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HomeMy WebLinkAboutApproved Minutes - June 28, 2018Finance Committee Meeting Minutes June 28, 2018   Page 1 of 9 CITY OF NEWPORT BEACH FINANCE COMMITTEE JUNE 28, 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 (Acting Chair), Committee Member William Collopy, Committee Member Joe Stapleton, and Committee Member Larry Tucker ABSENT: Mayor Pro Tem Will O'Neill (excused), Council Member Scott Peotter, and Committee Member (VACANT) STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve Montano, Accounting Manager Rukshana Virany, Budget Manager Susan Giangrande, and Administrative Specialist to the Finance Director Marlene Burns MEMBERS OF THE PUBLIC: Carl Cassidy and Jim Mosher OUTSIDE ENTITIES: Shayne Kavanagh (GFOA) via teleconference call and Hillary Davis (Daily Pilot) Chair Dixon announced that Mayor Pro Tem O'Neill is the new Committee Chair but is excused from the meeting this evening and she will serve as Chair. She expressed her gratitude for the opportunity to serve as Chair and pride at the accomplishments made by the Committee. III. PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher referenced the Ballot Initiative and noted there is no copy in the agenda packet. In terms of the Council's last meeting, there was a Brown Act issue related to the Finance Committee; however, the issue was not explained. He felt it important for everyone to understand the issue to ensure transparency. Chair Dixon stated she understood the matter but did not agree with the conclusion. It involved emails from a member of the public containing the anticipated content of a proposed Charter amendment and was circulated to every Council Member. The Finance Committee did not discuss the issue prior to the Council meeting, and it was not a violation of the Brown Act. Carl Cassidy thanked Chair Dixon for her service and hoped her next term will be as fruitful and productive. He requested a copy of each item on the agenda in order to provide public comments. Chair Dixon explained that there is opportunity for public comment on each agenda item. Noting there were no other members of the public who elected to speak on this item, Chair Dixon closed public comments. Finance Committee Meeting Minutes June 28, 2018   Page 2 of 9 IV. CONSENT CALENDAR A. MINUTES OF JUNE 14, 2018 Recommended Action: Approve and file. MOTION: Committee Member Tucker moved, and Committee Member Collopy seconded, to approve the minutes, as submitted. The motion carried (4 – 0, O’Neill and Peotter absent) unanimously. V. CURRENT BUSINESS A. AGREED UPON AUDIT PROCEDURES FOR INTERNAL CONTROL Summary: 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. Recommended Action: Direct staff to forward results to City Council. Finance Director Matusiewicz reported there was a misunderstanding with the auditors and they will not be attending the meeting. Committee Member Tucker noted they have reviewed wire transfers and ACH and inquired whether staff has reviewed check-writing, petty cash, and purchasing card policies. Director Matusiewicz noted they have not but it is forthcoming in a future procedures audit. Finance Director Matusiewicz described the steps taken in the audit, the City’s wire transfer processes, and reported the all critical steps require dual authorization. For example, no one person can issue a wire, modify a template, or make any transaction without secondary approval. They found; however, once a template is created, there is no annual review process to eliminate stale templates. In response to Chair Dixon's question, Director Matusiewicz reported the next study will review disbursements and purchasing cards. Chair Dixon opened public comments. Carl Cassidy referenced change orders and contracts and Finance Director Matusiewicz reported change orders and contracts had not yet been tested. There will be a continuous rotation for review of processes. City Manager Kiff reported in terms of contracts, Public Works Inspectors and Contract Managers review the work requested under change orders. They “sign off” and pass them to the Finance Department indicating whether, pursuant to internal controls, they are acceptable or not. Committee Member Tucker added he was concerned about false invoices or fraud, although he was not concerned about disputed change orders. Discussion ensued regarding the City conducting an operations audit during the Enterprise Resource Planning (ERP) process and provide information related to change orders at the City Council level. Jim Mosher felt it was good that the letter from the auditor was provided and commented on the importance of having dual controls. Chair Dixon closed public comments. Finance Committee Meeting Minutes June 28, 2018   Page 3 of 9 There was no further action