. According to City staff, most of the property development activity that is taking place in Newport Beach is infill development, turnover of property, and significant remodeling of existing properties. There could also be occasional appeals of assessed values, if the property market gets overheated. However, none of these factors seem capable of introducing enough volatility into property tax revenues to change the tax’s traditional role of imparting stability to the City’s revenues. Property Tax Checkpoints Property tax is the City’s largest revenue source. Property tax revenues did not decline at all during the Great Recession. Hence, it has a stabilizing influence on City revenues. The City’s tax base is diverse. This is a source of stability. Subsection B - Sales Taxes As we saw in Exhibit 5.A.1, sales taxes experienced the greatest decline during the Great Recession. For many cities, sales taxes are a volatile revenue that are vulnerable to economic downturns. To gain better insight into sales tax volatility, we can break down Newport Beach’s tax base by type of tax producer. The data available to GFOA from the City’s contracted sales tax analyst, HdL, breaks sales taxes down into eight categories of sales tax producers. Three of those categories produce just over 70% of the City’s revenues: autos and transportation (30%), restaurants and hotels (22%), and general consumer goods (20%). Exhibit 5.B.1 shows the three major categories of sales taxes.42 It also includes all other locally produced sales taxes as the “other” line. Finally, county and state pools are shown as a separate line. 42 This data is expressed in calendar years, rather than fiscal years. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 35 of 57 Exhibit 5.B.1 – City Sales Taxes by Category of Tax Producer (in millions) Restaurants and hotels have overtaken general consumer goods as a portion of the tax base. The former is a more stable producer. In Exhibit 5.B.1, we can see that all categories declined during 2008 through 2010, though some more than others. General consumer goods experienced the sharpest decline at 24%. Autos and transportation was second at 19%. A 19% decline was not too much more than the declines experienced by the “county and state pools” or “other” categories. However, the size of autos and transportation category makes a 19% decline more impactful. The restaurants and hotels category was barely effected by the Great Recession as evidenced by its 5% decline. Turning our attention to the recovery from the Great Recession, we can see that autos and transportation recovered well. In fact, it now produces a slightly higher share of all sales taxes than it did before the Great Recession. Since restaurants and hotels did not fall far, the segment recovered quickly and continued to grow. General consumer goods, however, has not recovered to pre-recession levels and has even declined in recent years. In fact, it fell behind restaurants and hotels in importance as a sales tax producer. This is probably not too surprising given the pressure that traditional retailer have faced from on-line retail. The “other” and county and state pool categories recovered well. The “other” category includes business and industry taxes, which were very volatile during the Great Recession. These taxes dropped sharply and recovered sharply. The “other” category also includes consumer essentials, like food and fuel that didn’t change much during the Great Recession. Hence, these sub-categories balanced each other out to some extent, thereby preventing the “other” category from exhibiting dramatic behavior. The implication is that the sales tax base does not appear to be any more vulnerable to recessions than it has been in the past. In fact, the sales tax base might now be somewhat less vulnerable because general A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 36 of 57 consumer goods has been overtaken by restaurants and hotels as a major sales tax producer. The latter category proved more resistant to economic downturns during the Great Recession. Further, Newport Beach now participates in a County sales tax pool for on-line sales, which does offset at least some potential future loss of brink-and-mortar stores to on-line sales. Sales Tax Checkpoints Sales tax is a volatile revenue. During the Great Recession, it had the sharpest decline of any of the City’s major revenue sources. Since the Great Recession, restaurants and hotels have superseded general consumer goods in importance as a source of sales tax revenue. The former appears to be a much more reliable producer during economic downturns. This means that the City’s sales tax revenues may be more stable than in the past. Subsection C - Transient Occupancy Taxes The transient occupancy tax (TOT) is essentially the City’s hotel bed tax. Exhibit 5.A.1 shows that TOT can be vulnerable to economic downturns, but perhaps not as volatile as other revenue sources. In Newport Beach, the top five TOT-producing hotels make up over 60% of the City’s total TOT revenue. The Resort at Pelican Hill is particularly important at over a quarter of TOT revenue. Hence, this means the City is theoretically vulnerable to a business interruption at one of the key hotels. Of course, it is in the financial interest of the hotels to be at peak capacity as much as possible and, since 2008, the TOT revenue produced has been up across all properties. This appears to be due to steadily rising room rates, while maintaining a consistent level of occupancy. Between calendar year 2010 and 2017, the average daily hotel room rate is up 54%, while occupancy rates are up only 13%.43 This has contributed to a doubling of TOT revenues between 2009 and 2017.44 The City’s long-term forecasting consultant, Beacon Economics, expects this upward trend to continue. In fact, for the period of FY 2017 through FY 2022, Beacon predicts that TOT will grow 25% more than property tax and 50% more than sales tax.45 Hence, it would appear that the hotel sector in the City is fundamentally healthy. The foregoing suggests that a general economic downturn is probably the most significant risk to TOT revenues. Given the continuing, if not increasing, strength of Newport Beach’s hotel sector, TOT does not appear to be any more vulnerable to a downturn than it has been in the past. Earlier, we mentioned that a business interruption to a large hotel might be a theoretical risk given that larger hotels produce the lion’s share of TOT revenue. For example, a fire at one of the major hotels that makes the hotel unoccupiable could cause a drop in revenues at that hotel. However, given that the hotel operator would have a clear incentive to put the rooms back in service as soon as possible and given that other hotels in Newport Beach would likely be able to pick up excess demand,46 this risk does not appear 43 “2016 – 2017 Newport Beach and Company Annual Report: Go Beyond”. New Beach & Company. 44 The City also added some rooms during this time period. 45 “City of Newport Beach Revenue Forecast” Beacon Economics. January 2017. 46 The occupancy rate in Newport Beach hotels is around 75%. The City’s occupancy reports suggests that Newport Beach hotels typically experience and occupancy rate that is close to the Orange County average, so are not especially overcrowded compared to other hotels in the region. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 37 of 57 to be large and would certainly be absorbable within a reserve that is sufficient to cover an economic downturn. Transient Occupancy Tax Checkpoints TOT is Newport Beach’s fastest growing major revenue source. TOT is vulnerable to economic downturns, but not as vulnerable as sales taxes or many other minor City revenue sources. The hotel industry appears strong in Newport Beach, given steady rising room rates and stable occupancy. Hence, it does not appear that the TOT is much more vulnerable to an economic downturn than before. Subsection D - Other Revenues When considered together, the City’s other revenue sources are larger than both TOT and sales taxes. They also can be vulnerable to economic downturns, as we saw in Exhibit 5.A.1. In fact, the decline in other revenues was only slightly less than the decline in sales taxes. As of FY 2017, the top five most important individual revenue sources within the other category are business license taxes, paramedic service fees, building permits, plan checking fees, and cable franchise fees. However, these sources only produced about 30% of other revenue. Newport Beach, in FY 2017, had almost 100 individual revenue sources that produced over $100,000 and 15 sources that produced over $1 million. This shows the diversity of these revenues. Comparing the individual sources that make up other revenues between the Great Recession and FY 2017, we can see that there have been some changes that would decrease potential volatility. For example, investment income was an important revenue at the start of the Great Recession and declined precipitously. Investment income does not break into the top ten other revenues in FY 2017. The top two other revenues in FY 2017 are business license taxes and paramedic service fees, both of which proved much more resistant to the economic downturn than most other revenues. Cable franchise fees and parking fines are also both important revenues in FY 2017 (as they were before) and proved more resistant to the downturn than most other revenues. There have also been a few changes that might increase vulnerability. Building permits and plan checking fees are now more important than they had been at the start of the Great Recession and both demonstrated higher-than-average vulnerability to the downturn. However, the changes that could increase vulnerability should be at least balanced out by the changes that decrease vulnerability. Other Revenue Checkpoints During the Great Recession, “other revenues” declined only slightly less than sales taxes, the City’s most volatile revenue. Since the Great Recession, the composition of “other revenues” has changed somewhat. Some less volatile revenues have gained more prominence. However, some volatile revenues are still important. Overall, “other revenues” should be at least as stable, if not more stable, than in the past. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 38 of 57 Subsection E - Risk Analysis of All City Revenues To analyze the risk that an economic downturn poses to the City’s revenues we will start with the City’s historical experience with past downturns. Earlier, we discussed some of the year-to-year changes in the City’ revenues during the Great Recession. However, in order to make the best use of the City’s data for risk analysis we need to use monthly and/or quarterly data. Monthly or quarterly data will give us a more precise estimate of how long the revenue downturn lasted. Annual revenue figures are essentially an average of all 12 months. However, if, for example, three of those months are part of an economic downturn and nine are part of the subsequent recovery, then the year as a whole will show revenue growth. This could cause us to underestimate the length of time City revenues are negatively impacted by an economic downturn. In order to make the best use of monthly/quarterly data for risk analysis, we need to remove the effects of what is known as “seasonal” variation. This means that there is some regularly occurring variance in the revenue that is independent from economic cycles. For instance, in Newport Beach, the final months of the calendar year always provides the most sales tax revenue, presumably due to holiday spending. So, if those months produce more revenue than the City was generating during the preceding fall months, that does not necessarily mean that an economic downturn has ended – it could just indicate seasonal variation. A simple way to remove season variation is to create a 12-month moving average. This means that for every single month in our data set we take an average consisting of that month plus the six months prior and the five months after (for a total of 12 months). This essentially averages out annual seasonal variation and gives us a purer sense of the impact of economic cycles on Newport Beach’s revenue. In Exhibit 5.E.1 monthly revenues are plotted out from December 1998 to December 2016. The blue line represents the 12-month moving average, while the red line is actual monthly revenues. We can see that the red lines exhibit large swings during the year such that it is hard to pick out when there is an economic downturn. The blue line removes seasonal effects, which results in a much smoother line. We can see the economic downturns much more easily – which are highlighted by the green circles. The Great Recession is the right-hand circle and revenues declined by about 13% from the high just before the downturn started to the point at which revenues turned back upwards. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 39 of 57 Exhibit 5.E.1 – Monthly Revenues for the City of Newport Beach The Great Recession had a much more noticiable impact on City revenues. The length of the downward trending blue line associate with the 2001 Dot.Bomb recession is 16 months. The length of the downward trending blue line associated with the Great Recession is 21 months. According to the Bureau of Economic Analysis, the duration of the 2001 Dot.Bomb recession was eight months while the length of the Great Recession was 18 months. Hence, it appears that the City’s revenue portfolio will be depressed by an economic downturn for longer than economists’ measurements of the length of that downturn might suggest. We will take this into consideration when analyzing the risk that the City is subject to. We can also see from Exhibit 5.E.1 that the Great Recession resulted in a steeper decline in revenues. From March 2008 to January 2010, the moving average of City revenues declined 14.7%. In contrast, from February 2001 to May 2002, the moving average only declined 4.4%. Because the Great Recession was both deeper and lengthier, we will use that as our primary reference case for determining possible future risk. A reserve calibrated against the Great Recession will prove sufficient for a lesser recession, like the 2001 Dot.Bomb recession. To analyze the variability of the City’s revenue and risk, we used quarterly data. We first measured all of the quarterly changes in revenue during the Great Recession period circled on Exhibit 5.E.1, where a A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 40 of 57 “quarter” was any consecutive three-month period (we did not limit ourselves to calendar year quarters). This gave us a sample of plausible changes in revenue during a hypothetical future recession. We found that the average quarterly change in revenue was a decline of 0.9%. We also found that changes were roughly normally distributed around this average, meaning they took the approximate shape of the “bell curve” that we introduced at the beginning of this report. We then were able to simulate potential revenue declines over multiple subsequent quarters. For example, we found that for a hypothetical 4- quarter recession there was only a 1% chance of a decline in revenue of 14.95% or more and a 10% chance of a decline of 10.53% or more. This gave us the probable depth of a recession for every quarter in a hypothetical future recession. The next step was to define the likelihood of different potential lengths of future recession. To do so, we gathered data on the lengths of all recessions that occurred in the U.S. since 1950. However, we also found that Newport Beach’s revenue downturns had lasted longer than both the 2001 Recession and Great Recession, by about three to four months. Hence, we assumed that Newport Beach’s revenues would also experience a one-quarter longer downturn in future recessions. With this in mind, we found the average length of a recession was four and 1/3 quarters. However, the lengths of the recessions were not normally distributed around this average. The shape was closer to the “lognormal” distribution we saw earlier in this report, where shorter recessions were more likely and very long recessions unlikely. This gave use the probable length of a hypothetical future recession. By combining length and depth, we can get the amount of reserves that Newport Beach would need to be prepared for a hypothetical future recession. The results are shown in Exhibit 5.E.2. The vertical axis shows various possible reserve levels, expressed as a percent of revenues. The horizontal axis shows how confident the City would be that a given level of reserves could replace 100% of the City’s revenue decline during a hypothetical future recession. First, let’s review a few points of interest about Exhibit 5.E.2: • The exhibit does not call out specific recession lengths or depths because they are all combined on the blue line. For example, a recession that would require a 10% fund balance to replace all revenue could be a product of shorter but a deeper recession or a longer but shallower recession. The point on the line that intersects with the 10% reserve reflects all such possibilities. • It is unlikely that the City would replace every last dollar of lost revenue with reserves during an actual recession. Rather, it would cut some spending. Hence, GFOA’s recommendations can be adjusted downward according to how much the City feels it could cut from its budget. We will reflect the possibility for downward adjustment in Section 7 of this report. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 41 of 57 Exhibit 5.E.2 – Reserves Required to Replace Revenues Lost During a Recession Reserves as a % of Revenue Confidence that reserves will remain above $0 during a future Recession Around 70% confidence provides the best “value” reserve level. Above 90% confidence, the value of additional reserves declines rapidly. In Exhibit 5.E.2, the point at which the City gets the most “value” for its reserve is about 70% confidence or a reserve of 8.0% of revenues. Past this point, it costs proportionately more money to “buy” an extra 5 percentage points of confidence. To illustrate, to go from 65% confidence to 70% confidence the reserve must go from 7.4% to 8.0%. But, to go from 70% confidence to 75% confidence the reserve must go from 8.0% to 8.8%. To go from 75% to 80% confidence requires 9.6% reserves. Past 90% confidence, the curve becomes even steeper, making additional confidence even more “expensive.” Hence, the City of Newport Beach might consider a range of possible reserves to guard against revenues declined from an economic downturn. Recall that earlier in this report we saw that the City’s revenue sources do not appear to be any more vulnerable to an economic downturn than they have been in the past. This means the numbers below, which are based on historical data, should provide a reasonable representation of current risk. If anything, they may be somewhat conservative given that some of Newport Beach’s revenues may now be less vulnerable to downturns than in the past. As a point of reference, at their lowest point, the City’s quarterly revenues declined about 10% from their highs right before the Great Recession. • Low end: A reserve equal to 8.0% of revenue, giving the City 70% confidence of being able to replace 100% of all revenue lost from a recession. Assuming annual revenues of about $205 million, this translates to a reserve of about $16.4 million. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 42 of 57 • High end: A reserve equal to 12.0% of revenue, giving the City a 90% chance of being able to replace 100% of all revenue lost from a recession. Assuming annual revenues of about $205 million, this translates to a reserve of about $24.6 million. Again, it should be noted that the City would probably not want to replace every last dollar of lost revenue with reserves during an actual recession. Rather, it would cut some spending. Hence, GFOA’s recommendations can be adjusted downward according to how much the City feels it could cut from its budget. We will reflect the possibility for downward adjustment in Section 7 of this report. Revenue Risk Analysis Checkpoints GFOA used Newport Beach’s historical experiences with the Great Recession, 2001 Dot.Bomb recession, and recession records since World War II to simulate the impact of a hypothetical future recession. The simulation found that a reserve equal to 8.0% of revenue (or about $16.4 million) would give the City 70% confidence of being able to replace 100% of all revenue lost from a recession. This represents a potential lower bound for the City’s reserve target because it is the point at which reserves provide the best “value” for the money. The simulation found that a reserve equal to 12.0% of revenue (or about $24.6 million) would give the City a 90% chance of being able to replace 100% of all revenue lost from a recession. Beyond this point, it gets much more “expensive” for the City to gain more confidence with larger reserves. The City may not wish to replace 100% of all lost revenue during a recession. It might also wish to cut back expenditures. The City can adjust GFOA’s recommended reserve levels downward in accordance with its willingness to cut spending during a recession. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 43 of 57 Section 6 - Secondary Risks This section of the report addresses other risk factors that have less weighty implications for the City’s reserve strategy than those described in the previous sections. These include pensions; non-pension debt; expenditure spikes; liquidity; future growth; and existing claims on the City’s fund balance. Subsection A - Pensions Like many cities in California, Newport Beach faces a substantial pension liability. The City has been forward-thinking in developing and following a plan to fund its pension liabilities. For the purposes of this report, we will examine one specific pension scenario: the impact of a recession.47 This is because the purpose of reserves is to buffer the City against shocks. A recession is a shock. The City’s normal, on-going pension liability is a known and predictable financial stressor that should be dealt with through the City’s normal budgeting and long-term financial planning process. The pension plan that the City is a part of CalPERS assumes a 7% annual return.48 A recession would cause CalPERS’s investments to perform below expectations. If the investments perform below expectations, the City eventually has to make up the difference with increased contributions. This unplanned additional expenditure would add more financial pressure in the aftermath of an economic downturn. It should be noted that CalPERS is administered in such a way that member municipalities would not feel the consequences of investment underperformance immediately – there is about a two-year lag. This means that the City would have forewarning of an increase in its contribution after investments underperform. However, since that increase would come on the heels of a recession it would certainly be an inopportune time for the City to make additional pension payments. Therefore, there may be some role for reserves to help cushion the blow. To calculate the potential increase in contribution costs from a recession, we first obtained a distribution of CalPERS expected returns. The average expected return is 7%. That means returns are expected to be below 7% half of the time and above 7% the other half of the time. Based on information from CalPERS, we learned that returns are expected to take the shape of a normal distribution or bell curve. This means that most the time returns will stay close to 7% but a wider variation is possible. Using estimates from CalPERS and records of what has happened during past recessions, we found that returns during a recession might range from 6.2% to -11%. -11% would be an extreme result, while something close to 6% would be much more likely during a recession. Next, we estimated potential recession lengths. Using past recessions as reference cases, we found the likelihood of a recession lasting one, two, or three years.49 Of course, a three-year recession is very unlikely, and a two-year recession is unlikely.50 Most recessions would last about a year or so. 47 A recession is a significant decline in economic activity that lasts longer than a few months. 48 CalPERS, “CalPERS to Lower Discount Rate to Seven Percent Over the Next Three Years,” December 21, 2016, https://www.calpers.ca.gov/page/newsroom/calpers-news/2016/calpers-lower-discount-rate. 49 We gathered recession lengths for every recession since 1950 and used that to simulate future recession lengths. 50 The Great Recession lasted 18 months. The Great Depression lasted just over 3.5 years. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 44 of 57 We then simulated thousands of possible recessions, where each recession lasted somewhere between one and three years and the rate of return for each year of the recession was somewhere between 6.2% and -11%. We then connected these variable rates of return to a pension contribution model developed by Newport Beach City staff. This gave us a range of potential contribution increases due to a recession. Exhibit 6.A.1 shows the results for a five-year period. Years 1, 2, and 3 are the potential recession years. The additional pension cost to the City will always be zero in years 1 and 2 because the CalPERS system is designed to defer the initial impact from investment underperformance. Year 3 is when the additional costs are felt. In the vast majority of cases, a recession will be over by the third year. However, in extreme cases a recession could go into a third year. Years 4 and 5 are recovery years, when the economy will very likely have emerged from a recession. The rows in the exhibit show the percent confidence the City can have that a given amount of money would be sufficient to cover the additional contribution costs in a given year. Exhibit 6.A.1 – Additional Pension Contributions in the Wake of a Recession Confidence Year 1 Year 2 Year 3 Year 4 Year 5 Total* 50% $0 $0 $1,600,000 $2,700,000 $3,400,000 $7,800,000 60% $0 $0 $1,800,000 $3,100,000 $4,100,000 $9,100,000 70% $0 $0 $2,000,000 $3,800,000 $5,100,000 $11,000,000 80% $0 $0 $2,500,000 $4,800,000 $6,400,000 $13,500,000 90% $0 $0 $3,500,000 $6,300,000 $8,300,000 $17,700,000 *Total is a simulation for the entire three years at once, not counting each year individually. Hence, the results are slightly different than if all three years were just summed arithmetically. For the purposes of reserve planning, the numbers of greatest interest in Exhibit 6.A.1 are probably the bolded and italicized ones in Year 3: the 70%, 80%, and 90% confidence levels. These represent particularly harsh recessions. During a harsher recession, the City is presumably facing greater pressure on its revenues and the recession would be longer, so the increased costs for pensions would be that much more of a burden. By contrast, a recession at the 50% or 60% confidence level would likely be over after one year, giving the City an entire year of recovery before having to shoulder increased pension costs. For building a reserve for this risk, the City probably would not want to reserve the entire bolded/italicized amounts shown in Exhibit 6.A.1. This is because the City will have forewarning of the impending costs and could structure its budget accordingly. However, it might want some reserves in place so that budget cuts do not have to be as dramatic as they would in the absence of reserves. For instance, a $2 million reserve might assume that the City will cut $1.5 million in costs. $1.5 million is about equal to the amount needed to cover the pension cost increase that would be associated with an average recession. $1.5 million in cuts plus $2 million in reserves is $3.5 million or 90% confidence. A $1 million reserve might assume that the City will cut deeper. For example, this means the City would be willing to cut $2.5 million in the case of a very severe recession. As we get into years 4 and 5 on Exhibit 6.A.1, the use of reserves becomes much more of a City policy issue than an issue of technical risk analysis. The City will have at least one and, probably, two years of A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 45 of 57 forewarning before experiencing these costs. The City could choose to handle these increased pension costs through its regular planning and budgeting process, but could have some reserves set aside if the City did not want to handle the costs only through increased revenue and/or spending cuts. Finally, it should be noted that the historical records suggests that CalPERS returns rise above average expectations immediately following a downturn (i.e., go above 7%). This would eventually reduce some of the financial pressure on the City. It would not help for the period of time we are interested in for a reserve strategy, but it does at least suggest that the City’s long-term prospects in the aftermath of a recession may be less dire than suggested by Exhibit 6.A.1. Subsection B - Debt (Not Including Pensions) Any form of leverage could reduce the City’s financial flexibility, thus increasing the need for reserves to provide some offsetting flexibility. For example, if the City had a great deal of outstanding debt, it might find it more difficult to borrow funds in the case of an emergency. The City’s existing debt policy provides a set of guidelines to encourage positive use of debt for investments like capital infrastructure. The policy requires that debt only be used if it meets the City’s payment distribution goals, is the most cost-effective funding means available, and is fiscally prudent. These guidelines provide stability to the City’s debt portfolio. According to its comprehensive annual financial report, the City’s debt policy is recognized by the California Debt and Investment Advisory Commission as one of only 14 equivalent city/county policies in California with 20 or more debt management best practice elements. At the end of FY 2016, the City had total long-term debt outstanding of $116.5 million. The City has an Issue Credit Rating of AAA as assigned by Standard & Poor’s Rating Services. A rating of AAA by Standard & Poor’s Rating Services is roughly equivalent to an Aaa rating by Moody’s Investors Services. The following table, Exhibit 6.B.1, uses figures from the City’s FY 2016 CAFR to compare Newport Beach’s debt to similar sized cities. The table shows median indebtedness, by credit rating as reported in Moody’s Investors Services. The City’s level of net direct debt, which includes a non-self-supporting portion of general obligation bonds, sales and special tax bonds, general fund lease obligations, bond anticipation notes, and capital leases, compared to its full value, or estimated full market value of taxable property within its boundaries, is only 0.25 percent. This is a good deal lower than the medians across the six ratings. While the actual net direct debt for the City is higher than the medians in the same population bracket, the low percentage indicates the City is in a healthy position with respect to the kind of debt typically used acquiring capital assets. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 46 of 57 Exhibit 6.B.1 - Comparison of Newport Beach’s Financial Indicators to Cities with Between 50,000 and 100,000 in Population by Credit Rating Newport Beach Aaa Aa A Baa Ba Net Direct Debt as % of Full Value 0.25% 0.6% 1.1% 2.0% 3.9% N/A Net Direct Debt ($000s) $116,544 $59,300 $64,143 $78,275 $170,848 N/A Source: “2015 US Local Government Medians – Tax Base Growth Reinforces Sector Stability as Pension Troubles Remain,” Moody’s Investors Service (March 30, 2017). Exhibit 6.B.2 includes a group of California cities that are comparable to Newport Beach based on a combination of factors, including geography, population, general fund revenue portfolio, and size. The exhibit provides summary statistics from each of the cities’ FY 2016 CAFR and includes four commonly used measures of indebtedness. The measures are categorized as “Measures of Direct Debt” and “Measures of Overall Debt.” Direct debt considers only bonded debt issued by the City of Newport Beach. Within this category, the first measure is debt service (principal and interest payments) as a percent of City expenditures. This figure gauges the pressure placed on the budget by debt payments. The second measure shows direct debt as a percent of the City’s full assessed value. This shows debt burden relative to the City’s tax base. Overall debt captures the full burden placed on the public by debt issued by all local governments that overlap Newport Beach. Within this category, the first measure shows the burden placed on citizens by municipal indebtedness inclusive of direct and overlapping debt. The second measure compares direct debt plus the debt of overlapping jurisdictions as a percent of the full assessed value of properties in the jurisdiction. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 47 of 57 Exhibit 6.B.2 - Comparison of Newport Beach's Indebtedness with Other Cities Newport Beach Laguna Beach Huntington Beach Santa Monica Costa Mesa Mission Viejo Population 84,915 23,505 197,574 93,834 114,044 96,718 Measures of Direct Debt Debt Service as a % of Expenditures 5.42% 0.00% 3.22% 2.84% 3.10% 3.86% Net Direct Debt as % of Full Value 0.25% 0.00% 0.14% 0.25% 0.15% 0.09% Measures of Overall Debt Overall Debt per Capita $8,603 $1,779 $2,823 $7,900 $1,615 $1,071 Overall Debt Burden (Overall Net Debt as % Full Value) 1.54% 0.33% 1.58% 2.38% 1.11% 0.68% Source: FY 2016 CAFR for each represented city. Exhibit 6.B.2 shows that Newport Beach has the highest overall debt per capita when compared to its peer cities, but falls in the middle of its peers when looking at overall debt burden as a percent of full assessed value. For direct debt, Newport Beach is relatively similar to its peers. While the City has the highest percentage of debt service as a percent of all expenditures at 5.42 percent, it is mostly comparable to the other cities when calculating direct debt as a percentage of full value. While the City does appear to have slightly higher debt measures than its counterparts, it must be considered that several of the comparables have extremely low amounts of debt to begin with, specifically Laguna Beach with no direct debt reported in the FY 16 CAFR. To conclude our discussion on debt, Newport Beach’s has a relatively low overall debt burden, which is illustrated by its high bond rating and low overall burden relative to other cities of comparable size across the United States. Newport Beach’s debt levels are not much different than nearby comparable cities, but these cities also have little debt. Newport Beach’s favorable debt position provides it with financial flexibility to complement a reserve strategy. Subsection C - Other Post-Employment Benefits (OPEB) Liabilities The City has manageable OPEB liabilities. In FY 2016, its annual OPEB cost amounted to $2.8 million. Newport Beach has also taken measures to mitigate funding risk by setting up a CalPERS OPEB trust to prefund OPEB obligations. Because of the proactive measures the City has taken to address its OPEB obligations, no specific general fund reserve is recommended. However, the City should continue its A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 48 of 57 practice to make its full actuarially required contribution and to administer the OPEB trust that is has created. Subsection D – Expenditure Spikes The City does not have large impending lawsuits against it. There is an external reserve to cover any lawsuits the City may face. If that fund were to be depleted, there may be cause for concern, but historically this has not been an issue. Of course, if the City encounters a situation in the future where a large impending lawsuit materializes, it will want to adjust its risk management strategy. However, for now, there does not appear to be compelling evidence that additional reserves are needed. Subsection E – Liquidity According to historical revenue data, the City receives about 45 percent of its annual revenue between July 1 and December 1. Most of that 45 percent comes during the month of December from property taxes; about 21% of the City’s entire yearly revenues are collected in December. This means that the City’s revenue receipts are slightly weighted towards the latter part of the fiscal year. However, this appears to be a relatively minor risk that can be addressed in two ways. First, the reserves recommended in this report can serve as “de facto working capital”. The relatively minor liquidity concerns the City might experience could be absorbed within its regular reserves. Second, the City’s investment policies and practices can provide for sufficient liquidity to ensure that the City’s idle funds are available when needed during the early part of the year. For example, the City staff perform cash flow analysis monthly and have a plan in place to liquidate investment maturities as cash is needed. The City’s investment strategy also anticipates these peaks and valleys in the City revenue inflows. Subsection F – Growth Population growth has remained relatively stable and plateaued. Hence, a potential resource strain due to population growth is not a risk. Subsection G - Claims on General Fund Balance The reserves that the City sets aside for risk mitigation are a subset of the City’s fund balances. Fund balance is the difference between the general fund’s assets and liabilities. Sometimes, there are claims on fund balances that make those balance unavailable for risk mitigation. The City’s FY 16 CAFR details claims on the City’s existing fund balance. As of FY 2016, the General Fund balance was $81.8 million. $15.2 million of this is classified as nonspendable. These nonspendable funds are long-term loan receivables, prepaid items, and inventories. The restricted general fund balance amounts to $3.1 million, intended for use in a variety of general fund activities including affordable housing and oceanfront encroachment. This total of about $18.1 million constitutes a solid claim that makes this portion of fund balance unavailable for risk mitigation. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 49 of 57 The City has $2.7 million classified as committed by City Council. Much of this is an encumbrance reserve. While the City could, hypothetically, redirect these funds to other purposes, it is not the City’s intent to redirect these funds. Hence, we might also consider these commitments to be a claim on fund balance. Assigned fund balance is about $4.2 million. Most of this is a wastewater subsidy. While intended to be more flexible than a “commitment”, the City still has expressed an intention to use this money for something other than risk management. That leaves $56.6 million as unassigned fund balance. Unassigned fund balance doesn’t have claims on it and could be used for risk mitigation. In conclusion, the City has a substantial amount of unassigned fund balance. The City also has some assigned and committed restrictions are self-imposed, so, if needed, the City could draw on these in an emergency. Secondary Risk Checkpoints Of the secondary risks we examined, only the possibility of increased pension payments in the aftermath of a recession appears to be significant risk. The way in which CALPERS is administered has the effect of deferring the effects of investment underperformance on the City for a two-year period. This means the City would not face immediate increased pension costs during an economic downturn. There is then a five year smoothing beyond that. A reserve of between $2.0 million and $3.5 million would give the City 70% to 90% confidence of being able to cover the increased pension costs in the third year after an economic downturn (i.e., after the aforementioned two-year period passes). The City could also experience increased annual pension costs four and five years after a recession. However, because this is a number of years after a recession occurs, planning for these costs might be better handled through the City’s long-term planning and budgeting process, rather than reserves. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 50 of 57 Section 7 - Putting it All Together In Sections 4, 5, and 6, we examined individual risks such as earthquakes, floods, fires, and revenue losses due to economic downturns. We examined each of these risks individually in order to best understand the nature of each risk, and we found a range of reserves that represents an “efficient” use of reserves for mitigating each individual risk. However, to arrive at a final reserve strategy for the City we need to consider these risks as a group. Considering the risks as a group has important advantages. The first advantage is that considering risks as a group recognizes the diversity in the risks that the City faces. This diversity actually is an advantage for City finances! Diversity in risks means we should not simply add together each of the reserve ranges for each individual risk. This may overstate the amount of reserves that the City really needs. This is because it is very unlikely that the City will experience a severe earthquake, recession, fire, and flood all within a short time period. Exhibit 7.1 below illustrates using fires and floods. Let’s imagine that the City wanted to be 95% confident that it could cover the damages from a flood and a fire. The table shows the amounts needs for each individual risk and then adds them together in a simple summation, arriving at $1.6 million. The “combined distribution” column creates an entirely new distribution from the data we have for fires and floods together. The 95% confidence level for this new distribution is only $1.47 million or about 8 percent less than the simple summation. This is recognizing that it is highly unlikely that the City will experience a severe fire and a severe flood at once. Rather, it is more likely that at least one of the events would be much milder. When we consider all of the City’s risks in this manner, the reserves required to achieve a given level of confidence will be much less than when each risk is considered in isolation. Exhibit 7.1 – Reserve Needed to be 95% Confident for Fire and Flood Risk Fire Flood Simple Summation Combined Distribution Difference 95% Confident $159,000 $1,431,000 $1,590,000 $1,473,589 8% The second advantage of considering all of the risks together is that not all of the risks have an equal chance of occurring over a given time period. For example, Newport Beach has experienced three floods in its recent history, but no earthquakes. This suggests that floods are more likely to occur than earthquakes. The City’s reserve strategy should reflect this fact. In the bullet points below, we show the relative chance of each of the major risks occurring over a ten-year period. We can use these probabilities to build a probabilistic model of risks over a long-term time horizon. You will note that some of the extreme events are expressed as a fraction. Of course, the City can’t experience a portion of an event, but the fraction does impact our simulation of risk. For instance, the City can expect to experience 1/3 of a wildfire in a ten-year period. If we created three different ten-year simulations, we might expect one of them to include a wildfire. We can create hundreds or even thousands of ten-year simulations, so there will be many that include a wildfire. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 51 of 57 • Revenue loss due to a recession. Historical data suggests that it is highly likely (over 90% chance) that there will be at least one recessionary year in a ten-year period.51 The historical data also tells us there is a considerable chance of having more than one recessionary year in a ten-year period. • Earthquake. Data obtained through the US Geological Survey (USGS) suggests that the Los Angeles area has about a 32% chance of experiencing an earthquake of a magnitude of at least 6.0 over a ten-year period.52 Of course, not every part of the Los Angeles region will be relevant to the risks faced by Newport Beach. However, given that some faults further from Newport Beach still pose a threat (i.e., San Andreas) much of the LA region is still relevant. Hence, we judged it prudent to use the probability for the entire Los Angeles region.53 • Flood. The City has experienced three FEMA-declared flood disasters between 2004 and 2017, a 13-year period. Hence, over ten-year period we might expect “2.3” floods. • Fire. The City has experienced one wildfire every 30 years. This means the City can expect “1/3” of a wildfire every ten years. The final advantage of considering all of the risks together is that we can consider “risk interdependencies”. This simply means that the occurrence of one risk could impact the probability and/or magnitude of a related risk. Perhaps the strongest and most obvious dependency is between revenue losses from a recession and spikes in pension costs due to CalPERS investment under- performance – both are caused by an economic downturn and both are worse for the City the worse the recession gets. We examined the potential for other interdependencies as well, but concluded that they weren’t as important. For example, could an earthquake lead to a wildfire? The City’s Fire Chief advised us that the areas where a wildfire could start are not exposed to infrastructure that could be damaged and start a fire as a result (e.g., electrical lines). Could an earthquake lead to tsunami? The USGS analyzed the potential impact of a 7.8 earthquake on the southernmost 200 miles of the San Andreas fault, the area thought to be at greatest risk to produce a large quake. The USGS found that because of the large distance from the earthquake to the coast, tsunamis are not a significant risk.54 To realize the advantages described above, we built a model that considers the City’s risks over a ten-year time horizon. As with our other models, the model runs hundreds or even thousands of simulations of possible futures for Newport Beach. Here are the key assumptions behind the model: • Probability of an undesirable event. The probability of any undesirable event occurring (e.g., fire, flood, earthquake, etc.) is consistent with the assumptions described above. • Magnitude of an undesirable event. Should a simulation show that an undesirable event occurs in a given year, the magnitude is generated randomly in a manner identical to the individual risk models we showed earlier in this report. 