taken on this item. B. RESERVE POLICY Summary: Further discussion and consideration of Draft Report: GFOA Risk Based Analysis of General Fund Reserve Requirements. Recommended Action: Receive, file and discuss next steps; direct staff to draft changes to Council Policy F-2 (Reserve Policy), as necessary. Committee Member Collopy expressed support to postpone City Council Policy F-2 revision or publication prior to the Finance Committee's next meeting in September. Shayne Kavanagh, GFOA consultant, displayed a spreadsheet noting the model is based on a thousand different simulations of the future of Newport Beach based on various risk levels. He addressed “Average Remaining Reserves” after one through ten years. The average General Fund Reserves across the thousands of possible results is $50.1 million down to $42 million over ten years. Committee Member Collopy inquired whether it is based on the probability of fire, flood and recession and Mr. Kavanagh explained it shows, for example, in year 1, on average, based on all the possible futures calculated, Newport Beach will have $50.1 million over ten years. He explained, further down the line, the amount decreases in consideration of the various things (events) that could possibly go wrong. Director Matusiewicz reviewed the variables under different confidence level assumptions. Staff identified several risks that were modeled; however, staff noted that it was not possible to model all risks Committee Member Collopy referenced information presented at the last Committee meeting where at a 70% to 90% confidence level the City would require approximately $13 to $16 million and felt the number should be higher. Now, between a 70% to 90% confidence level, the numbers for reserve presented are $11 to $22 million. Mr. Kavanagh explained the change occurs by changing the assumption of the amount of money the City wants to cut from its budget. He explained the red line on the spreadsheet is the Critical Threshold ($10 million) and the green line is the 10th percentile, which indicates 90% of the time, the City will end above the green line and 10% of the time, it will be below the green line. Changing to $32 million, the green line would move right to the red line so in ten years, there would be a 10% chance of being at or above the Critical Threshold. Finance Director Matusiewicz explained the $32 million reflects known risks and adding the $10 million buffer for unknowns would bring the cost to $42 million. Chair Dixon inquired whether ten years would be the duration of the crisis and Mr. Kavanagh explained it is the duration of the timeframe being considered; any number of crises could or could not happen during the ten years. Mr. Kavanagh reported the purple line on the spreadsheet indicates the 49th of the "thousand possible futures." In Year 9, it goes down, but otherwise, it is at the City's discretion. Committee Member Collopy noted that in Year 8, there was a projected fire, flood, earthquake or recession and could cause the City to require $15 million in reserves. Finance Director Matusiewicz reported the simulations are based on experience and stated past performance is not necessarily a predictor of the future. Committee Member Collopy suggested doubling the risk and magnitude and stated the Committee will need that information for evaluation purposes. Finance Committee Meeting Minutes June 28, 2018   Page 4 of 9 Finance Director Matusiewicz reported from a policy standpoint, $42 million gives the City 90% confidence level, a $10 million cushion, and the City could cut back the assumed amount that could be cut from the budget on an ongoing basis depending on the City’s appetite for risk and the ability to reduce the budget. Committee Member Collopy expressed support for the substantive analysis “behind” the numbers presented, instead of just considering a reserve policy based upon 25%. He indicated he was much more comfortable with $30 - $40 million than $13 - $16 million, and noted it is the City Council’s prerogative to determine the repurposing of any remaining funds. If the funds are placed into another reserve account and not spent, that, in itself, is a risk mitigator. In response to Chair Dixon's question regarding what was cut in the last budget, City Manager Dave Kiff stated the goal was $8 million but the City Council achieved $6 million. It was noted that not all of the $6 million would come out of Department operations. Committee Member Tucker reported the assumptions are good but wondered about the consequences of Phase 2. He wondered whether there is a compelling reason to switch from what the City has been doing and stated he would be more comfortable seeking funds for something needing replacement as opposed to considering a few more projects. He expressed concerns