51 We took economic data since 1950 and used that to calculate the odds of a recession occurring in a ten year period, including how many of those years would be recession years. 52 Edward H. Field, et al. “Long-Term Time-Dependent Probabilities for the Third Uniform California Earthquake Rupture Forecast”. Bulletin of the Seismological Society of America, Vol. 105, No. 2A, pp. 511–543, April 2015. 53 Further, data to calculate a probability specifically for Newport Beach or Orange County was not available. This means that the probability of an earthquake occurring is probably somewhat overstated. We tried using a somewhat lower probability to see what the difference was and observed that implications for reserves was not large. 54 Lucile Jones, et al. “The ShakeOut Scenario”. US Geological Survey. 2008. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 52 of 57 • Interdependencies. Should our simulation show that a recession occurs in a given year, then both a revenue loss and a pension loss of similar magnitude will be triggered. • FEMA reimbursement. The City could recoup some of its losses from extreme events due to reimbursements from FEMA. The model assumes the reimbursements are received two years after the event occurs.55 The model also assumes that a disaster must cost the City at least $100,000 to receive any reimbursement (anything smaller would not be declared a FEMA-eligible disaster). We also assume the City will be reimbursed at the customary rate of 75% of incurred costs. • The City cuts spending in response to a revenue downturn.56 The City will not use reserves to absorb the full revenue loss from a recession. The City will absorb 70% of the revenue loss through spending cuts. This is consistent with the City’s experiences during the Great Recession, where the City was able to make up about 70% of the revenue loss during that period. This is accomplished mainly through deferring regular maintenance of existing city assets, deferring purchases of certain new assets, and cutting back on some operating transfers out of the general fund. Smaller cuts in the City’s operating expenditures also help absorb the loss. • City cuts spending in other areas to in response to spike in pension costs. Similar to the revenue loss, it is assumed that the City’s reserve would not absorb the entire amount of a pension cost increase. Again, it is assumed spending cuts will absorb 70% of the first year of pension cost increases in the aftermath of recession. For subsequent years, it is assumed that 100% of increased costs would be accommodated within the City’s regular budget. • A reserve of zero is the City’s “red line”. All of the analysis assumes the City will want to stay above at least zero dollars in its reserve. We combined all of the information described above to create at ten-year probabilistic model. The model produces a curve, much like what we presented for the City’s individual risk factors. The curve is presented in Exhibit 7.2. It shows the level of confidence the City can have that a given level of general fund reserves will prove sufficient over a ten-year period to cover the extraordinary costs incurred by the general fund as a result of the risks covered in this report. “Sufficient” is defined as the reserves not dropping below zero. For example, the City can be 80% confident that a reserve of $10.4 million would cover the City general funds extraordinary expenditures over a ten-year period. 55 Our research shows that FEMA reimbursements are completed 18 months after the disaster occurs, on average. So, this is a conservative assumption. 56 Absorbing some of the revenue loss makes a substantial difference in the reserves required. To illustrate, planning on a dollar-for-dollar replacement of lost revenue with reserves would require about $40 million to be 90% confident. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 53 of 57 Exhibit 7.2 – Confidence that a Given Level of General Fund Reserves will be Sufficient over 10 Years Reserves (Millions of Dollars) Percent Confidence As with the other curves we have shown in this report, there is a point at which the curve begins to rise sharply. This is the point at which the City starts to receive less value from reserves. In Exhibit 7.2, this is between the 80% confidence level ($10.4 million) and 90% confidence level ($13.0 million). This represents the range at which reserves produce the best value for the City. However, there are a number of other factors that are worth considering as part of settling on a reserve level: Other risk management mechanisms can complement reserves. Understandably, City officials might not be satisfied with an 80% or 90% chance of being able to cover damages from the risks we described in this report. Other financial risk management tools like debt or insurance could be used to provide additional confidence beyond that provided by reserves. Our analysis is not inclusive of every risk the City could possibly face. We used the City’s disaster management plan to identify the risks that posed the most clear and present danger to the City. However, it is possible that the City could experience a shock that no one was expecting. Hence, there is a case for reserving more than our analysis suggest is efficient. This could provide additional protection against risks that no one can foresee. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 54 of 57 Our analysis is based on historical records. Global climate change could increase the City’s vulnerability to naturally occurring extreme events.57 This means that historical data could underestimate the likelihood and/or severity of extreme events in the future. Unfortunately, no one can say precisely what the impact of climate change will be. Hence, GFOA can’t speculate if an upward adjustment to the reserves is necessary and, if so, by how much. However, this does mean that there could be a case for reserving a higher amount than the efficient range described above (or pursuing other risk management strategies). Also, GFOA’s Microsoft Excel58 risk model provides the City with the ability to adjust the likelihood and/or magnitude of future extreme events, if it would like to test different scenarios. For example, if we were to double the likelihood of a flood then the 80% and 90% confidence levels increase to $10.8 million and $13.5 million, respectively. The reserves held by comparable cities. The reserves held by comparable cities can provide context to the City of Newport Beach’s officials for selecting their own reserve levels. Appendix 1 contains a detailed comparison of Newport Beach’s fund balance with those of Laguna Beach, Huntington Beach, Santa Monica, Costa Mesa, and Mission Viejo. The comparison shows that Newport Beach has more reserves set aside specifically for responding to emergencies than the other cities. Newport Beach has an amount equal to about 23% of annual revenue. Of the three other cities that have reserves set aside specifically for emergencies, those cities have an average reserve of about 10% of annual revenues. By way of comparison, the 90% confidence reserve we showed in Exhibit 7.2 is about $13 million, which equates to around 7% of annual revenue. In the two paragraphs above, we suggested a few rationales for why the City might wish to have reserves somewhat higher than our suggested “efficient” range. If GFOA’s range were augmented a bit, the resulting reserve would be pretty similar to the amount maintained by the other cities. The City’s desired level of reserves should be memorialized in a formal policy and expressed as a percent of revenue or expenditures. The City already has such a policy, so the policy can be updated based on how the City wishes to use GFOA’s analysis to adjust its desired level of reserves. The dollar figures contained in this report can be converted into a percent of the City’s annual revenues or expenditures. This way, the dollar amount will automatically adjust with changes in the City’s budget. The City’s desired level of reserves should be a range, rather than a single number. GFOA’s research into how local governments can best maintain financial sustainability has found that decision-making “boundaries” are essential. For example, if the City were to adopt a policy to maintain reserves between X% and Y% of revenues, then that would constitute a clear boundary that defines when reserves are too high or too low. Compare this to if the City just adopted a policy that reserves should be at X% of revenues. It is then impossible to say how far reserves can go above or below this number and still be an acceptable amount. A range also can accommodate the risk appetites of more City officials. Thus, a range could be more reflective of the preferences of a greater number of people and, thereby, get more support. 57 According to “The Impact of Climate Change on Natural Disaster”, an article from NASA’s “Earth Observatory”: “outcomes of an increase in global temperatures include increased risk of drought and increased intensity of storms, including tropical cyclones with higher wind speeds, a wetter Asian monsoon, and, possibly, more intense mid- latitude storms.” https://earthobservatory.nasa.gov/Features/RisingCost/rising_cost5.php?src=share 58 GFOA has provided the model to the City so it can run its own scenarios A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 55 of 57 Section 8 - Next Steps Based on the information presented in this report, we suggest that Newport Beach take the following steps: #1 - Pick a desired range of reserves. This can be based on what our analysis suggests is efficient. It will also depend on City officials’ appetite for risk. Section 7 provided a number of suggested factors that might help City officials decide on their preferred level of reserves. #2 - Consider how debt and insurance can complement the reserve strategy. Debt and/or insurance can provide protection to the City past the point where reserves are efficient. In the case of debt, the City might be able use a line of credit with a local lending institution (the City already has a $1 million line of credit with a local bank), certificates of participation, or revenue anticipation notes. The City might also think about interfund borrowing opportunities. Equipment/facility replacement funds, worker’s compensation fund, facility maintenance funds might all be able to make short-term loans to the general fund in the case of an emergency. The City could develop policies to provide the flexibility to use these borrowing tools while also providing the necessary guidelines and limitations to ensure that borrowing occurs in a fiscally prudent manner. The City could also investigate newer types of insurance instruments, like parametric policies. Parametric policies were described earlier in this report. #3 - Memorialize the City’s desired range of a reserve in a formal policy. We strongly recommend expressing this as a range, rather than a single number. A range provides a “boundary” within which decisions must be made. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 56 of 57 Section 9 - Appendix 1: Reserves in Comparable Cities To help the City consider the exact amount of reserves to maintain, Exhibit 9.1 provides a table of General Fund balances as a percent of General Fund revenues for California cities that are comparable to the City of Newport Beach. Several notes should be made about Exhibit 9.1 in order for the reader to fully understand its meaning. First, “fund balance” is an accounting term describing the difference between assets and liabilities in the General Fund. “Reserves” (which are the main topic of GFOA’s analysis for Newport Beach) are the portion of fund balance set aside, by City Council policy, as a hedge against risk. Hence, not all “fund balance” is necessarily available as a reserve. The three right-most columns of Exhibit 8.1 shows how much each city holds in fund balance as a percent of general revenue. Each of the three columns in this exhibit examines fund balances from a different perspective on the relationship between fund balance and risk mitigation. The column #1 shows “unrestricted” fund balance as a percentage of General Fund operating revenue. This is an accounting term describing fund balances that do not have constraints placed on their use by an outside entity (e.g., a bond covenant might restrict the use of some portion of fund balance to debt service) and are spendable (e.g., do not represent inventory or other non-liquid assets). This the broadest definition of fund balance we show in Exhibit 9.1. An “unrestricted” fund balance may still have constraints placed upon its use, but these constraints would be created by the city government itself. One common constraint is to dedicate some portion of fund balance to hedging against the types of risks described in this report. However, other constraints have nothing to do with risk mitigation - to illustrate: a common self-imposed constraint is setting aside fund balance to pay for a special capital project. Newport Beach has imposed several such constraints; for example, the city has about $790,000 in funding committed for NPTV programming. While such a constraint could be removed and, thus, the entirety of monies in the “unrestricted” category made available for risk mitigation, it is not the intent of the city to do so. Column #2 shows the amount of fund balance available for risk mitigation after fund balances having self- imposed restrictions (not germane to risk mitigation) are removed from consideration. Because have removed funds that are the subject of self-imposed restrictions, this category is narrower than the first category. This leaves self-imposed restrictions that are specifically germane to risk mitigation as well as unrestricted fund balance (i.e., fund balance for which no restrictions at all have been identified). Unrestricted fund balance could easily be used for responding to emergency events, if needed. Column #3 includes only those fund balances that have been specifically identified by the city government as intended for creating a risk mitigating reserve. It should be noted that since the analysis in Exhibit 9.1 is based only upon the information included in each city’s FY 2016 CAFR, it is possible the amount dedicated to risk mitigation could be somewhat higher for some of the cities as a legislative policy document might call for maintaining a given amount in fund balance as a reserve without creating an accounting restriction that would show up in the financial report. For example, Newport Beach’s CAFR dos not call out risk mitigating reserve in the financial statements, but one is described in the management discussion and analysis. It is also important to note that some cities, like Laguna Beach, account for emergency reserves in a fund outside of the general fund. These other funds appear to be substantively similar in purpose to the A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach Produced by the Government Finance Officers Association Page 57 of 57 general fund reserve Newport Beach is considering, but just are located in a separate fund. This does not include reserves that are found in utility funds or other funds with operational responsibilities apart from the general fund. We have included these amounts in column three to provide for greater comparability between the cities. Exhibit 9.1- Fund Balances as Percent of General Fund Revenue City Population (#1) Unrestricted (#2) Available for Risk Mitigation (#3) Dedicated to Risk Mitigation Newport Beach 84,915 32% 28% 23% Laguna Beach 23,505 83% 33% 8% Huntington Beach 197,574 27% 11% 11% Santa Monica 93,834 96% 19% 0% Costa Mesa 114,044 51% 38% 12% Mission Viejo 96,718 55% 24% 0% Average 101,765 57% 25% 9% Median 95,276 53% 26% 10% Sources: FY 2016 CAFR for each city. Given that column #3 is the most relevant to our analysis, it bears a closer look. Starting, with the City of Newport Beach’s, we see a reserve equal to 23% of revenues. This is the City’s Contingency Reserve. The reserve can be found as part of “Unassigned” fund balance in the City’s CAFR and amounts to $45.8 million. The City’s policy states that this amount exists to provide assistance in emergency situations. Many of Newport Beach’s peer cities have similar emergency funds set up. Laguna Beach’s Disaster Contingency Fund exists outside the General Fund, and has a total fund balance of $6.2 million to be used exclusively for repairing public facilities and protecting lives/property. During FY 16, Huntington Beach’s City Council established the Economic Uncertainties Reserve in the General Fund, which creates a reserve to be used for catastrophic events and natural disasters. The Council’s goal was to commit the value of two months of the General Fund expenditure adopted budget amount to this fund. The City of Santa Monica’s Disaster Relief Fund typically assists with covering expenses of a natural disaster. As of FY 16, the City’s fund had a net zero balance; the City received and promptly used a Federal and State Earthquake grant in FY 16 of $2.7 million. Additionally, $15,123 was transferred from the Disaster Relief Fund to the General Fund to “close out” the fund. It is unclear whether or not the fund will remain in use. While the City had a fund of that amount at some point during the year, the year-end balance is a net zero. The City of Costa Mesa has significant committed funds for declared disasters in the general fund. The fund currently has $14.1 million dollars, and per City ordinance, any fund balance utilized must be replenished. The City of Mission Viejo had no existing emergency or disaster fund. Exhibit 9.1 shows that Newport Beach has the most available for contingency. A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach, Produced by: The Government Finance Officers Association Item No. 5A1 Reserve Policy Presentation June 14, 2018 A Reserve is a Hedge Against Risk Current services? Preparing for Risk? But how much is enough? 3 A Definition of Risk* The probability and magnitude of a loss, disaster, or other undesirable event *Definition from Doug Hubbard in The Failure of Risk Management Key Source of Data on Risk Newport Beach’s own experience The experience of other California cities Research produced by other agencies Expertise of City staff Confidence that a Given Level of General Fund Reserves will be Sufficient over 10 Years Reserves (Millions of Dollars) Percent Confidence Considerations in Picking a Reserve “Best value” is between the 80% confidence ($10.4M) and 90% confidence ($13.0M) The City should supplement with other strategies, like debt capacity or insurance Our analysis does not account for every possible risk. May be wise to have some cushion The “best value” range is consistent with the amounts held for disasters by comparable cities Risk analysis is based on historical records. Consider adopting a range of desired reserves Rationale Used for Increasing Reserve from15 to 25% of Expenditures in 2014 •T� _Gove nment inance Officer Association (GFOAI recomn:iends, �ta n11 1 n1u rn, that gen er I-purpose governments , regard�ess n s1ze, main a1n unrestricted fund ba�anc · �n heir Gen ra� Fund of no less han \Vo months regular General Fund operating revenues or expend tures1 which 1s equivalent to a 17'% conttngeney res 1 'rV •Cr dit rating �ency Standard and Poors {S&PJ cons,d .rs n adequate levet of "fund bal nee to be a credi strength bet LI'S . he _,evel o� furnd balance mea. ures the flex�bility of an iss er to meet ess,ent1al services dunng transitionary periods . •S&P conside� 15% of annu1I orra11i���:����;!.:0o�e�;�r�\�aaz��:t�ff A er cond�ct1n g a survey or cq1 �f��en s n1ostlv in excess of 15'¾ arid ,n he rangefound con rngency reserye of 20% to 25% of operating budget. Item No. 5A2 Reserve Policy Presentation June 14, 2018 14/06/2018 1 RESILIENCE AND THE ROLE OF INSURANCE June 2018 Swiss Re Global Partnerships 2 0 50 100 150 200 250 300 350 400 450 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 The growing burden of uninsured losses Natural catastrophe losses 1970 – 2017 (in 2016 USD billion) insured Item No. 5B1 Parametric Insurance Presentation June 14, 2018 14/06/2018 2 Swiss Re Global Partnerships 3 0 50 100 150 200 250 300 350 400 450 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 The growing burden of uninsured losses Natural catastrophe losses 1970 – 2017 (in 2016 USD billion) insured Swiss Re Global Partnerships Amplified economic loss by climate change Annual expected loss in Billions (USD) 4 0 5 10 15 20 25 30 35 40 45 50 2008 Expected Loss 2030 Expected Loss 0 5 10 15 20 25 30 35 40 45 50 20 0 8 C l i m a t e Mo d e r a t e C h a n g e Hi g h C h a n g e 17 38 43 46 data sourced from BEA, US Census and Swiss Re analysis 20 0 8 Cl i m a t e 14/06/2018 3 Swiss Re Global Partnerships IS FEDERAL AID YOUR ONLY LIFE BOAT? 5 Swiss Re Global Partnerships 6 0 50 100 150 200 250 19 7 0 19 7 1 19 7 2 19 7 3 19 7 4 19 7 5 19 7 6 19 7 7 19 7 8 19 7 9 19 8 0 19 8 1 19 8 2 19 8 3 19 8 4 19 8 5 19 8 6 19 8 7 19 8 8 19 8 9 19 9 0 19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 20 0 0 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 20 0 6 20 0 7 20 0 8 20 0 9 20 1 0 20 1 1 20 1 2 20 1 3 20 1 4 20 1 5 20 1 6 20 1 7 Disaster declarations have tripled since the 1970s FEMA Disaster Declarations – (1970 to 2017) 14/06/2018 4 7 “There is no more valuable disaster recovery tool than insurance” “There is no more valuable disaster recovery tool than insurance” Daniel Kaniewski, FEMA deputy administrator Swiss Re Global Partnerships 8 $27.4m in liability A single event can erode several budgets $1.8M per inchin removal $150m in road repairs 14/06/2018 5 Swiss Re Global Partnerships 9 THE WORLD IS CHANGING THE WAY WE USE INSURANCE SHOULD TOO Swiss Re Global Partnerships ECONOMIC ENGINES SHUTDOWN 10 40 – 60% of businesses never reopen after a natural disaster Almost 9 of 10 business will not be open 2 years after a disaster Source: Forbes, 2014 “Will your business recover from disaster? 14/06/2018 6 Swiss Re Global Partnerships PORTS UNUSEABLE 11 Hurricane Katrina 2005 70% back to pre-Katrina volume within 5 months Port of New Orleans was the 5th largest port in 2003… but by 2016 it was still only 19th Swiss Re Global Partnerships BOND RATINGS JEOPARDIZED 12 Moody’s and S&P announced that they will review credit and bond ratings for communities with high natural catastrophe exposures 14/06/2018 7 Swiss Re Global Partnerships COMMUNITY COLLAPSE 13 2005 Hurricane Katrina Only half the population returned after a year After a decade, the population was 80% of pre-Katrina population 14 The Economist, June 13, 2015 “Insurance helps entire economies to recover more rapidly” “Insurance helps entire economies to recover more rapidly” 14/06/2018 8 15 Using risk parameters to fund contingent liabilities Using risk parameters to fund contingent liabilities Swiss Re Global Partnerships 16 Loss of business and property tax revenue Overtime expenses for first responders Evacuation and relocation costs Lost revenue from scheduled events including sports activities and tourism Communication and IT infrastructure interruption Compliance audits by FEMA and others can result in return of received funds Unanticipated, unbudgeted disaster expenses 14/06/2018 9 Swiss Re Global Partnerships 17 Uses Independent Data Provider: Shake Intensity from post-event ShakeMap provided by independent 3rd party (USGS). Offers Quick pay out: Pay out in less than 30 days after notification of eligible event. Coverage in Insurance Form: Insured has 12 months post event to determine full extent of financial loss and sign letter attesting to actual financial loss. Offers Flexible Coverage: Payments can be used for immediate emergency needs, business expenses not covered elsewhere, increased supply cost, increased labor cost, delay cost, building damage, etc. Addresses impact at a granular level:The structure reflects the impact of and damage caused by ground shaking at each insured location. The damage is not necessarily determined by distance from epicenter. Deductible: None. Swiss Re QUAKE: Parametric Product Overview The QUAKE parametric uses USGS ShakeMaps to determine the shaking at each individualized location. Swiss Re Global Partnerships 18 WILDFIRE FLOODING SNOWFALL HURRICANE TOURISMPANDEMICAGRICULTURE EARTHQUAKE POWER 14/06/2018 10 Swiss Re Global Partnerships 19 KEY QUESTIONS How long will it take to receive aid? Does your budget have sufficient cushion to account for unanticipated expenses? Will the aid or reserves be sufficient to cover your exposure? Can your economy continue to be competitive during the recovery phase? Swiss Re Global Partnerships 20 14/06/2018 11 Swiss Re Global Partnerships Legal notice 21 ©2018 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation. CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5C June 14, 2018 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Steve Montano, Deputy Finance Director (949) 644-3240, smontano@newportbeachca.gov SUBJECT: FEE STUDY UPDATE SUMMARY: The latest fee study was conducted by the City’s consultant, MGT of America (MGT). Staff recommends changes to the fee schedule for the following departments based on the latest fee study in accordance with the established cost recovery rates: • Fire Department o Marine Operations o Junior Lifeguards o Emergency Medical Services (EMS) • Community Development Department (CDD) o Life Safety Services (LSS) (currently managed by CDD in conjunction with Fire) o Flat fee for the Coastal Development Permit (CDP) • Finance Department - Revenue Division o New fee to recover staff time spent creating payment plans • All Other Departments o Update non-studied fees by the annual increase to the Consumer Price Index (CPI) since the last study Newport Beach Municipal Code (NBMC) Section 3.36, Council Policy F-4 (Revenue Measures) and Item 12 of the Fiscal Sustainability Plan (FSP) provide staff and the City Council with policy guidance related to setting cost recovery targets and updating user fees. NBMC Section 3.36.030 has set the cost recovery for user fees at one hundred percent (100%) with the exception of a small number of fees listed in Exhibit “A” of the NBMC and those limited by statute. Any newly proposed fee or fee increase that is not approved will be absorbed through General Fund subsidy. RECOMMENDED ACTION: Staff welcomes comments and recommendations related to the proposed fee schedule updates. Based upon Finance Committee input, Finance staff will bring the proposed recommendations to the City Council for formal action. Fee Schedule Update June 14, 2018 Page 2 DISCUSSION: Newport Beach Municipal Code (NBMC) Section 3.36, Council Policy F-4 (Revenue Measures) and Item 12 of the Fiscal Sustainability Plan (FSP) provide staff and the City Council with policy guidance related to setting cost recovery targets and updating user fees. User fees, or cost-of-service fees, are charged to a private citizen or group for services performed or provided by a government agency on their behalf. If the service benefits primarily an individual or group of people, then the burden of that cost should be borne by the person receiving the benefit. NBMC Section 3.36.030 sets the cost recovery for user fees at one hundred percent (100%) with the exception of the subsidized fees listed in Exhibit “A” of that same section, as well as those limited by California or Federal statutes. A recommendation for less than a hundred percent (100%) cost recovery rate occurs, for example, when a service is beneficial to the community at large along with specific individuals or groups, and/or when there is an economic incentive, or disincentive, to do so. In these cases the General Fund is essentially subsidizing the service. Any newly proposed fee or fee increase that is not approved will be absorbed through General Fund subsidy. The Schedule of Rents, Fines, and Fees (SRFF) is a customer service document maintained by the Finance Department Revenue Division which contains fees and charges such as, but not limited to, cost-of-services fees, fines and penalties, rents, and other charges imposed by the City or mandated by the State of California. SRFF is available online under the Revenue webpage and is saved with both detailed and summarized versions for public viewing. In order to establish fees on the basis of full cost recovery, it is necessary to determine the cost of services. MGT conducts a comprehensive review and update of the City-wide cost allocation plan and direct user fee calculations for each department on a rotating basis every three to five years. MGT uses well-established cost accounting methodologies to calculate our municipal fees on a full cost recovery basis and contracts with significant number of municipalities in California. This year, MGT studied the following departments: • Fire o Marine Operations o Junior Lifeguards o Emergency Medical Services (EMS) • CDD o LSS (currently managed by CDD in conjunction with Fire) o Flat fee for the Coastal Development Permit (CDP) • Revenue o New fee to provide payment plans Not all fee changes are detailed within the staff report; however, the studied fees can be found in Attachment A. MGT meets with each of the studied departments and discusses the services provided, the annual volume for those services, and the staff and time estimates for working on said services. MGT calculates the department staff’s fully burdened hourly rate, which includes both internal administrative as well as citywide overhead costs. The fully burdened hourly rates are applied to the time estimates provided by staff and the fee is calculated. MGT reviews and cross checks the results to ensure the data is valid and asks each department to review the calculations for accuracy and reasonableness. Based on this review, department staff make a recommendation of either the fee to be fully recovered or to change/introduce a subsidy pursuant to NBMC Section 3.36.030. An example of this process is provided in Attachment B. All NBMC 3.36.030 Exhibit “A” changes can be found in Attachment C. Fee Schedule Update June 14, 2018 Page 3 Below is a summary of how fees are changing: Department Increasing Decreasing No Change New Fees Deleted Totals Fire 14 4 5 4 0 27 CDD 60 8 1 26 37 132 Revenue 0 0 0 3 1 4 TOTAL 74 12 6 33 38 163 PCT of TOTAL 45% 7% 4% 20% 24% 100% Along with the studied fee updates, staff also recommends updating the non-studied department fees by CPI. The last CPI increase approved by Council calculated the change in CPI up through April 2016. In order to update these fees, it is necessary to calculate the change in CPI from April 2016 to April 2018 which results in a total CPI increase of 6.63%. Moving forward, staff is recommending automatic CPI increases which would go into effect July 1st of every year using the April to April CPI calculation beginning July 1, 2019. In June 2016, the Finance Subcommittee recommended that development fees and rental charges for use of City property are updated every three (3) years; and amounts charged by enterprise funds, are updated at least every five (5) years. Staff recommends annual increases for development fees and rental charges in order to minimize the percent increase and fiscal impact to the customer and to maximize the recapture of funds to the City. Fire The Fire Department provides 24-hour protection and response to the City’s residents and visitors. Guided by their standard operating principles “Safety, Service, and Professionalism”, they are engaged in the community, recognized for their exemplary services, and always available to help. The Fire Department is comprised of the following divisions; Marine Operations, Junior Guards, Emergency Medical Services/Fire Operations, and Life Safety Services, some of which are partially funded by cost-of-service fees. The majority of Fire cost-of-service fees were last studied in 2013 with the exception of the EMS fees, which were fully studied and restructured in 2015 and further refined in 2016 to separate out ambulance mileage costs. Marine Operations Marine Operations role is to protect the many beach visitors that enjoy our 6.2 miles of ocean and 2.5 miles of bay beaches. They ensure safety and provide customer service. In most cases, the City does not charge the public for these services. The study updates Lifeguard staff hourly rates as well as the 2 person Rescue Boat. These fees are only charged when lifeguards are requested to provide safety or service for activities that do not qualify for the special event hourly rates, for instance when lifeguard personnel are needed due to a film permit filming on the beach. Junior Guards The Newport Beach Junior Lifeguard Program was established in 1984 and has grown rapidly throughout the years. It is a very popular program with residents and non-residents alike that is focused on educating children about ocean safety. The fee is currently subsidized in order to minimize cost increases and to encourage participation in the program. Staff recommends increasing the recovery rate from 82.1% to 85%, which would increase the fee from $727 to $768, a $41 or 5.64% increase. This increase keeps the fee in line with annual CPI increases, but retains the original intent to minimize substantial increases to the participant. Fee Schedule Update June 14, 2018 Page 4 EMS The EMS division delivers high quality emergency medical care to our community. They provide timely response, evaluation, treatment, and transportation to a local hospital when necessary. Although EMS fees were studied a few years ago, they are being studied again with the rest of the Fire Department so that all Fire related fees will be on the same schedule moving forward. Primary fees within EMS are the fees charged for the Fire Engine and Paramedic Unit responding to 911 calls and evaluating and treating a patient. The fees primarily fall into two categories: Advanced Life Support (ALS) or Basic Life Support (BLS). Overall, the ALS with Transport fee is going down $72 and the BLS with Transport is increasing by $113. Service Name Current Fee Proposed Fee Net Change from Current Fee ALS with Transport $1,617 $1,545 ($72) BLS with Transport $1,403 $1,516 $113 In 2015, Council approved the addition of ALS and BLS Non-transport fees. The belief was that even patients not transported to a local hospital still received care from Fire Department personnel and should be assessed a fee for these services. The fee is heavily subsidized and patients currently pay $400 for an ALS Non-transport and $300 for a BLS Non-transport. Staff recommends that the BLS Non-Transport fee be increased from $300 to $400, the same as the ALS fee. Reporting shows that the amount of time staff spend on a BLS call is negligibly less than an ALS call and the amount of treatment being provided to a BLS patient warrants a higher recapture of our costs. Furthermore, changes in our local deployment model necessitates the addition of a new fee referred to as the First Responder Fee. This fee will allow for the proper billing for medical services provided by our Paramedic Assessment Units (PAU’s), which are Fire Engines staffed with a Paramedic capable of providing ALS treatment, when a Paramedic Unit is not present. Since we currently have five three-person engines staffed with a Paramedic, there can be several treat and no transport cases where the three-person engine shows up and treats a patient and a Paramedic Unit is not necessary. In order to bill these services, participate in future reimbursement opportunities for non-transported patients, and fully recover costs; staff recommends the addition of this fee type. Newport Beach residents and businesses do have the option to participate in the Paramedic Subscription Program to protect themselves and their family, or employees and patrons against potential costs related to an unexpected medical emergency. There are no recommended changes to the Paramedic Subscription Program at this time. CDD Flat Fees In the fall of 2016, CDD converted valuation-based residential construction permits and selected deposit- based planning permits to flat fees. Also in the beginning of 2017, as a post-Local Coastal Program (LCP) Certification requirement, Planning added the Coastal Development Permit to the SRFF. Initially, a deposit Fee Schedule Update June 14, 2018 Page 5 of $2,500 was estimated to cover processing time. This was based on the Minor Site Development Review fee of $2,467. After analyzing a year’s worth of staff time, it was discovered that the CDPs were taking less time to process than initially estimated. Staff proposes a flat fee of $2,129 to cover average staff and noticing costs. As for the other building and planning flat fees, it is determined that more data is needed and will defer until the next comprehensive fee study for CDD. LSS Towards the end of FY16 LSS transitioned from being solely within the Fire Department to being managed by CDD and working in conjunction with Fire. Currently the staff remain under the Fire Department budget with the Chief acting as the Fire Marshall; however, the staff report to the CDD Deputy Director and CDD manages the program. When reviewing the LSS fees CDD attempted to simplify the fees by deleting fees that weren’t being used, combining like fees, and creating a new fee structure, where appropriate, that utilizes a base fee with incremental fees rather than fees that encompass a range. The FY19 budget requests the addition of a Fire Marshall. If the position is approved by Council, the new Fire Marshall will take a look at the fee changes and bring the fees back to Council if any additional changes are warranted. In the interim, staff recommends that operational permits, including state-mandated inspections, only increase 10% over the current fee while all other fees remain at full recovery. This will require a subsidy to be coded into NBMC Section 3.36 Exhibit “A”. Clean Up Currently NBMC Section 3.36.030 Exhibit “A” includes a recovery rate of $33 for the Permit Issuance (Counter Only) Electrical and Plumbing fees. The intention was for the Electrical, Mechanical, and Plumbing Permit Issuance (Counter Only) fees to be the same. When the CPI increase is applied to these three fees the Mechanical fee will go up, while the Electrical and Plumbing fees will stay the same. Staff would like to update Exhibit “A” so all three fees match the Mechanical fee ($35) after CPI is applied. Finance Revenue AB503 was adopted in January of 2018 and goes into effect July 1, 2018. It requires agencies to provide payment plan options for indigent persons and also allows agencies to collect a $5 fee for payment plan processing for indigent persons and $25 for non-indigent persons. The Revenue division has been offering payments plans for citation debt as well as other types of debt. Payment plans require significant staff time to set up and to monitor, at the cost of approximately $80. In addition, for parking citations, our citation processing contractor, Turbo Data Systems (TDS) will monitor payment plans. They have proposed charging the City $10 per plan. Staff recommends establishing the payment plan fee to defray the costs of TDS and staff time. For consistency, staff further recommends establishing a payment plan fee of $25 for all other debt types, which is subsidized at the same amount as the parking citation payment plans. CVC Section 26101(b), Modified Lighting, requires that no person shall use on a vehicle or drive a vehicle on a highway that has a device which modifies the design or performance of lighting, safety glazing material, or other device. The violation is not currently included in the City’s fine schedule. Staff recommends adding it to the Newport Beach Parking Citation Violation Penalty Schedule, previously approved by Council (Resolution No. 2016-94). Staff proposes a $61 fine amount to be consistent with other CVC violations in the fine schedule (effective July 1, 2018 parking fines will increase by CPI resulting in the current $58 fee increasing to $61). Staff recommends removing from the Newport Beach Parking Citation Violation Penalty Schedule Code 11.04.020(B) MC Prohib Park/Stop-Park Lawns. This particular MC does not refer to a violation and the violation noted is covered under 11.04.070(F) MC Parked In Park. Fee Schedule Update June 14, 2018 Page 6 CONCLUSION: If the fees are approved by Council as recommended, staff projects the City will recover an additional $180,000 on an annual basis. This does not account for the CDD fees where the structure changed or for fees where volume statistics were unavailable. Based upon Finance Committee comments and input, Finance staff will bring the proposed recommendations to the City Council for formal action. Any newly proposed fee or fee increase that is not approved will be absorbed through General Fund subsidy. Prepared and Submitted by: /s/ Theresa Schweitzer _____________________________ Theresa Schweitzer Senior Accountant Attachments: A. FY18 Studied Department Changes B. Application of Indirect Costs to the Calculation of Fees for Services C. Municipal Code 3.36.030 Changes ATTACHMENT A FY18 STUDIED DEPARTMENT CHANGES 1 6/8/2018 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date 1 COMMUNITY DEVELOPMENT - BUILDING $1,146,039.00 $59,819.00 60 8 1 25 37 2 Life Safety Services (LSS) - Fire Access Gate 3 Closure Report Review COS-Fee 100% Loaded Hourly $228/hour X 9/22/2018 4 Commercial Battery: Inspection COS-Fee 10 220.00$ see notes $2,200.00 $2,200.00 X New Fixed Fee 2018 9/22/2018 5 Commercial Battery: Plan Review COS-Fee 10 239.00$ see notes $2,390.00 $2,390.00 X New Fixed Fee 2018 9/22/2018 6 Fire Lane Plan Review (Fire Master Plan)COS-Fee 100% Loaded Hourly $228/hour X 9/22/2018 7 Fire, Life Safety Or Special Hazard Consultation COS-Fee 100% Loaded Hourly $228/hour X 9/22/2018 8 In Service Building Public Radio Coverage System Service in Private Structures Pass Thru see notes see notes see notes 1 100% pass through of OC Sheriff-Coroner Communications Division Charge 9/22/2018 9 Inspection COS-Fee 2 145.00$ 151.00$ 6.00$ 4.14%$302.00 $12.00 X 9/22/2018 10 Inspection Tank Installation Or Removal - per tank COS-Fee 335.00$ 407.00$ 72.00$ 21.49%X 9/22/2018 11 Plan Review COS-Fee 2 182.00$ 187.00$ 5.00$ 2.75%$374.00 $10.00 X 9/22/2018 12 Plan Review Tank Installation Or Removal - per tank COS-Fee 442.00$ 342.00$ (100.00)$ -22.62%X 9/22/2018 13 Pre-submittal Review COS-Fee 100% Loaded Hourly $228/hour X 9/22/2018 14 Reinspection or Special Inspection COS-Fee 220.00$ see notes X New Fixed Fee 2018 9/22/2018 15 Technical Assistance of Complex Fire Protection Systems - Plan Review and/or Inspection Services COS-Fee 100% Loaded Hourly $228/hour X 9/22/2018 16 LSS - Fuel Modification New and/or Change to Existing Plan 17 Inspection COS-Fee 118.00$ 127.00$ 9.00$ 7.63%X 9/22/2018 18 Plan Review/Update COS-Fee 131.00$ 136.00$ 5.00$ 3.82%X 9/22/2018 19 LSS - Hazardous Materials Inventory Disclosure Program 20 1-4 Chemicals COS-Fee 132.00$ 141.00$ 9.00$ X Transferred to the County 7/24/2018 21 5-6 Chemicals COS-Fee 154.00$ 165.00$ 11.00$ X Transferred to the County 7/24/2018 22 7-10 Chemicals COS-Fee 168.00$ 179.00$ 11.00$ X Transferred to the County 7/24/2018 23 11-14 Chemicals COS-Fee 217.00$ 231.00$ 14.00$ X Transferred to the County 7/24/2018 24 15-20 Chemicals COS-Fee 270.00$ 288.00$ 18.00$ X Transferred to the County 7/24/2018 25 21-40 Chemicals COS-Fee 324.00$ 345.00$ 21.00$ X Transferred to the County 7/24/2018 26 More Than 40 Chemicals COS-Fee 435.00$ 464.00$ 29.00$ X Transferred to the County 7/24/2018 27 LSS - Inspection 28 All Assembly (A), Factory (F) < or equal to 1500 3,000 square feet (also used for Business (B),Mercantile (M), and Storage (S) occupancies COS-Fee 25 335.00$ 314.00$ (21.00)$ -6.27%$7,850.00 ($525.00)X 9/22/2018 29 All Assembly (A), Factory (F) > 1,500 3,000 < or equal to 10,000 square feet aggregate (also used for Business (B),Mercantile (M), and COS-Fee 4 417.00$ 407.00$ (10.00)$ -2.40%$1,628.00 ($40.00)X 9/22/2018 30 All Assembly (A), Factory (F)>10,000 s.f. aggregate (also used for Business (B),Mercantile (M), and Storage (S) occupancies when COS-Fee 580.00$ 594.00$ 14.00$ 2.41%X 9/22/2018 31 Day Care Educational (E) or Institutional Day Care (I-4) < 1,000 square feet aggregate or Day Care Educational (E) or 1-4: Portable or re-COS-Fee 212.00$ 227.00$ 15.00$ X 9/22/2018 Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 2 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 32 Day Care Educational (E) or Institutional Day Care (I-4) > 1,000 square feet aggregate COS-Fee 1 308.00$ 430.00$ 122.00$ 39.61%$430.00 $122.00 X 9/22/2018 33 Educational other than day care COS-Fee 308.00$ 430.00$ 122.00$ 39.61%X 9/22/2018 34 High-Hazard Groups H1, H2, H3, H4, or Laboratory ( L) (Chemical Classification Technical Report Review fee also required)COS-Fee 1 417.00$ 501.00$ 84.00$ 20.14%$501.00 $84.00 X 9/22/2018 35 Hi-Rise: Structures that are 75 ft. or higher measured from lowest point of fire department access COS-Fee 1,395.00$ 1,549.00$ 154.00$ 11.04%X 9/22/2018 36 Misc. Inspection including elevators, elevator lobbies, generators, canopies, awnings COS-Fee 100% Loaded Hourly $209/hour X 9/22/2018 37 Residential R1 or Residential R2: Hotels, motels, apartments, condominiums with < or equal to 20 dwelling units per building COS-Fee N/A 335.00$ 357.00$ 22.00$ X 9/22/2018 38 Residential R1 or Residential R2: Hotels, motels, apartments, condominiums with 21- 50 dwelling units per building COS-Fee N/A 444.00$ 474.00$ 30.00$ X 9/22/2018 39 Residential R1 or Residential R2: Hotels, motels, apartments, condominiums with 51 to 150 dwelling units per building COS-Fee N/A 580.00$ 619.00$ 39.00$ X 9/22/2018 40 Residential R1 or R2: Hotels, motels, apartments, condominiums (Base Fee)COS-Fee 3 333.00$ see notes $999.00 X New Fixed Fee 2018 9/22/2018 41 Residential R1 or R2: Hotels, motels, apartments, condominiums (Per Unit, Per Building)COS-Fee 463 9.00$ see notes $4,167.00 X New Per Unit Fee 2018 9/22/2018 42 Residential R4: licensed residential care/assisted living facilities and similar uses serving >19 clients COS-Fee 1 634.00$ 733.00$ 99.00$ 15.62%$733.00 $99.00 X 9/22/2018 43 Residential R4: licensed residential care/assisted living facilities and similar uses serving 7-19 clients COS-Fee 1 417.00$ 501.00$ 84.00$ 20.14%$501.00 $84.00 X 9/22/2018 44 LSS - Inspection Fire Alarm Systems 45 Fire alarm system: >60 devices COS-Fee N/A 417.00$ 445.00$ 28.00$ X 9/22/2018 46 Fire alarm system: 11-60 devices COS-Fee N/A 212.00$ 227.00$ 15.00$ X 9/22/2018 47 Fire alarm system: Base Fee COS-Fee 81 220.00$ see notes $17,820.00 X New Fixed Fee 2018 9/22/2018 48 Fire alarm system: Per Device COS-Fee 1682 3.00$ see notes $5,046.00 X New Per Device Fee 2018 9/22/2018 49 LSS - Inspection Fixed Fire Extinguishing Systems 50 Commercial fire sprinkler system (NFPA 13): 100 heads or less per system COS-Fee N/A 308.00$ 329.00$ 21.00$ X 9/22/2018 51 Commercial fire sprinkler system (NFPA 13): > 100 heads per system COS-Fee N/A 362.00$ 386.00$ 24.00$ X 9/22/2018 52 Commercial fire sprinkler system (NFPA 13): each additional identical system or per floor in buildings >3 stories COS-Fee N/A 362.00$ 386.00$ 24.00$ X 9/22/2018 53 Commercial fire sprinkler system (NFPA 13): Base per head With 1 Riser COS-Fee 2 220.00$ see notes $440.00 X New Fixed Fee 2018 9/22/2018 54 Commercial fire sprinkler system (NFPA 13) : each add'l head COS-Fee 1755 3.00$ see notes $5,265.00 X New Per Head Fee 2018 9/22/2018 55 Each Additional Commercial Riser COS-Fee 5 116.00$ see notes $580.00 $580.00 X New Per Riser Fee 2018 9/22/2018 56 Fire pump installation COS-Fee 362.00$ 407.00$ 45.00$ 12.43%X 9/22/2018 57 Fire sprinkler monitoring system, water flow & tamper switches, < 11 notification devices COS-Fee 172.00$ 267.00$ 95.00$ 55.23%X 9/22/2018 58 Multi-family dwelling residential fire sprinkler system (NFPA 13R): >16 units per building COS-Fee N/A 525.00$ 560.00$ 35.00$ X 9/22/2018 59 Multi-family dwelling residential fire sprinkler system (NFPA 13R): 3 to 16 units per building COS-Fee N/A 417.00$ 445.00$ 28.00$ X 9/22/2018 60 Multi-family dwelling residential fire sprinkler system (NFPA 13R) (Base Fee)COS-Fee 2 220.00$ see notes $440.00 X New Fixed Fee 2018 9/22/2018 61 Multi-family dwelling residential fire sprinkler system (NFPA 13R) (per unit)COS-Fee 9000 3.00$ see notes $27,000.00 X New Per Unit Fee 2018 9/22/2018 62 Standpipes : NFPA 14 Class I, II or III and includes all standpipes within a single building or boat dock COS-Fee 417.00$ 501.00$ 84.00$ 20.14%X 9/22/2018 3 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 63 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: 21-100 heads, no calculations COS-Fee N/A 308.00$ 329.00$ 21.00$ X 9/22/2018 64 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: >100 heads or requiring calculations COS-Fee N/A 362.00$ 386.00$ 24.00$ X 9/22/2018 65 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: 4-20 heads COS-Fee N/A 212.00$ 227.00$ 15.00$ X 9/22/2018 66 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: base fee COS-Fee 133 173.00$ see notes $23,009.00 X New Fixed Fee 2018 9/22/2018 67 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: per head COS-Fee 3487 3.00$ see notes $10,461.00 X New Per Head Fee 2018 9/22/2018 68 Underground fire protection - New COS-Fee 362.00$ 407.00$ 45.00$ 12.43%X 9/22/2018 69 Underground fire protection - Repair COS-Fee 212.00$ 314.00$ 102.00$ 48.11%X 9/22/2018 70 LSS - Inspection Special Fire Protection Equipment 71 Commercial Cooking Hood and Duct (per system)COS-Fee 20 199.00$ 220.00$ 21.00$ 10.55%$4,400.00 $420.00 X 9/22/2018 72 Pre-action fire sprinkler system, includes alarm system COS-Fee 10 254.00$ 267.00$ 13.00$ 5.12%$2,670.00 $130.00 X 9/22/2018 73 Special extinguishing system: dry chemical, CO2, foam liquid system, inert gas (Halon, Inergen, etc.)COS-Fee 10 185.00$ 220.00$ 35.00$ 18.92%$2,200.00 $350.00 X 9/22/2018 74 Spray Booth, Spraying area COS-Fee 444.00$ 407.00$ (37.00)$ -8.33%X 9/22/2018 75 LSS - Operational and Special Event Permits 76 Candle Permit Program COS-Fee 20 47.00$ 51.00$ 4.00$ 8.51%$1,020.00 $80.00 X 76% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $67.23)9/13/2018 77 Nuisance Abatement Service COS-Fee 100% Loaded Hourly $209/hour X Actual costs: pass through contract costs plus staff time.7/24/2018 78 Operational Permits - Level 1 New or Renewal COS-Fee 176 145.00$ 159.00$ 14.00$ 9.66%$27,984.00 X 40% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $398.39)9/13/2018 79 Operational Permits - Level 2 New or Renewal COS-Fee 1132 268.00$ 294.00$ 26.00$ 9.70%$332,808.00 X 38.1% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $772.02)9/13/2018 80 Operational Permits - Renewal COS-Fee N/A 118.00$ 126.00$ 8.00$ X 7/24/2018 81 Operational Permits - Renewal COS-Fee N/A 199.00$ 212.00$ 13.00$ X 7/24/2018 82 Special Event Permits - single event permit COS-Fee 243 145.00$ 159.00$ 14.00$ 9.66%$38,637.00 $3,402.00 X 88% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $180.62)9/13/2018 83 Special Event Permits - Level III as defined by the Recreation Department COS-Fee 100% Loaded Hourly $209/hour X 7/24/2018 84 Special Event Permits - public display - Fireworks - ground display only COS-Fee 295.00$ 352.00$ 57.00$ 19.32%X 7/24/2018 85 Special Event Permits - Public display - Fireworks - aerial display >10 min COS-Fee 3 808.00$ 920.00$ 112.00$ 13.86%$2,760.00 $336.00 X 7/24/2018 86 Temporary Change Of Use COS-Fee 100% Loaded Hourly $228/hour X 7/24/2018 87 Weekend, Holiday, or Non Contiguous & After Hours Inspection Request COS-Fee 100% Loaded Hourly $209/hour X 7/24/2018 88 LSS - Plan Review 89 All Assembly (A), Factory (F) < or equal to 3000 square feet (also used for Business (B), Mercantile (M), and Storage (S) occupancies when required) 2016 CBC COS-Fee 25 528.00$ 547.00$ 19.00$ 3.60%$13,675.00 $475.00 X 9/22/2018 90 All Assembly (A), Factory (F) > 3,000 < or equal to 10,000 square feet aggregate (also used for Business (B), Mercantile (M), and Storage (S) COS-Fee 4 701.00$ 718.00$ 17.00$ 2.43%$2,872.00 $68.00 X 9/22/2018 91 All Assembly (A), Factory (F)>10,000 s.f. aggregate (also used for Business (B), Mercantile (M), and Storage (S) occupancies when required)COS-Fee 1,048.00$ 901.00$ (147.00)$ -14.03%X 9/22/2018 4 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 92 Day Care Educational (E) or Institutional Day Care (I-4) < 1,000 square feet aggregate or Day Care Educational (E) or 1-4: Portable or re-COS-Fee N/A 182.00$ 194.00$ 12.00$ X 9/22/2018 93 Day Care Educational (E) or Institutional Day Care (I-4) > 1,000 square feet aggregate COS-Fee N/A 585.00$ 624.00$ 39.00$ X 9/22/2018 94 Daycare Educational € or Institutional Daycare (I-4)COS-Fee 1 444.00$ see notes $444.00 X New Fixed Fee 2018 9/22/2018 95 Educational other than day care COS-Fee 528.00$ 547.00$ 19.00$ 3.60%X 9/22/2018 96 High-Hazard Groups H1, H2, H3, H4, or Laboratory ( L) (Chemical Classification Technical Report Review fee also required)COS-Fee 1 1,422.00$ 1,514.00$ 92.00$ 6.47%$1,514.00 $92.00 X 9/22/2018 97 Hi-Rise: Structures that are 75 ft. or higher measured from lowest point of fire department access COS-Fee 3,470.00$ 3,570.00$ 100.00$ 2.88%X 9/22/2018 98 Misc. Plan Review including elevators, elevator lobbies, generators, canopies, awnings COS-Fee 100% Loaded Hourly $228/hour X 9/22/2018 99 Residential R1 or Residential R2: Hotels, motels, apartments, condominiums with < or equal to 20 dwelling units per building COS-Fee N/A 269.00$ 286.00$ 17.00$ X 9/22/2018 100 Residential R1 or Residential R2: Hotels, motels, apartments, condominiums with 21- 50 dwelling units per building COS-Fee N/A 355.00$ 378.00$ 23.00$ X 9/22/2018 101 Residential R1 or Residential R2: Hotels, motels, apartments, condominiums with 51 to 150 dwelling units per building COS-Fee N/A 528.00$ 563.00$ 35.00$ X 9/22/2018 102 Residential R1 or R2: Hotels, motels, apartments, condominiums (Base Fee)COS-Fee 3 232.00$ see notes $696.00 X New Fixed Fee 2018 9/22/2018 103 Residential R1 or R2: Hotels, motels, apartments, condominiums (Per Unit, Per Building)COS-Fee 463 8.00$ see notes $3,704.00 X New Per Unit Fee 2018 9/22/2018 104 Residential R4: licensed residential care/assisted living facilities and similar uses serving >19 clients COS-Fee 1 1,566.00$ 1,514.00$ (52.00)$ -3.32%$1,514.00 ($52.00)X 9/22/2018 105 Residential R4: licensed residential care/assisted living facilities and similar uses serving 7-19 clients COS-Fee 1 874.00$ 900.00$ 26.00$ 2.97%$900.00 $26.00 X 9/22/2018 106 LSS - Plan Review Fire Alarm Systems 107 Fire alarm system: >60 devices COS-Fee N/A 701.00$ 747.00$ 46.00$ X 9/22/2018 108 Fire alarm system: 11-60 devices COS-Fee N/A 442.00$ 471.00$ 29.00$ X 9/22/2018 109 Fire alarm system: Base Fee COS-Fee 81 187.00$ see notes $15,147.00 X New Fixed Fee 2018 9/22/2018 110 Fire alarm system: Per Device COS-Fee 1682 2.00$ see notes $3,364.00 X New Per Device Fee 2018 9/22/2018 111 LSS - Plan Review Fixed Fire Extinguishing Systems 112 Commercial fire sprinkler system (NFPA 13): 100 heads or less per system COS-Fee N/A 355.00$ 378.00$ 23.00$ X 9/22/2018 113 Commercial fire sprinkler system (NFPA 13): > 100 heads per system COS-Fee N/A 701.00$ 747.00$ 46.00$ X 9/22/2018 114 Commercial fire sprinkler system (NFPA 13): Base Fee COS-Fee 10 187.00$ see notes $1,870.00 X New Fixed Fee 2018 9/22/2018 115 Commercial fire sprinkler system (NFPA 13) : each add'l head COS-Fee 1755 3.00$ see notes $5,265.00 X New Per Head Fee 2018 9/22/2018 116 Fire pump installation COS-Fee 355.00$ 444.00$ 89.00$ 25.07%X 9/22/2018 117 Fire sprinkler monitoring system, water flow & tamper switches, < 11 notification devices COS-Fee 139.00$ 165.00$ 26.00$ 18.71%X 9/22/2018 118 Multi-family dwelling residential fire sprinkler system (NFPA 13R): >16 units per building COS-Fee N/A 442.00$ 471.00$ 29.00$ X 9/22/2018 119 Multi-family dwelling residential fire sprinkler system (NFPA 13R): 3 to 16 units per building COS-Fee N/A 298.00$ 317.00$ 19.00$ X 9/22/2018 120 Multi-family dwelling residential fire sprinkler system (NFPA 13R) (Base Fee)COS-Fee 187.00$ see notes X New Fixed Fee 2018 9/22/2018 121 Multi-family dwelling residential fire sprinkler system (NFPA 13R) (per unit)COS-Fee 3.00$ see notes X New Per Unit Fee 2018 9/22/2018 5 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 122 Standpipes : NFPA 14 Class I, II or III and includes all standpipes within a single building or boat dock COS-Fee 327.00$ 444.00$ 117.00$ 35.78%X 9/22/2018 123 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: >100 heads or requiring calculations COS-Fee N/A 355.00$ 378.00$ 23.00$ X 9/22/2018 124 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: 21-100 heads, no calculations COS-Fee N/A 182.00$ 194.00$ 12.00$ X 9/22/2018 125 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: 4-20 heads COS-Fee N/A 139.00$ 148.00$ 9.00$ X 9/22/2018 126 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: base fee COS-Fee 133 136.00$ see notes $18,088.00 X New Fixed Fee 2018 9/22/2018 127 Tenant Improvement (TI) NFPA 13 or 13R fire sprinkler system: per head COS-Fee 3487 2.00$ see notes $6,974.00 X New Per Head Fee 2018 9/22/2018 128 Underground fire protection - New COS-Fee 355.00$ 376.00$ 21.00$ 5.92%X 9/22/2018 129 Underground fire protection - Repair COS-Fee 139.00$ 187.00$ 48.00$ 34.53%X 9/22/2018 130 LSS - Plan Review Special Fire Protection Equipment 131 Commercial Cooking Hood and Duct (per system)COS-Fee 20 124.00$ 136.00$ 12.00$ 9.68%$2,720.00 $240.00 X 9/22/2018 132 Pre-action fire sprinkler system, includes alarm system COS-Fee 10 442.00$ 547.00$ 105.00$ 23.76%$5,470.00 $1,050.00 X 9/22/2018 133 Special extinguishing system: dry chemical, CO2, foam liquid system, inert gas (Halon, Inergen, etc.)COS-Fee 10 298.00$ 290.00$ (8.00)$ -2.68%$2,900.00 ($80.00)X 9/22/2018 134 Spray Booth, Spraying area COS-Fee 585.00$ 547.00$ (38.00)$ -6.50%X 9/22/2018 135 LSS - State Mandated Inspections (Annual Fees) 136 Care Facilities: 7-99 clients as defined in CBC COS-Fee 125 349.00$ 383.00$ 34.00$ 9.74%$47,875.00 $4,250.00 X 36% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $1,062.61)9/13/2018 137 Care Facilities: >99 clients as defined in CBC COS-Fee 160 444.00$ 488.00$ 44.00$ 9.91%$78,080.00 $7,040.00 X 40.8% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $1,197.36)9/13/2018 138 Commercial Day Care Facilities COS-Fee 70 199.00$ 218.00$ 19.00$ 9.55%$15,260.00 $1,330.00 X 36% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $605.96)9/13/2018 139 High Rise Buildings COS-Fee 1,001.00$ 1,101.00$ 100.00$ 9.99%X 96% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $1,249.63)9/13/2018 140 Hospitals COS-Fee 50 6,752.00$ 7,427.00$ 675.00$ 10.00%$371,350.00 $33,750.00 X 95% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $7,791.29)9/13/2018 141 Hotels/Motels 50-299 Rooms COS-Fee 70 199.00$ 218.00$ 19.00$ 9.55%$15,260.00 $1,330.00 X 36% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $605.96)9/13/2018 142 Hotels/Motels 300 or more rooms COS-Fee 349.00$ 383.00$ 34.00$ 9.74%X 92.4% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $414.39)9/13/2018 143 Residential Care Facility Pre-License Inspection COS-Fee 254.00$ 279.00$ 25.00$ 9.84%X 96% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $291.70)9/13/2018 144 State Fire Clearance COS-Fee 28 77.00$ 84.00$ 7.00$ 9.09%$2,352.00 $196.00 X 82% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $102.69)9/13/2018 145 Surgery Centers COS-Fee 10 376.00$ 413.00$ 37.00$ 9.84%$4,130.00 $370.00 X 93% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $445.56)9/13/2018 146 COMMUNITY DEVELOPMENT - PLANNING $195,868.00 $44,068.61 1 147 Coastal Development Permit (CDP) - Stand Alone COS-Fee 92 $198/hour 2,129.00$ N/A $195,868.00 $44,068.61 X New flat fee 2018, Used when only a CDP is needed for a project 9/22/2018 148 FINANCE $750.00 $750.00 3 1 149 Revenue 150 Payment Plan (except Parking)COS-Fee 30 25.00$ 25.00$ $750.00 $750.00 X New Fee 2018 $25 Recovery per M.C. 3.36.030 Exhibit A (Full Cost $80)9/13/2018 151 Payment Plan (Parking)COS-Fee $5 Indigent / $25 All Other $5 Indigent / $25 All Other X New Fee 2018 $5 Indigent / $25 All Other Recovery per CVC 40220(a)(1)(A)(i)(III) (Full Cost $90)7/24/2018 152 Parking Penalties 6 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 153 11.04.020(B) MC PROHIB PARK/STOP-PARK LAWNS Delete 2018 Duplicate Penalty 44.00$ 44.00$ -$ X Updated by CPI every July, per Resolution 9/8/2016 154 26101(b) MODIFIED LIGHTING Penalty 61.00$ 61.00$ X New Parking Penalty 2018 Updated by CPI every July, per Resolution 7/24/2018 155 FIRE DEPARTMENT & LIFEGUARDS $5,425,484.85 $77,206.64 14 4 5 4 0 156 Emergency Medical Services 157 Advanced Life Support (ALS)COS-Fee 3219 1,385.00$ 1,144.00$ (241.00)$ -17.40%$2,137,543.22 ($121,599.64)X 7/24/2018 158 Basic Life Support (BLS)COS-Fee 2530 1,171.00$ 1,115.00$ (56.00)$ -4.78%$1,634,077.87 $104,901.18 X 7/24/2018 159 Emergency Ambulance Transportation COS-Fee 5749 232.00$ 401.00$ 169.00$ 72.84%Included in Above Included in Above X 7/24/2018 160 Advanced Life Support Non-Transport COS-Fee 250 400.00$ 400.00$ -$ 0.00%$44,231.67 ($127.47)X $400 Recovery per M.C. 3.36.030 Exhibit A (Full Cost $1,144.14)7/24/2018 161 Basic Life Support Non-Transport COS-Fee 444 300.00$ 400.00$ 100.00$ 33.33%$78,634.09 $19,488.57 X $400 Recovery per M.C. 3.36.030 Exhibit A (Full Cost $1,115.77)9/13/2018 162 Emergency Ambulance Transportation Mileage Charge COS-Fee 22536 11.56$ 10.09$ (1.47)$ -12.72%$172,518.00 ($10,601.00)X 7/24/2018 163 ALS First Responder Fee COS-Fee 90 -$ 400.00$ $10,800.00 $10,800.00 X New fee 2018 $400 Recovery per M.C. 3.36.030 Exhibit A Est 30% collection rate per Wittman (Full Cost $671.34)9/13/2018 164 BLS First Responder Fee COS-Fee 160 -$ 400.00$ $19,200.00 $19,200.00 X New fee 2018 $400 Recovery per M.C. 3.36.030 Exhibit A Est 30% collection rate per Wittman (Full Cost $652.37)9/13/2018 165 Paramedic Subscription Service - Resident Annual Fee Program 60.00$ 60.00$ -$ 0.00%X 9/22/2015 166 Paramedic Subscription Service - Business +10 employees Annual Fee Program 60.00$ 60.00$ -$ 0.00%X 9/22/2015 167 Paramedic Subscription Service - Business, each add'l 10 employees Annual Fee Program 44 25.00$ 25.00$ -$ 0.00%$1,100.00 $0.00 X Maximum $410 (includes Annual Fee)9/22/2015 168 Fire Safety Services - Hourly Rates 169 Battalion Chief Unit (one person)COS-Fee 269.00$ 408.00$ 139.00$ 51.67%X 7/24/2018 170 Fire Engine (three persons)COS-Fee 598.00$ 809.00$ 211.00$ 35.28%X 7/24/2018 171 Fire Truck (four persons)COS-Fee 738.00$ 1,026.00$ 288.00$ 39.02%X 7/24/2018 172 Firefighter (per person)COS-Fee 140.00$ 149.00$ 9.00$ 6.43%X 7/24/2018 173 Life Safety Specialist II COS-Fee 163.00$ 187.00$ 24.00$ 14.72%X 7/24/2018 174 Life Safety Specialist III COS-Fee 163.00$ 205.00$ 42.00$ 25.77%X New to SRFF 2018 7/24/2018 175 Lifeguard Battalion Chief COS-Fee 213.00$ 249.00$ 36.00$ 16.90%X 7/24/2018 176 Lifeguard Captain COS-Fee 167.00$ 183.00$ 16.00$ 9.58%X 7/24/2018 177 Lifeguard I COS-Fee 46.00$ 60.00$ 14.00$ 30.43%X 7/24/2018 178 Lifeguard II / III COS-Fee 51.00$ 67.00$ 16.00$ 31.37%X 7/24/2018 179 Lifeguard Officer COS-Fee 143.00$ 77.00$ (66.00)$ -46.15%X 7/24/2018 180 Paramedic Assessment Unit (PAU) Engine COS-Fee -$ 875.00$ X New fee 2018 181 Paramedic Unit (two persons)COS-Fee 393.00$ 567.00$ 174.00$ 44.27%X 7/24/2018 182 Rescue Boat (two persons)COS-Fee 182.00$ 239.00$ 57.00$ 31.32%X 7/24/2018 183 Junior Guards Program 4857 $291,420.00 $0.00 7 A B C D E F G H I J K L M N O P SERVICE NAME Type Volume Rounded down to nearest dollar Fee at Policy Level Current to Proposed % Increase /Decrease Total Annual Increase/ Decrease Increase Decrease No Change New Fee Deleted Notes Implementation Date Attachment A: FY18 Studied Department Changes Proposed Fee 2018 adjustments Current Fee 2016 Adjustment From PY Revenue 184 Junior Guard - Administrative Fee COS-Fee Punitive 15 200.00$ 200.00$ -$ 0.00%$3,000.00 $0.00 X 7/24/2018 185 Junior Guard - Per Participant COS-Fee 1345 727.00$ 768.00$ 41.00$ 5.64%$1,032,960.00 $55,145.00 X 85% Recovery per M.C. 3.36.030 Exhibit A (Full Cost $904.05)9/13/2018 ATTACHMENT B APPLICATION OF INDIRECT COSTS TO THE CALCULATION OF FEES FOR SERVICES 1 Attachment B: Application of Indirect Costs to the Calculation of Fees for Services The purpose of this exhibit is to provide a detailed explanation of the methodology used by the City of Newport Beach to incorporate indirect overhead costs in the development of the municipal fee schedule. The nature of indirect overhead costs will also be described. A Community Development Department (CDD) Life Safety Services (LSS) Special Event Permits - Public Display - Fireworks Aerial Display Fee (Fee) facilitates the explanation. The 4th of July and Boat Parade are wonderful opportunities for people to enjoy spectacular fireworks shows right here in our own community. An incredible amount of time and energy goes into planning, preparing, inspecting, and ensuring that these events go smoothly. Safety is paramount. The permit application submitted to LSS must include proof of liability insurance, State Fire Marshal licenses, and a list of persons working the shoot. The LSS Specialists reviews the packet and provides a list of “Conditions” to the applicant to follow upon approval. The day of the shoot, the LSS Specialist does an onsite inspection in the morning, afternoon, and evening to ensure all safety requirements are met and verifies the pyrotechnician has their license and double checks its validity. The LSS Specialist is present during the show and after checking for possible fires, extinguishing fires should they occur, stopping the show at any time if necessary, and ensuring that all debris is cleaned up. The following steps demonstrate how the Fee is derived. Step 1: Calculate Hourly Staffing Rates and Burdened Factors The first step is to determine the hourly rates of staff providing the services associated with the fee. Table 1 below provides the hourly salary and benefit rates plus the hourly burden factors for the staff that are responsible for performing this task within CDD. Indirect overhead costs or “burdened factors” are costs that are not directly accountable to the expenses incurred for a user fee service, but are necessary and contribute to the total cost of that service delivery, i.e. - managerial administration, utilities, insurance, legal, information technology, payroll, and finance, which are all valid components to the analysis of what it costs the City to provide municipal services. Table 1- Hourly Rates for Salary, Benefit and Overhead Factors Salary and Benefits Burdened Factors Total Burdened Rate Hourly Rate Hourly Rate Life Safety Specialist II $95.45 + $91.57 = $187.02 CDD Permit Tech $58.15 + $75.95 = $134.10 Deputy CDD Director $137.99 + $132.39 = $270.39 The City’s cost allocation plan consultant uses the Federal Office of Management and Budget (OMB) Super Circular 2 CFR Part 200 as a guideline to determine the allowable burdened, or indirect, cost elements. The Super Circular is a document that state and local governments use to identify allowable indirect costs when applying for reimbursement of cost from state or federal 2 programs. Although the calculation of user fee services is not specific to applying for reimbursement from any state or federal program, the underlying methodology of identifying costs is much the same. The relevant sections of the Super Circular that specify how direct and indirect costs shall be applied to the calculation of the Fee follows below. Composition of Cost Direct Costs 1. General. Direct costs are those that can be identified specifically with a particular final cost objective. 