with exposing the City to further risk. Chair Dixon declared she did not think this was done to free up money to spend, but rather to find a comfortable risk-factor level and consider where to put the difference. Committee Member Stapleton noted that Chair Dixon stated an important point. Finance Director Matusiewicz pointed out that with explicit Council Authorization, the City could buy Treasuries and Agencies with a maturity up to 10 years for circumstances that warranted a longer investment horizon. Committee Member Collopy inquired about the differences in yield and Finance Director Matusiewicz reported yield changed rapidly. Chair Dixon added the matter of what to do with the differential could be something the Finance Committee could consider. If the City were to keep it and send more money to CalPERS, the return on their investment is greater than what the City would get with a Section 115 Trust. Finance Director Matusiewicz reported that the City already uses a Section 115 Trust administered with CalPERS for OPEB liabilities so the City gets marginally the same economy of scale as the Public Employers’ Retirement Fund. Committee Member Stapleton inquired whether future City Councils would be able to spend the money as they saw fit. Chair Dixon noted it is City Council policy and inquired whether part of the money ($8.8 million) should be sent to CalPERS or to a separate Section 115 Trust. It was noted the matter would warrant a separate discussion. Committee Member Collopy stated the reserve would be more than $45 million and inquired whether there is appetite for the Committee to consider sending more than $8.8 million to CalPERS. Committee Member Tucker stated he was not sure and noted the City has an obligation to CalPERS, which accrues interest at 7.5%. Any money in CalPERS or that should have been in CalPERS is supposed to earn 7.5%. If the money were not there, the City would be guaranteeing the 7.5%, as the City is paying interest. To the extent that the City takes that money, pays down the principal obligation, the money would be in the fund, and the fund has to earn 7.5% or the shortfall would be due. The guaranteed savings would be 7.5% minus the shortfall. He commented on the differences in the quality of reserves and suggested considering all the choices and developing a recommendation. Finance Committee Meeting Minutes June 28, 2018   Page 5 of 9 Discussion ensued between Chair Dixon and Committee Members Stapleton and Collopy regarding the source of the $10 million buffer. Committee Member Tucker commented on the $10 million as a buffer in case the assumptions are wrong. Committee Member Collopy felt the intention, when starting this project, was not necessarily to free up money, but hoped this will be used in the next budget cycle to determine if the reserve can be moved to higher-yielding instruments and not necessarily on things like building a new library. Ultimately, it would be City Council prerogative. Finance Director Matusiewicz reported typically, prior to issuing and recommending a budget, staff would look at over-funded accounts and staff would make a recommendation using the over-funding to back-fill some of the accounts that may be short. He suggested the Finance Committee review General Liability and Workers Compensation, have a more robust discussion regarding a Section 115 Trust in order to make recommendations before getting into the budget, and by December, start fine-tuning those recommendations and amendments to Council Policy F-2 on the reserves. He suggested Committee Members review Council Policy F-2, and that copies of the changes that were last drafted will be provided. Committee Member Tucker indicated the Budget Policy is not very clear, or descriptive. He suggested clarifying and simplifying the policy. Finance Director Matusiewicz indicated the Subcommittee is welcome to make suggestions to the Finance Committee. In response to Committee Member Stapleton's inquiry regarding the $15 million, Finance Director Matusiewicz reported City Reserves are restricted by Government Code 53601 in that maximum maturity can go no longer than five years. It also limits the types of instruments that can be purchased. Other than a Section 115 Trust, the only other thing City Council could do is give staff the discretion to buy Treasuries out to 10 years. City Manager Kiff reported a Section 115 Trust can only be used for pensions, but CalPERS is considering doing its own Section 115 for non-OPEB items. Chair Dixon reported Irvine Ranch Water District (IRWD) has a Section 115 Trust, not managed by CalPERS and funds can be invested in different types of instruments; however, it must be defined by the Internal Revenue Service; though, their investment profile is determined by the IRWD Board. Committee Member Collopy inquired why CalPERS would offer a Section 115 Trust in addition to investing in CalPERS. He noted it has to be just for employee benefits or retirement. Chair Dixon noted the need to bring in outside experts, such as John Bartel, to discuss the benefits and disadvantages of Section 115 Trust. City Manager Kiff suggested having a Section 115 Trust workshop day to assist in forming recommendations. Committee Member Tucker opined that one meeting might not be enough. Finance Director Matusiewicz reported it is politically unpopular to send money to CalPERS and some agencies participate in Section 115 Trusts for that reason or because they perceive it to have more flexibility with no added market risk or cost. City Manager Kiff added Mr. Bartel commented that Newport Beach was not the typical category of agency that makes use of a Section 115 Trust. Finance Committee Meeting Minutes June 28, 2018   Page 6 of 9 Chair Dixon opined it would be better than what the City could do on its own. She suggested putting a package together including Council Policy F-2, suggested changes, and Section 115 Trust. Committee Member Collopy suggested considering a higher yield use of funds, if possible, as the reserve is higher than it needs to be. Chair Dixon opened public comments. Carl Cassidy inquired where the public fits in as it relates to this discussion. He heard the public would be against additional contributions to unfunded liabilities and stated he still has questions not yet answered. Chair Dixon reported any questions from the public could be presented. She suggested scheduling a study session for the Committee to discuss proposed changes for Council Policy F-2 and there would be opportunity for public input. City Manager Kiff voiced respect for Mr. Cassidy's comments, and noted the Committee has been discussing this for at least four years. He and Finance Director Matusiewicz are available to respond to questions. Committee Member Tucker commented on the complexity of the item and believed the purpose of the Finance Committee is to assist the City Council Members on the Committee to understand various financial matters as they impact the City. Jim Mosher noted he attends meetings and asks questions for increased understanding. Chair Dixon closed public comments. There was no further action taken on this item. C. PENSION DISCUSSION Summary: Agenda item reserved for any discussion regarding the status of the City's pension liability, funding policy and Section 115 Pension Prefunding Funding Trust. Recommended Action: Receive, file and provide direction as necessary. Finance Director Matusiewicz reported the Finance Committee has discussed paying more now to “level out” payments and ensure savings down the road. The City is trying to keep the amortization schedule under twenty years and explained the benefits of doing so. He stated he wants to maximize long-term savings, noted the repayment of the unfunded liability should be aggressive, but stressed the need to be mindful of current needs. Additionally, he addressed preserving financial flexibility, maximizing the use of additional discretionary payments, and noted it is a good option but additional options should be further explored. Finance Director Matusiewicz commented on keeping the City's CalPERS contributions level, for budgeting purposes, not wanting to increase risk, and choosing the most cost-effective path. He reported that in February, CalPERS approved a new shorter amortization policy. Additional Discretionary Payments (ADPs) are strategically applied to the longest bases that provide the most long-term economic savings. The City's payment schedule is made up of various bases and terms. In response to Chair Dixon's inquiry, Finance Director Matusiewicz reported that the investment credits that have not yet amortized out 30 years are not being fully utilized. Finance Committee Meeting Minutes June 28, 2018   Page 7 of 9 Finance Director Matusiewicz addressed 2014 and 2017 Experience Gain Valuation and the impact of further assumption changes that will be reflected in the 2018 valuation (to be received in August of 2019). In reply to Committee Member Tucker's question, Finance Director Matusiewicz reported that investment gains or losses in 2019 would be amortized over twenty years with a five-year phase-in. Finance Director Matusiewicz reported by making the targeted ADP payments and by having under-utilized credits, the City would not be able to prevent the default payment from reaching $40 million unless the City considered another fresh start to fully utilize the underutilized investment credits from 2014 and 2017 that are currently being amortized over 30 years. To get those credits on future payments, the City would have to combine all bases through a full