2. Application. Typical direct costs include: a) Compensation of employees for the time devoted and identified specifically to the performance of the operation. b) Cost of materials acquired, consumed, or expended specifically for the purpose of fulfilling the mission of the operation. c) Equipment and other approved capital expenditures.1 d) Travel expenses incurred specifically to carry out the operation. Using the personnel identified in Table 1, the direct costs are found on line 1.1 (total salary and benefits on an hourly basis) in Table 1a below. Table 1a 1 Includes maintenance and/or depreciation expense only, not equipment purchases, which are capitalized over a number of years. Life Safety Specialist II CDD Permit Tech Deputy CDD Director 198,527$ 120,953$ 287,027$ 1.Calculate hourly salary & benefits 1.1 Divide annual cost by 2,080 hrs $95.45 $58.15 $137.99 Total Salary and Benefits CDD $95.45 $58.15 $137.99 2.Indirect Overhead LSS Building 2.1 Compensated Absences 13.4%13.4%$12.79 $7.79 $18.49 (vacation, sick leave) 2.2 General Administration 20.8%22.9%$19.84 $13.30 $28.69 (supervision, support services) 2.3 Operating Expense 32.7%27.2%$31.21 $15.83 $45.12 (training, supplies, maint & repair) 2.4 Citywide Overhead 29.1%67.1%$27.73 $39.02 $40.09 (Finance, City Manager, Human Resources) Total Indirect Overhead 95.9%130.6%$91.57 $75.94 $132.39 Total Burdened Rate:$187.02 $134.10 $270.39 Fully Burdened Hourly Rates Annual Salary & Benefits: 3 Indirect Costs 1. General. Indirect costs are those: (a) incurred for a common or joint purpose benefiting more than one cost objective, and (b) not readily assignable to the cost objectives specifically benefitted. The term “indirect costs,” as used herein, applies to costs of this type originating from staff within LSS and CDD Building, their operating expenditures and administration support, as well as those incurred by administrative departments in supplying goods, services, and facilities. The cost of service analysis includes four types of indirect overhead categories or “cost pools” consisting of compensated absences, general administration, operating expenses, and citywide overhead. a) Compensated Absences – The compensated absences cost pool is used to account for employees' time off with pay for vacations and sick days. The City is obligated to pay for these days off and is required by the matching principle to record the expense when the employees are working, since the benefits are a part of the employees' compensation. It is estimated that 280 out of 2,080 total available hours per year per full-time equivalent (FTE) are taken as compensated absences. This translates into a 13.4% burden factor applied to the hourly salary and benefit rate as indicated on line 2.1 in Table 1a above. b) General Administration – The general administration cost pool includes the cost of staff time spent on such activities as budget planning and staffing allocations; public counter and telephone time, meetings, and training and education. The wages of management staff and the workers engaged in administration and support activities are considered an indirect labor cost. It is calculated that 20.8% of LSS and 22.9% of CDD Building’s overall workload is spent on this general administrative function as indicated on line 2.2 in Table 1a above. c) Operating Expenditures – The operating expenditure cost pool consists largely of Internal Service Fund (ISF) charges to the divisions on a cost reimbursement basis. The City’s internal service funds are used to allocate the cost of providing general liability insurance and workers’ compensation; maintaining and replacing the City’s rolling stock fleet; and the cost of maintaining and replacing the City’s computers, printers, copiers, and telecommunication services. This cost pool also includes other general operating expenses such as publications, supplies, and training. The operating expenditure burden factor of 32.7% for LSS and 27.2% for CDD Building as indicated on line 2.3 in Table 1a above is calculated by comparing the total cost of (allowable indirect) operating expenditures to the total (allowable direct) labor pool. d) Citywide Overhead - The Cost Allocation Plan (CAP) distributes the costs of City departments that serve a central service function supporting LSS and CDD Building operations. These “Central Service Departments/Divisions” include: City Council, City Clerk, City Manager, Finance & Treasury Financial Planning, and Financial Reporting, as well as Human Resources Risk Management. The citywide overhead burden factor of 29.1% for LSS and 67.1% of CDD Building is calculated by comparing the total cost of LSS and CDD Building’s share of citywide overhead to the total (allowable direct) labor pool (see line 2.4 in Table 1a above). Step 2: Calculate Time Spent on the Service The second step is to calculate the time spent on the service. The task and time in minutes estimated to complete the task is captured in Table 2 below. 4 Table 2: Task Description & Time Estimates in minutes Review application, conduct inspections morning, afternoon, and evening day of event Schedule and Verify Code Compliance Process and File Permit Life Safety Specialist II 280 minutes CDD Permit Tech 1 minute Deputy CDD Director 10 minutes Step 3: Calculate the Cost to Provide the Service The third and final step is to calculate the cost to provide the service by converting the total minutes to hours per unit (or staff person). The product of the hourly rate calculation times the time spent yields the cost of providing the service (see Table 3 below). Table 3 – Fee is Product of Times and Rates Summary The purpose of a CAP is to accurately, fairly, and reasonably distribute the City’s central administrative costs to the operating departments in the City. The development of a CAP follows a series of general guidelines and principles, which originate from federal guidelines established in OMB Super Circular. These principles ensure that allocated costs are necessary and reasonable to the operation of the government. A cost analysis study is almost entirely reliant upon the data provided by the City. Since all study components are interrelated, bad data at any step in the process will cause the ultimate results to be flawed. To avoid accuracy problems and other quality flaws, the study included a series of quality control measures including reasonableness tests and validation; balance and cross checks; and internal City review. Finally it should be noted that private businesses typically add a layer of profit margin to their cost analysis, public agencies are not allowed to do so. Total Fully Total Cost Total Hours per Burdened to Provide Minutes Unit Hourly Rates the Service Life Safety Specialist II 280.00 4.67 $187.02 $872.75 CDD Permit Tech 1.00 0.02 $134.10 $2.23 Deputy CDD Director 10.00 0.17 $270.39 $45.06 $920.05 Proposed Fee $920.00 =X ATTACHMENT C MUNICIPAL CODE 3.36.030 CHANGES Attachment C: Municipal Code 3.36.030 Changes 3.36.030 Cost Recovery Percentages. A. The municipal functions the City Council has determined to be user services and for which the City Council has initially determined the actual costs and the appropriate cost recovery percentage are described in the fee resolution. The cost recovery percentage appropriate for each user service shall be one hundred (100) percent with the exception of the user services listed in Exhibit “A” and those services for which the fee is limited by statute. The City Council may include in the fee resolution a schedule to phase in specific fee increases over a period not to exceed four years. B. The City Council shall establish, pursuant to the fee resolution, the actual fee or charge for each user service described in the fee resolution. The fee or charge shall be based upon the actual cost of providing the user service, multiplied by the relevant cost recovery percentage. C. The City Council may, without amending this chapter, modify (increase or decrease) the fee resolution to amend the amount of any fee or charge for, and the actual cost of providing, any user service upon a determination that there has been an increase or decrease in one or more of the cost factors relevant to the calculation of the actual cost of providing that service. D. The City Council may modify the municipal functions determined to be user services in the fee resolution and the cost recovery percentage for any service only by amending this chapter. E. Fees for service established in the fee resolution may be waived by the City Council. The City Manager may waive fees imposed on nonprofit organizations for nonprofit sponsored events in an amount not to exceed one thousand dollars ($1,000.00) per year. Exhibit A The City’s cost of providing the following services shall be recovered through direct fees charged for services. Exhibit “A” limits cost recovery fees to the percentages or dollar amounts indicated below. Attachment C: Municipal Code 3.36.030 Changes Service Percentage of Cost or Amount to Be Recovered from Direct Fees Community Development Building Appeals Board Hearing 50% Harbor Construction 50% Permit Issuance (Counter Only) Electrical, Plumbing $3335 Preliminary Plan Review First Two Hours Free, Full Cost Thereafter Life Safety Services Candle Permit Program 76% Care Facilities: 7-99 Clients 36% Care Facilities: > 99 Clients 40.8% Commercial Day Care Facilities 36% High Rise Buildings 96% Hospitals 95% Hotels/Motels 50-299 Rooms 36% Hotels/Motels 300 or more Rooms 92.4% Operational Permits – Level 1 40% Operational Permits – Level 2 38.1% Attachment C: Municipal Code 3.36.030 Changes Service Percentage of Cost or Amount to Be Recovered from Direct Fees Residential Care Facility Pre- License Inspection 96% Special Event Permits – Single Event 88% State Fire Clearance 82% Surgery Centers 93% Planning Appeals to City Council 50% Appeals to Planning Commission 50% Reasonable Accommodation 0% Recreation and Senior Services Adult Sports 50%—95% Administrative Processing Fee $5 Badge Replacement $5 After School/Camp Programs Camps 20%—50% After-School/Teen Program 20%—50% Pre-School Program 20%—50% Aquatics 20%—50% Contract Classes 50%—95% Class Refunds Attachment C: Municipal Code 3.36.030 Changes Service Percentage of Cost or Amount to Be Recovered from Direct Fees $74 or less $10 $75 or more $20 Youth Sports 20%—50% Special Events—Levels 1, 2, and 3 Resident, Level 1 and Late Fees for Level 1 0%—20% Resident, Levels 2—3 and Late Fees for Levels 2—3 20%—50% Nonresident, Levels 1—2 and Late Fees for Level 1 20%—50% Nonresident, Level 3 and Late Fees for Levels 2—3 50%—95% Appeal to City Council 50%—95% Natural Resources Programs 0%—20% Senior Services Oasis Transportation $1—$3 each way Contract Classes 20%—50% Fitness Center 50%—95% Library Services Passport Photo $10 Attachment C: Municipal Code 3.36.030 Changes Service Percentage of Cost or Amount to Be Recovered from Direct Fees Use Fees—Materials $1 Inter-Library Loan $5 Fire and Marine Emergency Medical Services Advanced Life Support (ALS) — Nontransport $400 Basic Life Support (BLS) — Nontransport $300400 ALS First Responder Fee $400 BLS First Responder Fee $400 State-Mandated Inspections Day Care Facilities 25% Marine Junior Guards 82.185% Police Bike Licenses 17% Secondhand/Pawn Dealer Tag Check 0% Registrant—Narcotics 0% Impound Fee Maximum Permitted by Contract Attachment C: Municipal Code 3.36.030 Changes Service Percentage of Cost or Amount to Be Recovered from Direct Fees Public Works Engineering Encroachment Permit without Other Department/Division Review 88% Encroachment Permit with Other Department/Division Review 57% Harbor Resources Appeal of Lease/Permit under Section 17.60.080 $100 Finance Payment Plans (except Parking) $25 Parking Hearings 0% Admin. Cite Hearings 0% Municipal Operations Construction Water Meter Establishment 50% Fats, Oils, and Grease (FOG) Annual Permit 0% City Council, Board, Commission, Committee or Any Individual Member Thereof When Acting Attachment C: Municipal Code 3.36.030 Changes Service Percentage of Cost or Amount to Be Recovered from Direct Fees within the Scope of Their Official Duties Review from a Lower Body or Official $0 (Ord. 2016-14 § 1, 2016; Ord. 2015-29 § 1, 2015; Ord. 2015-9 § 1, 2015; Ord. 2013-18 §§ 1, 2, 2013; Ord. 2013-1 § 1, 2013; Ord. 2011-28 § 1, 2011; Ord. 2011-10 § 1, 2011; Ord. 2009-32 § 1 (Exh. A), 2010; Ord. 2009-21 § 1 (Att. 1), 2009; Ord. 2008-14 § 1 (Exh. 1) (part), 2008: Ord. 2004-4 § 3, 2004; Ord. 2002-26 Exh. A, 2002; Ord. 2000-24 § 1, 2000; Ord. 98-18 § 1, 1998; Ord. 97-8 §§ 1 (part), 2, 1997) Fee Study Update Finance Committee Presentation June 14, 2018 Fire CDD Item No. 5C1 Master Fee Schedule Presentation June 14, 2018 PRESENTATION OVERVIEW I.Background (authority, Council policy, fee administration) II.Fee for Service Methodology III.Proposed Fees and Charges by Department AUTHORITY FOR COST OF SERVICE FEES •Council Policy Directives •Fiscal Sustainability Plan: Establish appropriate cost-recovery targets and adjust fee structure to ensure that the fees continue to meet cost recovery targets. •F-4 Revenue Measures: The City will establish appropriate cost-recovery targets for its fee structure and will annually adjust its fee structure to ensure that the fees continue to meet cost recovery targets. •Authority •NBMC §3.36.030 mandates 100% cost recovery (except for subsidies identified in the code) FEE FOR SERVICE METHODOLOGY Scope of Work: 1.Calculate the fully burdened (labor and overhead)cost of providing user fee services; 2.Applied fully burdened labor rates to time requirement estimates and annual workload figures; 3.Calculate the cost of providing the service; and 4.Review and cross check results to ensure data validity. MGT of America performs cost of service analysis for developing user fees FEE CALCULATION EXAMPLE (LSS –FIREWORKS AERIAL DISPLAY FEE) Step 1: Calculate Hourly Staffing Rates and Burdened Factors Salary and Benefits Burdened Factors Total Burdened RateHourly Rate Hourly Rate Life Safety Specialist II $95.45 +$91.57 =$187.02 CDD Permit Tech $58.15 +$75.95 =$134.10 Deputy CDD Director $137.99 +$132.39 =$270.39 FEE CALCULATION EXAMPLE (LSS –FIREWORKS AERIAL DISPLAY FEE) Step 2: Calculate Time Spent on the Service Review application, conduct inspections morning, afternoon, and evening day of event Schedule and Verify Code Compliance Process and File Permit Life Safety Specialist II 280 minutes CDD Permit Tech 1 minute Deputy CDD Director 10 minutes FEE CALCULATION EXAMPLE (LSS –FIREWORKS AERIAL DISPLAY FEE) Step 3: Calculate the Cost to Provide the Service Step 4: Review for Accuracy and Reasonableness Total Fully Total Cost Total Hours per Burdened to Provide Minutes Unit Hourly Rates the Service Life Safety Specialist II 280.00 4.67 $187.02 $872.75 CDD Permit Tech 1.00 0.02 $134.10 $2.23 Deputy CDD Director 10.00 0.17 $270.39 $45.06 $920.05 Proposed Fee $920.00 =X Fire Department FIRE DEPARTMENT Areas Under Review: •EMS •Junior Guards •Marine Operations Fees Last Updated: 2013 except EMS, fully studied in 2015 and refined in 2016 Sample Services: Advanced Life Support Transport and Non- Transport, Basic Life Support Transport and Non-Transport, Junior Guards Participation Fee, Lifeguard and Emergency Medical Services personnel hourly rates Department Increasing Decreasing No Change New Fees Deleted Totals Fire 14 4 5 4 0 27 PCT of TOTAL 52%15%19%15%0%100% FIRE DEPT. -MAJOR CHANGES Service Name Current Full Cost Current Fee Studied Full Cost Proposed Fee Net Change from Current Fee EMS -Transport ALS with Transport $1,617 $1,617 $1,545 $1,545 ($72) BLS with Transport $1,403 $1,403 $1,516 $1,516 $113 EMS -Non-Transport ALS Non-Transport $1,385 $400 $1,144 $400 $0 BLS Non-Transport $1,171 $300 $1,115 $400 $100 ALS First Responder N/A N/A $671 $400 $400 BLS First Responder N/A N/A $652 $400 $400 Junior Guards Program Junior Guard $886 $727 $904 $768 $41 CDD –Life Safety Services COMMUNITY DEVELOPMENT DEPARTMENT Areas Under Review: •Coastal Development Permit (CDP) •Life Safety Services (LSS) Fees Last Updated: 2013 –LSS 2017 –CDP Fee Established Sample Services: Life Safety Services Plan Reviews and Inspections, Operational and Special Event Permits, State Mandated Inspections Department Increasing Decreasing No Change New Fees Deleted Totals CDD 60 8 1 26 37 132 PCT of TOTAL 45%6%1%20%28%100% Finance Department FINANCE DEPARTMENT Areas Under Review: •Parking Fees Last Updated: 2016 Sample Services: Payment Plans, California Vehicle Code (CVC) violations Department Increasing Decreasing No Change New Fees Deleted Totals Revenue 0 0 0 3 1 4 PCT of TOTAL 0%0%0%75%25%100% Fees Study Update Finance Committee June 14, 2018 CONCLUSION AND QUESTIONS BACK UP SLIDES, IF NEEDED… TAX VS. FEE •A monetary imposition by a government on persons or property for the purpose of raising revenue to support the purposes of the government. •A tax need not be levied in proportion to a specific benefit to a person or property. Charge imposed for a specific benefit conferred, benefit, or product to the payer that is not provided to those not charged (should not exceed reasonable cost of service). Charge imposed for reasonable regulatory costs to a local government for issuing licenses and permits, investigations, etc. Charge imposed for entrance, use, or lease of government property. Fine, penalty, or charge imposed as a result of violation of law. FEES AND TAXES –WHO PAYS, WHO BENEFITS? SUMMARY OF CHANGES Department Increasing Decreasing No Change New Fees Deleted Totals Fire 14 4 5 4 0 27 CDD 60 8 1 26 37 132 Revenue 0 0 0 3 1 4 TOTAL 74 12 6 33 38 163 PERCENT of TOTAL 45%7%4%20%24%100% FEES AND CHARGES Fees -Charges for Services Rentals -Use of Money and Property Fines and Penalties SCHEDULE OF RENTS, FINES, AND FEES (SRFF) Charges for Services (COS, Pass Thru) 24 BACKGROUND SUMMARY OF PROPOSED FEE SCHEDULE •In furtherance of Council policy, the fee schedule aligns revenues with the actual (direct and indirect) costs of providing services. •Each department gets “studied” every 3-5 years whereby fees are updated to the costs of providing services. •Proposed fees are better defined to reflect the nature of work performed. •All fees not studied are updated by the Consumer Price Index (CPI). REASONS FOR CHANGE •Increasing –due to the increase of any service delivery cost component (e.g. hourly staffing rates, benefits, supplies, materials, indirect costs) •Decreasing or Eliminated –due to lower cost of service resulting from gained efficiencies, technological improvements, combined with other existing fees, or service outsourcing •Combined with Existing Fees –due to opportunities for simplifying and standardizing the fee schedule FINANCE COMMITTEE CHARGE CITY COUNCIL RESOLUTION NO. 2015-40 Purpose and Responsibilities: “Recommend for Council approval, and manage an on-going process for measuring and setting goals designed to maximize the City’s revenues consistent with existing taxation structures and inter-governmental funding opportunities, fee generation consistent with market rate charges for City provided services and market rate fees for utilization of City owned assets. Recommend to Council major initiatives to accomplish identified goals.” Operating Factors Public Sector Private Sector Motives Uses taxing power to raise revenues to provide infrastructure & public services. Unlike taxes, fees based on cost of service. Heightened focus on accountability, compliance, and regulatory disclosure Generate sufficient revenues and profit by selling goods and services. Focus on sustained profitability Operating Environment Revenues may only partially recover cost –may be subsidized for public good Revenues must completely cover cost –or else “out of business” Decision Making Influenced By Political constituencies and navigating competing interest groups Top -down internal decision making without public sanction or approval 28 Public vs. Private Sector Finance CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5D June 14, 2018 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Dan Matusiewicz, Finance Director and City Treasurer (949) 644-3126, danm@newportbeachca.gov SUBJECT: Update of Council Policy F-14 SUMMARY: The federal Office of Management and Budget has issued new requirements for Federal awards and are requiring all agencies to implement written policies and procedures that align with the new regulations. Staff has incorporated the required language in City Council Policy F-14, which establishes the authority to enter into all contracts on behalf of the City. RECOMMENDED ACTION: Review the draft update to Council Policy F-14, suggest changes as needed and recommend the policy for submission to the City Council for final approval. DISCUSSION: The addition of Section IV.D to Council Policy F-14 provides the necessary language needed to ensure compliance with the Office of Management and Budget (OMB) requirements to receive federal funding. As mentioned in the new draft section, staff will also recommend some changes to the Administrative Procedures related to contracting. Administrative Procedures are approved by the City Manager. The OMB required language must be adopted by the agency’s governing body, on or before June 30, 2018. If the City does not adopt the required language, we would not be in compliance with Federal regulations which would result in our inability to receive Federal funding. Staff has also suggested other minor changes to Council Policy F-14 to further clarify contracting requirements. Attachment: A. Council Policy F-14 with Redlined Changes Prepared by: Submitted by: /S/ Susan Giangrande_______________________ /S/ Dan Matusiewicz_____________________ Susan Giangrande Budget Manager Dan Matusiewicz Finance Director and City Treasurer ATTACHMENT A COUNCIL POLICY F-14 WITH REDLINED CHANGES F-14 1 AUTHORITY TO CONTRACT I. PURPOSE AND LIMITATION The purpose of this policy is to set out the City’s policy establishing authority for City contracts. This policy applies to all contracts, whether entered into through standard, emergency, or other procedures, including, but not limited to, professional services, purchase requisitions, acquisition of goods, supplies, equipment, and materials, settlements, right of entry agreements, cost sharing agreements, joint defense agreements, cooperative agreements, reimbursement agreements, grant agreements, audit services, legal and investigative services, independent instructional and recreation services, former employee services, on-call and emergency services, temporary labor services, training services, public works projects, and public property maintenance, installation, custodial, and repair services. II. GENERAL AUTHORITY TO ENTER INTO CONTRACTS Provisions of the Charter govern the methods through which the City may be bound by contracts. Under the Charter, all contracting authority, with the exception of services rendered by a person in the employ of the City at a regular salary, rest with the City Council. The Charter states that the City shall not be bound by any contract or amendment thereto, unless the same shall be made in writing, approved by the City Council and signed on behalf of the City by the Mayor and City Clerk or by such other officer or officers as shall be designated by the City Council (Charter § 421). The City Attorney shall approve the form of all contracts made by or amendment thereto and all bonds given to the City, endorsing his or her approval thereon in writing (Charter § 602(e)). The City Council may, however, by ordinance or resolution authorize the City Manager to bind the City, with or without a written contract, for the acquisition of equipment, materials, supplies, labor, services or other items included within the budget approved by the City Council, and may impose a monetary limit upon such authority. III. DELEGATION OF AUTHORITY TO ENTER INTO AND AMEND CONTRACTS The City Council hereby delegates its authority to contract to the City Manager and through him or her to Department Directors, and to the City Attorney as set out below. All formalities required under the provisions of the Charter shall be applied to these contracts. As such, the City Attorney shall review, approve and sign all such contract documents prior to contract award and execution and the City Clerk shall sign all such contracts attesting to their being entered into by the City. Additionally, the City Manager shall adopt and enforce administrative procedures that assure all contracts are: (1) entered into at a reasonable, fair and competitive price to the City; (2) all F-14 2 necessary formalities are followed and the requirements of federal, state, and local laws, including Council policies, are met; (3) best accounting practices are followed; and (4) the contracting process of the City is open and transparent, and provides accountability. A. Authority to Enter into Contracts The authority to enter into original contracts is delegated as set out below. 1. The City Manager. The City Manager is authorized to award and sign all contracts or purchase requisitions, without prior Council approval, in an amount not in excess of $120,000 provided funding for the contract was approved by the City Council as part of the annual Department budget, authorized budget amendment, City Council action or is available in an applicant deposit account. With the exception of grants and donations, which are covered in City Council Policies F-3, F-25 and B-17, the City Manager is authorized to sign all contracts without prior Council approval where the City is receiving or expending an amount not in excess of $120,000. This authority shall not be delegated below the Assistant City Manager level. 2. Department Directors. Contracts for Services Department Directors are authorized to award and sign contracts for services without prior City Manager or Council approval in an amount not in excess of $75,000 provided that the services and funds were approved by the City Council as part of the annual Department budget, authorized budget amendment, City Council action, or are available in an applicant deposit account. This authority may not be delegated below the Department Director level. Contracts or Purchase Requisitions for the Acquisition of Goods and Materials Department Directors, including the City Clerk and the City Attorney, are authorized to award and sign contracts or purchase requisitions for the acquisition of goods and materials, with prior City Manager or Council approval, in an amount not in excess of $75,000 provided that the funds were approved by the City Council as part of the annual Department budget, authorized budget amendment, City Council action or are available in a deposit account. F-14 3 3. City Attorney. The City Attorney is authorized to award and sign contracts for all services for outside counsel, investigators, and experts related directly to and necessary for prosecution and defense of pending litigation as defined in the Brown Act, and for services for outside counsel, investigators, and experts necessary to address other pending or potential legal claims or legal issues so long as funds for outside counsel, investigators, experts and related legal services were approved by the City Council as part of the approved annual budget. The City Attorney shall keep formally notify Council informed regarding any such expense that exceeds $120,000 on not less than a quarterly basis and shall seek budget updates, if needed, within a timely fashion. B. Authority to Amend Contracts If circumstances arise that were are not reasonably foreseeable by the parties at the time of contracting which make extra work or material necessary for the proper completion of the service originally contracted for, a contract amendment and corresponding increase in total contract amount may be necessary. Under those circumstances, the City Manager and Department Directors are authorized to amend a contract as set out below. For purposes of this policy, "total contract amount" shall be defined as the total consideration paid over the term of the agreement, including any previous amendments to the contract. “Original contract amount” shall be defined as either the amount of compensation agreed upon when the contract was first entered into or the amount of compensation last approved to by the City Council, whichever is greater. 1. City Manager. The City Manager may sign and award a contract amendment on a contract approved by the Council if the total costtotal contract amount will not exceed 125% of the original contract amount, or increase the original contract by more than $120,000, whichever amount is less. These provisions for the City Manager to amend up to 125% of the original contract amount or $120,000 of the original contract amount shall reset each time the City Council authorizes an amendment to the contract amount. Otherwise the City Manager may sign and award a contract amendment, including but not limited to, amendments to extend the term of a contract, so long as the total contract amount as amended does not exceed $120,000. 2. Department Directors. The Department Director overseeing the contract may sign the a contract amendment if that amendment will not cause the total contract amount to exceed $75,000. Any amendments to contracts with a total contract amount in excess $75,000 may not be signed by a Department Director. F-14 4 3. Amendments in Cases of Possible Work Stoppage or Undesirable Delay. In certain situations, the City Manager and the Department Director in charge of the contract may determine that an amendment is needed that will cause the total contract amount to exceed the City Manager’s amendment signing authority, and that the timing is such that a work stoppage or other undesirable consequence will result if approval of the change is delayed until the next City Council meeting. In those situations, the City Manager may approve an amendment that increases the total contract amount up to 150% of the original contract. However, the City Manager will notify all City Council Members individually if this situation develops, and if any individual Council Member objects to the increase, a special meeting of the City Council will be called to address the issue. 4. Amendments Necessary to Address Emergency Situations In event of emergency work that requires an amendment to an existing contract, the emergency contracting policy outlined below may be followed. IV. TYPES OF SERVICES CONTRACTS AND HOW TO AWARD THEM It is recognized that by their nature, service contracts cannot always be awarded as a result of a competitive bid process. However, competitive proposals should be obtained whenever possible before resorting to negotiated awards. A. Professional Services Consultant Selection Professional consultant services differ from other services in that they are of a professional nature, and due to the ethical codes of some of the professions involved, as well as the nature of the services provided, do not readily fall within the competitive bidding process. Professional consultants should be individually selected through a qualifications-based selection process for a specific project or service on the basis of demonstrated competence and qualifications for the types of services to be performed and with the objective of selecting the most qualified consultant at a fair, reasonable and verifiably appropriate cost. The procedures for achieving this goal shall be adopted and applied by the City Manager in the Administrative Procedures Manual. This policy section shall include, but not be limited to, procurements for services in the following fields: Engineering (civil, mechanical, electrical, structural, traffic, geotechnical, etc.) F-14 5 Building plan review and grading plan review and/or inspection services Architecture Landscape Architecture Construction Project Management Firms Environmental Planning Economic Analysis Property Appraisals Land Surveying Financial Services Data Processing Services Legal Services not otherwise authorized in Section A(3) of this Policy Training and Temporary Labor Services B. General Services Contracts General Services Contracts are not strictly professional in nature, but arise are needed where operations, repair, installation, and maintenance services, or other services of a non- professional nature, are provided to the City. Contracts that typically fall into this category are for repair and maintenance of roadways, landscape maintenance, repair and maintenance of City facilities, and other such non-professional services. Some General Service Contracts may be considered “public works” under the Charter and, if so, the work covered by the General Service Contract shall be awarded in accordance with the laws governing the award of “public works” contracts. If not considered a “public work” under the Charter, the City shall select general services contractors though a Request for Proposal or a Request for Bid process, whichever serves the City’s greater benefit, based on each contract or procurement. Contracts through a Request for Bid process shall be awarded based solely on pricing and minimum qualifications to determine the most responsive and responsible bidder. F-14 6 Contracts through a Request for Proposal process shall be awarded based on qualifications and pricing in order to determine the best value to the City. C. Capital Improvement Program Contracts for public works shall be awarded consistent with the provisions of Charter Section 1110 and Chapter 15.75 of the Newport Beach Municipal Code as updated and amended from time to time. Under the terms of City Charter Section 1110, contracts for public works that exceed $120,000 in total expenditures must be awarded by the City Council through the conducting of a formal bidding process. At its option, the City Council may direct that such contracts be signed by the Mayor, the City Manager or the Public Works Director. D. Procurements and Contracts Involving Federal or Pass-Through Funding Procurements expending funds from federal grants or awards received directly by the City or from a pass-through agency such as the State of California, must comply with the provisions of Title 2 of the Code of Federal Regulations (“CFR”) §200.318 through §200.326. To ensure the City’s adherence to the Federal guidelines related to these procurements and contracts, the City Manager has adopted procurement procedures for such projects in the Administrative Procedures Manual. A.E. Independent Instructional and Recreation Contractors Where contractors are paid for services from fees collected for the services provided, Department Directors are authorized to award and sign contracts with independent contractors for instructional, educational, cultural, or recreational purposes where the fees paid by the City are based upon either a percentage of fees collected by City for a program or on a flat rate basis for tasks performed by the contractor. Contracts with such independent contractors may be up to two (2) years in duration. Should fees paid to any contractor exceed $75,000 during the term of the contract, the Department Director shall provide written notice to the City Manager identifying the program, independent contractor and anticipated total fees to be paid. The City Manager shall give written notice to the City Council should fees paid exceed $120,000. B.F. On-Call or Emergency Contracts for Services Under limited circumstances the use of formal contracting procedures to procure services is not an effective or an efficient use of City resources. The following contracting procedures are authorized for entering into on-call agreements for services as needed and for procuring services in times of emergency. F-14 7 1. On-Call Agreements. The City Manager and Department Directors are authorized to enter into on-call agreements for obtaining services on an as needed basis, including, but not limited to, professional services and repair and maintenance services, that are needed from time to time where the size of the job does not warrant the expense of entering into individual agreements for each service. On-call agreements must be within the authority of the individual entering into the agreement on behalf of the City and the initial term cannot exceed three (3) years. The City Manager is authorized to extend the term of an on-call agreement for up to six (6) months if work has been authorized or encumbered during the initial term but not yet completed. Selection of consultants and contractors for award of on-call agreements shall be consistent with the award procedures for the type of contract being awarded as set out above. Procedures for entering into on-call agreements shall be prescribed by the City Manager in the Administrative Procedure Manual. 2. Emergency Contracts for Services. If a contract for services is necessary under the provisions of Newport Beach Municipal Code Section 2.20.020, the City Emergency Procedures shall be followed. If a contract for services is entered into in times of urgent necessity under the authority of Newport Beach City Charter Section 1110, and the contract amount exceeds the signing authority of the relevant Department Director or City Manager as authorized in this Policy, then that contract shall be brought to the City Council at its next regularly scheduled meeting for review. Whenever possible, the City shall enter Emergency On-Call Agreements with contractors or consultants who can be relied upon to assist the City in advance of any actual emergency. Emergency On-Call Agreements shall be submitted to Council for approval after being reviewed and approved by the Office of the City Attorney. After the Emergency On-Call Agreement is approved, services provided on an emergency basis under an Emergency On-Call Agreement may be retained by oral commitment of the City Manager (or, in the case of an emergency described by Municipal Code Section 2.20.020, the Director or Assistant Director of Emergency Services), to be memorialized in a Letter Agreement between the parties as soon as possible thereafter. When a written contract has been entered into in order to address an emergency, a copy of the written contract shall be provided to the City Clerk as soon as possible. C.G. Contracts with Former City Employees When not more than five (5) years has passed since a person who is a former City employee has left service with the City: 3.1. All professional services contracts with former City employees or F-14 8 temporary employment contracts with retiring or former City employees shall require approval of the City Council; and 4.2. City Council approval shall also be required for professional services contracts with a corporation or other business entity owned or operated by a former City employee or that employs a former City employee F-14 9 V. GENERAL PROCEDURES A. Contract Retention The City Clerk shall retain all original executed contracts in accordance with the City’s current adopted Records Retention Schedule. Contracts shall be posted into the City’s electronic document data base in order to maintain transparency in contracting. B. Insurance All contracts shall be accompanied by proof of the appropriate level of insurance at the time of execution. The insurance level required shall be in accordance with the City’s published Contract Templates (or as otherwise approved by the City’s Risk Management Division). C. Reporting At least once annually, the City Manager shall report to the Council the summary of all contracts entered into by the City Manager and Department Directors. The summary shall include the vendor, the department responsible that will oversee the contract, the purpose of the contract, and the contract amount. FUTURE AMENDMENTS TO POLICY Any future changes in the provisions of this Policy shall be made by resolution of the City Council. Adopted - January 24, 1994 Amended - April 13, 2004 Amended by Resolution No. 2006-35 - May 9, 2006 Amended by Resolution No. 2011-15 - January 25, 2011 Amended - May 12, 2015 Amended - February 23, 2016 (F-5 & F-20 were consolidated with F-14) Revisions pending approval – June 26, 2018 F-14 1 AUTHORITY TO CONTRACT I.PURPOSE AND LIMITATION The purpose of this policy is to set out the City’s policy establishing authority for City contracts. This policy applies to all contracts, whether entered into through standard, emergency, or other procedures, including, but not limited to, professional services, purchase requisitions, acquisition of goods, supplies, equipment, and materials, settlements, right of entry agreements, cost sharing agreements, joint defense agreements, cooperative agreements, reimbursement agreements, grant agreements, audit services, legal and investigative services, independent instructional and recreation services, former employee services, on-call and emergency services, temporary labor services, training services, public works projects, and public property maintenance, installation, custodial, and repair services. II.GENERAL AUTHORITY TO ENTER INTO CONTRACTS Provisions of the Charter govern the methods through which the City may be bound by contracts. Under the Charter, all contracting authority, with the exception of services rendered by a person in the employ of the City at a regular salary, rest with the City Council. The Charter states that the City shall not be bound by any contract or amendment thereto, unless the same shall be made in writing, approved by the City Council and signed on behalf of the City by the Mayor and City Clerk or by such other officer or officers as shall be designated by the City Council (Charter § 421). The City Attorney shall approve the form of all contracts made by or amendment thereto and all bonds given to the City, endorsing his or her approval thereon in writing (Charter § 602(e)). The City Council may, however, by ordinance or resolution authorize the City Manager to bind the City, with or without a written contract, for the acquisition of equipment, materials, supplies, labor, services or other items included within the budget approved by the City Council, and may impose a monetary limit upon such authority. III.DELEGATION OF AUTHORITY TO ENTER INTO AND AMENDCONTRACTS The City Council hereby delegates its authority to contract to the City Manager and through him or her to Department Directors, and to the City Attorney as set out below. All formalities required under the provisions of the Charter shall be applied to these contracts. As such, the City Attorney shall review, approve and sign all such contract documents prior to contract award and execution and the City Clerk shall sign all such contracts attesting to their being entered into by the City. Additionally, the City Manager shall adopt and enforce administrative procedures that assure all contracts are: (1) entered into at a reasonable, fair and competitive price to the City; (2) all Item No. 5D1 Proposed Revisions to Council Policy F-14 Authority to Contract Additional Materials Received June 14, 2018 F-14 2 necessary formalities are followed and the requirements of federal, state, and local laws, including Council policies, are met; (3) best accounting practices are followed; and (4) the contracting process of the City is open and transparent, and provides accountability. A. Authority to Enter into Contracts The authority to enter into original contracts is delegated as set out below. 1. The City Manager. The City Manager is authorized to award and sign all contracts, without prior Council approval, in an amount not in excess of $120,000 provided funding for the contract was approved by the City Council as part of the annual Department budget, authorized budget amendment, City Council action or is available in an applicant deposit account. With the exception of grants and donations, which are covered in City Council Policies F-3, F-25 and B-17, the City Manager is authorized to sign all contracts without prior Council approval where the City is receiving or expending an amount not in excess of $120,000. This authority shall not be delegated below the Assistant City Manager level. 