fresh start or do a partial fresh start on selected bases In reply to Chair Dixon's inquiry regarding taking from the surplus or making an extra payment, Finance Director Matusiewicz stated ADPs alone will not keep the minimum payment from increasing above $35 million unless the City would open combining / shortening credit bases that are being amortized over a longer period of time. Options could include continuing with ADPs, do a fresh start to realize investment credits sooner and level out minimum payments requirements. Alternatively, the City could divert ADP payments into a Section 115 Trust. Committee Member Collopy inquired why the City does not do that (fresh start all bases) every year. Chair Dixon referenced the fresh start process in 2014 and reported the new Council has been making extra payments as well. It was noted if a new fresh start is executed next year, all known investment credits would be captured and credited against minimum required payments City Manager Kiff reported that the only way long-term investment credits could be captured was to offset pension costs in the near term. Finance Director Matusiewicz reported that $32 million came from the actuary and it does not include the final quarter point discount reduction nor the expected investment gains from 2017. Chair Dixon reported the reason why the City Council has not wanted to do a “fresh start” is because when the City pays extra, it is discretionary, and funds typically come out of the surplus. Committee Member Collopy noted the importance of flexibility. Finance Director Matusiewicz stated that by Year 6, the current minimum payment would overtake the fresh start level dollar payment, and as a result, the perceived flexibility would be lost. Committee Member Collopy suggested doing a fresh start in Year 6. Finance Director Matusiewicz stated he could not keep to the desired level payment without capturing the out-year credits and that every year that a fresh start is delayed; the minimum level dollar payment option would increase. Chair Dixon reported $28 million is mandatory and $8 million is discretionary. Finance Committee Meeting Minutes June 28, 2018   Page 8 of 9 Finance Director Matusiewicz reported assuming $35 million was the target cap; the additional discretionary payments would start dwindling away to zero and minimum payments would eventually breach the $35 million. Finance Director Matusiewicz reported there is no vehicle to transfer a security from a Section 115 Trust to CalPERS, without selling that asset at then market prices, which could involve considerable market risk and investment losses to the potential short investment horizon. Finance Director Matusiewicz addressed the risks associated with using a Section 115 Trust as a rainy-day fund. He also suggested any funds put into a trust would not likely have a material impact on asset diversification given the current City funds with CalPERS exceeds $550 million in assets. He noted that assets in a Section 115 Trust are not counted when measuring an agency’s net pension obligation. In response to Committee Member Collopy's question as to who makes investment decisions, Finance Director Matusiewicz addressed two primary providers (PARS and PFM) and Committee Member Collopy noted additional services would be necessary to manage a Section 115 Trust. Chair Dixon opened public comments. Carl Cassidy reported IRWD has a Treasurer and a section in their Code that allows them to own real estate. He commented on the City doubling up on its reserves and expressed concern the City is holding back employee money. Committee Member Collopy reported the discussion on fresh start and using available credits results in almost exactly the same number as the City's unfunded liability plus ADP. The additional $8.8 million, he stated, should not be seen as just an additional reserve. Chair Dixon closed public comments. Committee Member Tucker noted the City is already contributing a lot of money. Chair Dixon added there is no reason to pay before needing to do so. There was no further action taken on this item. D. 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 Summary: On the June 26 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. Chair Dixon reported she wanted to inform the public regarding the pros and cons of a Charter Amendment but noted the lateness in hour and suggested the new Chair of the Finance Committee will want to discuss it at the next meeting in September. Discussion ensued regarding making sure not to tie the hands of future City Councils, the money being there when needed because it is in the City's Financial Plan, the possibility of issuing debt, City Council flexibility in terms of how to use the money, managing the matter, and coverage of damages was the original intent.