2. Department Directors. Contracts for Services Department Directors are authorized to award and sign contracts for services without prior City Manager or Council approval in an amount not in excess of $75,000 provided that the services and funds were approved by the City Council as part of the annual Department budget, authorized budget amendment, City Council action, or are available in an applicant deposit account. This authority may not be delegated below the Department Director level. Contracts or Purchase Requisitions for the Acquisition of Goods and Materials Department Directors, including the City Clerk and the City Attorney, are authorized to award and sign contracts or purchase requisitions for the acquisition of goods and materials, with prior City Manager or Council approval, in an amount not in excess of $75,000 provided that the funds were approved by the City Council as part of the annual Department budget, authorized budget amendment, City Council action or are available in a deposit account. F-14 3 3. City Attorney. The City Attorney is authorized to award and sign contracts for all services for outside counsel, investigators, and experts related directly to and necessary for prosecution and defense of pending litigation as defined in the Brown Act, and for services for outside counsel, investigators, and experts necessary to address other pending or potential legal claims or legal issues so long as funds for outside counsel, investigators, experts and related legal services were approved by the City Council as part of the approved annual budget. The City Attorney shall keep Council informed regarding any such expense that exceeds $120,000 on not less than a quarterly basis and shall seek budget updates, if needed, within a timely fashion. B. Authority to Amend Contracts If circumstances arise that were are not reasonably foreseeable by the parties at the time of contracting which make extra work or material necessary for the proper completion of the service originally contracted for, a contract amendment and corresponding increase in total contract amount may be necessary. Under those circumstances, the City Manager and Department Directors are authorized to amend a contract as set out below. For purposes of this policy, "total contract amount" shall be defined as the total consideration paid over the term of the agreement, including any previous amendments to the contract. “Original contract amount” shall be defined as either the amount of compensation agreed upon when the contract was first entered into or the amount of compensation last approved to by the City Council, whichever is greater. 1. City Manager. The City Manager may sign and award a contract amendment on a contract approved by the Council if the total cost will not exceed 125% of the original contract amount, or increase the original contract by more than $120,000, whichever amount is less. Otherwise the City Manager may sign and award a contract amendment, including but not limited to, amendments to extend the term of a contract, so long as the total contract amount as amended does not exceed $120,000. 2. Department Directors. The Department Director overseeing the contract may sign the contract amendment if that amendment will not cause the total contract amount to exceed $75,000. 3. Amendments in Cases of Possible Work Stoppage or Undesirable Delay. In certain situations, the City Manager and the Department Director in charge of the contract may determine that an amendment is needed that will cause the total contract F-14 4 amount to exceed the City Manager’s amendment signing authority, and that the timing is such that a work stoppage or other undesirable consequence will result if approval of the change is delayed until the next City Council meeting. In those situations, the City Manager may approve an amendment that increases the total contract amount up to 150% of the original contract. However, the City Manager will notify all City Council Members individually if this situation develops, and if any individual Council Member objects to the increase, a special meeting of the City Council will be called to address the issue. 4. Amendments Necessary to Address Emergency Situations In event of emergency work that requires an amendment to an existing contract, the emergency contracting policy outlined below may be followed. IV. TYPES OF SERVICES CONTRACTS AND HOW TO AWARD THEM It is recognized that by their nature, service contracts cannot always be awarded as a result of a competitive bid process. However, competitive proposals should be obtained whenever possible before resorting to negotiated awards. A. Professional Services Consultant Selection Professional consultant services differ from other services in that they are of a professional nature, and due to the ethical codes of some of the professions involved, as well as the nature of the services provided, do not readily fall within the competitive bidding process. Professional consultants should be individually selected through a qualifications-based selection process for a specific project or service on the basis of demonstrated competence and qualifications for the types of services to be performed and with the objective of selecting the most qualified consultant at a fair, reasonable and verifiably appropriate cost. The procedures for achieving this goal shall be adopted and applied by the City Manager in the Administrative Procedures Manual. This policy shall include, but not be limited to, services in the following fields: • Engineering (civil, mechanical, electrical, structural, traffic, geotechnical, etc.) • Building plan review and grading plan review and/or inspection services • Architecture • Landscape Architecture • Construction Project Management Firms • Environmental F-14 5 • Planning • Economic Analysis • Property Appraisals • Land Surveying • Financial Services • Data Processing Services • Legal Services not otherwise authorized in Section A(3) of this Policy • Training and Temporary Labor Services B. General Services Contracts General Services Contracts are not strictly professional in nature, but arise where operations, repair, installation, and maintenance services, or other services of a non- professional nature, are provided to the City. Contracts that typically fall into this category are for repair and maintenance of roadways, landscape maintenance, repair and maintenance of City facilities, and other such non-professional services. Some General Service Contracts may be considered “public works” under the Charter and, if so, the work covered by the General Service Contract shall be awarded in accordance with the laws governing the award of “public works” contracts. If not considered a “public work” under the Charter, the City shall select general services contractors though a Request for Proposal or a Request for Bid process, whichever serves the City’s greater benefit, based on each contract or procurement. Contracts through a Request for Bid process shall be awarded based solely on pricing and minimum qualifications to determine the most responsive and responsible bidder. Contracts through a Request for Proposal process shall be awarded based on qualifications and pricing in order to determine the best value to the City. C. Capital Improvement Program Contracts for public works shall be awarded consistent with the provisions of Charter Section 1110 and Chapter 15.75 of the Newport Beach Municipal Code as updated and amended from time to time. Under the terms of City Charter Section 1110, contracts for public works that exceed $120,000 in total expenditures must be awarded by the City Council through the conducting of a formal bidding process. At its option, the City Council may direct that such contracts be signed by the Mayor, the City Manager or the Public Works Director. F-14 6 D. Procurements and Contracts Involving Federal or Pass-Through Funding Procurements expending funds from federal grants or awards received directly by the City or from a pass-through agency such as the State of California, must comply with the provisions of Title 2 of the Code of Federal Regulations (“CFR”) §200.318 through §200.326. To ensure the City’s adherence to the Federal guidelines related to these procurements and contracts, the City Manager has adopted procurement procedures for such projects in the Administrative Procedures Manual. A.E. Independent Instructional and Recreation Contractors Where contractors are paid for services from fees collected for the services provided, Department Directors are authorized to award and sign contracts with independent contractors for instructional, educational, cultural, or recreational purposes where the fees paid by the City are based upon either a percentage of fees collected by City for a program or on a flat rate basis for tasks performed by the contractor. Contracts with such independent contractors may be up to two (2) years in duration. Should fees paid to any contractor exceed $75,000 during the term of the contract, the Department Director shall provide written notice to the City Manager identifying the program, independent contractor and anticipated total fees to be paid. The City Manager shall give written notice to the City Council should fees paid exceed $120,000. B.F. On-Call or Emergency Contracts for Services Under limited circumstances the use of formal contracting procedures to procure services is not an effective or an efficient use of City resources. The following contracting procedures are authorized for entering into on-call agreements for services as needed and for procuring services in times of emergency. 1. On-Call Agreements. The City Manager and Department Directors are authorized to enter into on-call agreements for obtaining services on an as needed basis, including, but not limited to, professional services and repair and maintenance services, that are needed from time to time where the size of the job does not warrant the expense of entering into individual agreements for each service. On-call agreements must be within the authority of the individual entering into the agreement on behalf of the City and the initial term cannot exceed three (3) years. The City Manager is authorized to extend the term of an on-call agreement for up to six (6) months if work has been authorized or encumbered during the initial term but not yet completed. Selection of consultants and contractors for award of on-call agreements shall be consistent with the award procedures for the type of contract being awarded as set out above. Procedures for entering into on-call Formatted: Numbered + Level: 2 + Numbering Style:A, B, C, … + Start at: 1 + Alignment: Left + Aligned at: 0.57" + Indent at: 1.07" Formatted: Font: 12 pt Formatted: Font: 12 pt Formatted: Numbered + Level: 2 + Numbering Style:A, B, C, … + Start at: 1 + Alignment: Left + Aligned at: 0.57" + Indent at: 1.07" Formatted: Numbered + Level: 2 + Numbering Style: A, B, C, … + Start at: 1 + Alignment: Left + Aligned at: 0.57" + Indent at: 1.07" F-14 7 agreements shall be prescribed by the City Manager in the Administrative Procedure Manual. 2. Emergency Contracts for Services. If a contract for services is necessary under the provisions of Newport Beach Municipal Code Section 2.20.020, the City Emergency Procedures shall be followed. If a contract for services is entered into in times of urgent necessity under the authority of Newport Beach City Charter Section 1110, and the contract amount exceeds the signing authority of the relevant Department Director or City Manager as authorized in this Policy, then that contract shall be brought to the City Council at its next regularly scheduled meeting for review. Whenever possible, the City shall enter Emergency On-Call Agreements with contractors or consultants who can be relied upon to assist the City in advance of any actual emergency. Emergency On-Call Agreements shall be submitted to Council for approval after being reviewed and approved by the Office of the City Attorney. After the Emergency On-Call Agreement is approved, services provided on an emergency basis under an Emergency On-Call Agreement may be retained by oral commitment of the City Manager (or, in the case of an emergency described by Municipal Code Section 2.20.020, the Director or Assistant Director of Emergency Services), to be memorialized in a Letter Agreement between the parties as soon as possible thereafter. When a written contract has been entered into in order to address an emergency, a copy of the written contract shall be provided to the City Clerk as soon as possible. C.G. Contracts with Former City Employees When not more than five (5) years has passed since a person who is a former City employee has left service with the City: 3.1. All professional services contracts with former City employees or temporary employment contracts with retiring or former City employees shall require approval of the City Council; and 4.2. City Council approval shall also be required for professional services contracts with a corporation or other business entity owned or operated by a former City employee or that employs a former City employee Formatted: Numbered + Level: 2 + Numbering Style: A, B, C, … + Start at: 1 + Alignment: Left + Aligned at: 0.57" + Indent at: 1.07" F-14 8 V. GENERAL PROCEDURES A. Contract Retention The City Clerk shall retain all original executed contracts in accordance with the City’s current adopted Records Retention Schedule. Contracts shall be posted into the City’s electronic document data base in order to maintain transparency in contracting. B. Insurance All contracts shall be accompanied by proof of the appropriate level of insurance at the time of execution. The insurance level required shall be in accordance with the City’s published Contract Templates (or as otherwise approved by the City’s Risk Management Division). C. Reporting At least once annually, the City Manager shall report to the Council the summary of all contracts entered into by the City Manager and Department Directors. The summary shall include the vendor, the department responsible that will oversee the contract, the purpose of the contract, and the contract amount. FUTURE AMENDMENTS TO POLICY Any future changes in the provisions of this Policy shall be made by resolution of the City Council. Adopted - January 24, 1994 Amended - April 13, 2004 Amended by Resolution No. 2006-35 - May 9, 2006 Amended by Resolution No. 2011-15 - January 25, 2011 Amended - May 12, 2015 Amended - February 23, 2016 (F-5 & F-20 were consolidated with F-14) 6/11/18 Scheduled Date Agenda Title Agenda Description Tuesday, January 09, 2018 Council Study Session 9th - Economic Overview (Optional) Broad Local Economic Overview to be provided by Beacon Economics. Thursday, January 11, 2018 Risk Based Reserve Analysis Overview Consultant will provide an update and overview of the Risk -based Reserve Analysis. Consultant Overview of Property and Sales Tax Revenues Consulting specialists in Property and Sales Tax will provide an overview of revenue prospects. Long Range Financial Forecast (LRFF) City staff will provide an update on efforts to improve the City's Long Range Financial Forecast and provide a comparative review of best practices to other cities. Review of Finance Committee Resolution The Committee will review its objectives as set forth in Council resolution 94- 110 as amended by 2017-58. Review of Finance Committee Workplan Staff will review with the Committee the agenda topics scheduled for the remainder of the fiscal year and highlight those work plan items that were carried forward from the prior fiscal year. The Committee will also consider setting up a subcommittee to review finance related Council Policies. Monday, January, 29, 2018 Council Goal Setting Session - (FYI Only) Thursday, February 15, 2018 Create a Subcommittee to Review Council Finance Policies The Finance Committee will consider the creation of a Finance Subcommittee to review Council Finance policies, discuss membership, scope of work and timeline. Risk-Based Reserve Subcommittee Update Discuss Finance Committee progress since the last meeting. Debt Policy Review Subcommittee Update Subcommittee will discuss revisions of Debt Policy and discuss next steps. Review of Police Department Budget to Actual Results In preparation of the 2018-2019 Budget, staff will review budget assumptions against actual results for Fiscal Year 2016-2017 and pertinent updates concerning the Fiscal Year 2017-2018 to date. Year-End Closing Results Staff will present year-end closing results for Fiscal Year 2016-2017. Pension Discussion Agenda item reserved for discussion regarding the status of the City's pension liability, payment strategies, CalPERS policy updates and or advocacy efforts. Review of Finance Committee WorkPlan Staff will review with the Committee the agenda topics scheduled for the remainder of the fiscal year and highlight those work plan items carried forward from the prior fiscal year. The Committee will also consider setting up a subcommittee to review finance related Council Policies. MARCH Thursday, March 15, 2018 Audit Closing The City’s external audit firm, White Nelson Diehl Evans LLP will meet with the Finance Committee to discuss the audit findings for the fiscal year ending 6/30/2017. The committee will have an opportunity to discuss any potential areas of concern and the auditors can discuss any changes in accounting standards or disclosures that were relevant for the audit year.Harbor & Beaches Master Plan Review Harbor & Beaches Master Plan for financial solvency based on known Council Priorities Review of Fire Department Budget to Actual Results In preparation of the 2018-19 Budget, staff will review budget assumptions against actual results for fiscal year 2016-17. Facilities Financial Plan Review Facilities Financial Plan for financial solvency based on known Council Priorities Pension Discussion Agenda item reserved for discussion regarding the status of the City's pension liability, payment strategies, CalPERS policy updates and or advocacy efforts. APRIL Thursday, April 5, 2018 Submit Budget Documents to Finance Committee - Information Only ** NOT A MEETING DATE ** Information Only - Not a meeting date. Thursday, April 12, 2018 Fiscal Year 2018-19 Budget Brief Overview Staff will prepare brief presentation of key initiatives proposed in the City Manager’s Fiscal Year 2018-2019 Proposed Budget. Internal Controls Staff will prepare a brief presentation summarizing of internal and external review of internal control efforts. Reserve Policy Subcommittee Update Staff and or Subcommittee members will provide the Finance Committee a brief update on the status of the Risk-Based Reserve Study. Budget Amendments Receive and file a staff report on the budget amendments for the prior quarter. Workplan Review Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. JANUARY FEBRUARY City of Newport Beach Finance Committee Work Plan 2017-18 I:\Users\FIN\Shared\Admin\Finance Committee\WORKPLAN\2018\2018 FC Workplan 1 6/11/18 Scheduled Date Agenda Title Agenda Description City of Newport Beach Finance Committee Work Plan 2017-18 MAY Thursday, May 10, 2018 Finance Committee Budget Review Staff will provide a high-level variance analysis and will address certain questions raised by the Committee during the April meeting. Long-Range Financial Forecast Staff will provide a preview and update on the latest draft of our new Long Range Financial Forecast. Agreed Upon Audit Procedures for Internal Control The Finance Department is working with the City’s audit firm, White Nelson Diehl Evans LLP, to develop agreed upon procedures for the audit of the City’s internal control processes and procedures. Staff will present these agreed upon procedures for the Finance Committee’s review. Assessment District (AD) 117 Update Staff will provide an oral update on the progress of AD 117. Uptown Newport Community Facilities District (CFD) Update Staff will provide an oral update on the progress of the Uptown Newport CFD. Risk Based Reserve Status Update Staff will provide an oral update on the Risk Based Reserve Study being performed by the GFOA. Work Plan Review Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Tuesday May 22, 2018 Council Budget Study Session (Joint FC Study Session ) District discretionary grants, position count changes, pensions operating budget expenditures and other topics will be covered with both the City Council and Finance Committee. Thursday, May 24, 2018 FY 2018-19 Budget Review & Recommendation(s) to Council Reserved For Policy Discussion(s) JUNE Thursday, June 14, 2018 Reserve Policy Presentation of Draft Report: GFOA Risk Based Analysis of General Fund Reserve Requirements Parametric Insurance Teleconference with SwissRE and the GFOA to discuss parametric insurance options. Master Fee Schedule Staff will present the Master Fee Schedule to the Finance Committee and subsequently will present to the City Council at the July 24, 2018, meeting. Proposed Revisions to Council Policy F-14 - Authority to Contract Staff will propose changes to Policy - F14 pursuant to the specified requirements in the Federal Uniform Guidance for Federal Awards. Changes are required to be approved by the City Council prior to June 30, 2018 for continued eligibility to receive Federal grant funding. Discuss Potential Ballot Initiative that May Require a Vote of the Electorate Prior to the Issuance of Certain Certificates of Participation (COPS) and Other Lease Revenue Obligations On the June 12th City Council agenda, Council members will discuss a potential ballot initiative that would require a vote of the electorate prior to the issuance of certain COPs and other lease revenue obligations. Discuss Potential Reorganization of the Finance Committee On the June 12th City Council agenda, Council members will discuss reorganizing the Finance Committee to be a 7-member all citizen’s committee (versus one with 3 Council Members and 4 citizens), starting July 1, 2019. Workplan Review Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Thursday June 28, 2018 Agreed Upon Audit Procedures for Internal Control The Finance Department is working with the City’s audit firm, White Nelson Diehl Evans LLP, to develop agreed upon procedures for the audit of the City’s internal control processes and procedures. The Auditor will present the audit findings. Master Fee Schedule (reserved for continuation if needed) Staff will present the Master Fee Schedule to the Finance Committee and subsequently will present to the City Council at subsequent date. Reserve Policy (tentative based on progress made on June 14) Further discussion and consideration of Draft Report: GFOA Risk Based Analysis of General Fund Reserve Requirements Water Enterprise Advanced Metering Infrastructure Financing (tentative) Discussion with Acting Utilities Director to discuss financing plan for advanced metering infrastructure (AMI). AMI s an integrated system of smart meters, communications networks, and data management systems that enables two- way communication between utilities and customers. Workplan Review Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. I:\Users\FIN\Shared\Admin\Finance Committee\WORKPLAN\2018\2018 FC Workplan 2